Shareholders tell CEOs not to expand overseas

Credit: Mike Mozart

Readers may have seen an article in Fairfax media this morning, which reported that major shareholders of big companies like Wesfarmers Ltd (ASX: WES) and Coca-Cola Amatil Ltd (ASX: CCL) have been pressured by shareholders to abandon their overseas expansion plans.

Coca-Cola Amatil has been investing heavily in Indonesia, while Wesfarmers – which owns Bunnings and Coles – recently announced plans to buy UK home improvement retailer Homebase for A$700m.

Shareholders of Insurance Australia Group Ltd (ASX: IAG) have seen it all before however, as their management recently decided to abandon plans to expand in China following input from major shareholders.

In IAG’s case, arguably the decision was justified as an initial investment in Chinese motor insurance didn’t go according to plan, and resulted in write-downs. A similar situation occurred at Woolworths Limited (ASX: WOW), where major shareholders were reportedly agitating for the closure of the Masters Hardware venture. The subsequent closure of Masters would have been game-changing (either in a good or bad way) for many shareholders’ investment theses.

The trouble for mature companies is that Australia is a small market, and market-leading businesses have limited room for growth without expanding into new jurisdictions. Fortunately, Coca-Cola Amatil and Wesfarmers’ executives appear to be focussed on the long-term growth of the business rather than short-term performance.

The influence of major shareholders can be a blessing, especially in the instance of owner-founder CEOs who tend to be skilled and motivated.

Owners aside, significant shareholders also have a lot of say as they own part of the company – controlling a fair percentage of votes – and usually have a platform from which they can convince other major shareholders of their views. This can result in decisions being taken out of the hands of management and retail shareholders.

Foolish takeaway

Ultimately, smaller shareholders should try to remain aware of management’s plans, and continually ask ‘is this decision in my best interests as a shareholder?’ If major shareholders force a decision (e.g. a major debt-funded acquisition) that is at odds with your priorities as an investor (e.g. low-risk, reliable income) there’s no shame in parting ways.

Many companies also maintain an investor relations department which shareholders can contact via phone or email – their job is to answer your questions.

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Motley Fool contributor Sean O'Neill owns shares of Coca-Cola Amatil Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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