Preferential voting and shareholder churn

Introduction

As Australia heads into another election season off the back of the unprecedented pandemic, a market slump and historic rate hikes for the first time in decades — voter churn remains a key success metric. It’s rare to see such a significant power change in the turbulent macroeconomic landscape we face today.

Political parties have to tailor their agendas towards addressing the most prominent concerns on most Australians’ minds — the ever rising cost of living and how we’re going to navigate an economy in which interest rates are rising for the first time in years.

As the cost of borrowing rises and flows on to debt in all forms, the average Australian will be impacted through their debt exposure to housing, commercial, personal & financial categories.

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The Election Effect on Capital Markets

1. The future election outcome brings political uncertainty to the present
2. Political uncertainty translates into market volatility as shareholders try to price in the outcomes
3. Shareholders refactor to election hedges until uncertainty cools down post-election

Preferential voting in Australia puts a specific pressure on party strategy when engaging with voters. In the event where a political party is unable to convince a voter to place them as their first vote, being their second preference is equally valuable in the event of a non-majority preference vote.

As a result, a political party’s goal is twofold:

1. To appeal to their target demographic as the first preference
2. To appeal to their non-target demographic as the second preference (or the least-worst of the other options).

This provides an interesting parallel into shareholder engagement for companies. Companies frequently focus on bringing in new investors to revitalize their shareholder base (similar to how parties focus on attracting first preference votes), but unlike political parties, fail at the equivalent of their “second preference” vote strategy (i.e. actively engage and realise the potential of their longer term and existing shareholders).

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Retention Value for Investors

In capital markets, just as in elections, investors tend to lose faith over time, but many companies fail to recognise this as a factor and can experience high rates of investor churn as a result.

The value of retaining an investor is twofold:

1. The company can rely on investors who’ve demonstrated that they are investing for the long term.
2. This in turn allows companies to decrease the cost of capital by being able to get more from their SPPs and entitlement offers through a data-driven approach to capital markets strategies.

The way that 2022 has gone so far, it’s going to be vital that companies have effective engagement strategies in place to retain their existing shareholder base as investors globally look to de-risk and refactor their portfolios into defensive assets.

Capital raising may also be challenging given that activity has tanked more than 50% year on year, and engaging existing retail shareholders & optimising shareholder data will be key to successfully planning and executing on capital raises.

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Just my 2 (now 3) cents.