UK: Shareholder Protests Get Personal

Last Updated: 27 July 2018
Article by Henry Ker

The rise in shareholder protests against individual directors shows the public register is having an impact

Statistics from the Investment Association (IA) show a sharp increase in votes against individual directors at the mid-point of the 2018 annual general meeting (AGM) season.

The IA, the trade body for UK investment managers, has reported a 100% increase in votes from shareholders against directors – with 54 individual director-related resolutions receiving a vote of 20% or more against – at AGMs held before 8 June 2018.There was also a 62% rise in the number of companies facing revolts on director-related resolutions.

The backdrop to this is the introduction last December of the IA's public register. Developed as part of the response to the government's green paper on corporate governance, the register includes FTSE All-Share companies that have received votes of 20% or more against any resolution, or withdrew a resolution prior to their AGM.

In the words of the IA, 'the aim of the register is to highlight companies who receive a high vote against or withdraw a resolution, and to understand the process used by those companies to identify and address the concerns of their shareholders.'

Rising dissent

One of the complaints occasionally levelled at the UK's shareholder-centric system of corporate governance is that shareholders do not always exercise the full extent of their existing power to effect change. There is sometimes a resigned passivity, perhaps because in the past they have not been listened to when they did take a stand against a company.

This is not to make a sweeping generalisation and good companies will of course be engaging with investors over contested resolutions and areas of disquiet. Shareholders do also have binding votes on items such as remuneration policy at least every three years.

But the register does seem to be having an impact. Although all resolutions receiving significant dissent are added to the register, the sharpest increase has been against directors' re-elections. The public register looks to have added a few more teeth to the shareholder bite, via that simplest of methods – naming and shaming. And in particular, naming and shaming individual directors.

Andrew Ninian, director of stewardship and corporate governance at the IA, commented: 'Directors are getting a very clear message from shareholders that they will be held accountable for their actions.'

On a contentious issue such as remuneration, in the past, shareholders have often voted against the policy or report but not against the chair of the committee that developed the policy. However, there appears to have been a change of tack. Contested resolutions over pay, although still high in number, remain relatively unchanged with the previous year – from 48 to 47 – while protests against directors rose.

"Shareholders do not always exercise the full extent of their existing power to effect change"

Of course not all of these director resolutions relate back to issues over pay, but by way of an example, at its AGM this year Playtech plc received a 59% vote against its remuneration policy and 43% against re-election of remuneration committee chair John Jackson as a director. In contrast, at its 2017 AGM, while the remuneration report received a 32% against vote, Jackson only received a 9% against vote as director.

Where before some company directors may have been tempted to treat negative shareholder sentiment as par for the course and play it down, suddenly, with their name published on a public register, they are taking it understandably personally.

'There is nothing that focuses the mind of the board more than when individuals are being targeted, especially the chairman,' says Sacha Sadan, director of corporate governance at Legal & General Investment Management.

'We do not take a decision to vote against lightly. But, for example, if you are the chair of the remuneration committee and for two years in a row you have had a large vote against, then of course you should be thought of as part of the problem, not part of the solution.'

History of shaming

Naming and shaming is an increasingly common method for regulators, pressure groups and interested parties to squeeze business over an issue.

In October 2013, the Department for Business, Energy and Industrial Strategy's decided to start naming employers that do not pay the national minimum wage, with more than a thousand companies since being identified – often leading to highly critical press.

Although there is no official body looking to embarrass companies over tax issues, the media has led this crusade themselves. Those deemed to be exploiting loopholes to pay less than their fair-share, have faced a backlash of public opinion with a demonstrable impact.

Indeed, in 2012, Starbucks announced it would voluntarily pay a higher rate of tax than it owed to HMRC – waiving tax deductions and paying £20 million in voluntary tax over two years – to combat the public uproar. Kris Engskov, then managing director of Starbucks UK, said 'these decisions are the right things for us to do. We have heard that loud and clear from our customers.'

The public register is just the next in line in a long history of embarrassing business in order to get something done.

Improving engagement

Hopefully, the result of this increased individual opposition will be revitalised enthusiasm for engagement between shareholders and companies over problematic issues.

Mirza Baig, global head of governance at Aviva Investors, although cautioning patience as 'the real impact of the register will take time to fully assess', says he is already starting to see positives: 'anecdotally, we have already noticed an increased level of responsiveness from companies to shareholder objections during pre-AGM consultations. We believe that the register will complement other trends in the market in supporting the overall effectiveness of company-investor dialogue.'

Ninian adds, 'Remuneration committees are considering carefully the proposals they are putting to shareholders. Where committees are putting forward unusual proposals, they are spending time engaging with their investors to understand their views.'

'One example is the remuneration committee of Weir Group who invested significant time to engage and explain their new remuneration structure and understand the views of investors. This led to over 90% of investors supporting the new remuneration policy. Ensuring open and honest dialogue between shareholders and companies is vital.'

The IA reports it is also seeing greater acknowledgement by companies of issues, stating '74% of companies added to the public register so far in 2018 acknowledged shareholder dissent in their AGM results and spelled out actions they intend to take.'

"Shareholders often vote against the remuneration policy but not the chair that developed it"

In contrast, just 55% of companies added to the Public Register in 2017 acknowledged shareholder dissent in their AGM statement.

On this, Ninian commented 'Investors want those companies that do appear on the public register to acknowledge the dissent at the time of the AGM and outline the actions they intend to take following the vote.

'Within six months of the AGM, they would like an update outlining the views heard from their shareholders and the actions the company intends to take.'

Another effect of this may actually be to empower directors within their own organisations. As Sadan explains, '[directors] sometimes feel empowered when they receive a vote against, because they can go back and force the board to take them more seriously.

'We do not always know what is going on in the remuneration committee, but we cannot help that. It is the director's job to do something about the issue, and if we as investors can give the director ammunition to help them create change – and sadly that might be by voting against them – then we will do that.

'That said, my team do not like voting against. We would rather engage and influence before it gets to that stage.'

Correlation not causation

While there may be a correlation between an increase in votes against directors and the public register, we cannot draw a direct causation. There are a number of other factors in play.

'I do not think it is possible to attribute the increase in investors voting against individual directors to one single factor. I believe the rise in voting activity is the cumulative effect of a number of factors, including increased disclosure, best practice guidance, oversight failures by boards and greater public scrutiny of investor actions,' says Ian Burger, head of corporate governance at Newton Investment Management.

Investors certainly seem to be taking a stronger stance and being more vocal on environmental, social and governance issues – something Sadan discusses in our interview on page 18. Perhaps the rise in votes against directors is that stance coming to a head.

A balanced power

In response to various consultations, ICSA has opposed giving more power to shareholders – instead suggesting that they use their existing powers more frequently and to greater effect. The introduction of the register seems to have helped in this regard.

Although singling out individual directors is not a practice investors relish – and, given we have a unitary board model, in opposition to one of the tenets at the heart of UK corporate governance – it looks like the approach of choice for the disaffected shareholder in the future.

Henry Ker is editor of Governance and Compliance

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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