Every company shareholder has a vote, but very few of us use them. We discuss why it’s important your voice is heard and how things may be about to change.
Individual investors own more than 10% of UK shares and tend to keep their holdings for longer, yet their views on company performance, diversity or climate change are still overlooked.
The way many companies held AGMs or raised funds during the Covid-19 pandemic highlighted that shareholders are not the equals they are supposed to be. As many as 30 companies out of a sample of just over 200 did not include any shareholder engagement at their virtual annual meetings, according to figures from the Financial Reporting Council (FRC), while investors have been infuriated at not being able to take part in some share placings.
The big institutions hold the power and most of the AGM votes, but that's still no reason for DIY shareholders not to use their collective voice and put pressure on companies, whether it's on boardroom pay or the price of a takeover deal.
To do so they must use their vote, something that happens far too infrequently for a variety of reasons. Encouraging greater shareholder democracy won't happen overnight, but through the efforts of pressure groups and voting and information services such as the one provided by interactive investor, there are reasons to be hopeful.
How shareholders make a difference
The ‘stakeholder voice’ is growing in scope and forcing companies to move beyond the traditional metric of just maximising shareholder value. This now includes scrutiny on their executive remuneration, diversity on boards and long-term economic sustainability.
Shareholders have already risen to the challenge on boardroom pay, with Tesco (LSE:TSCO) the latest to be rebuked when more than 67% of voting investors opposed its remuneration report.
The onus is now on all shareholders to be aware of the social impact of their investments.
Chancellor Rishi Sunak's pledge to introduce more robust financial disclosure standards has been hailed as a sea-change for investors in terms of sustainable decision-making.
Not only will benchmarking help shareholders to direct money towards climate-friendly firms, it will empower shareholders to force boards to improve their act. If enough shareholders vote in one direction the company will have to listen, particularly in a social media-driven world.
Shareholder activism has also forced changes of strategy, most notably at Whitbread (LSE:WTB), where the Premier Inn owner agreed to sell its Costa coffee shops to Coca-Cola following pressure from Elliott Advisors and other shareholders.
The lessons from company failures such as Carillion or Patisserie Valerie have highlighted the value of rigorous shareholder scrutiny. Too many investors rely on audit firms for reassurance that the companies in which they invest are performing as they claim to be.
And yet a recent spot check by the FRC revealed that 49 out of 130 audits were in need of improvement or significant improvement. On too many occasions, the FRC said auditors had failed to sufficiently challenge company management.
It called on accountancy firms to “redouble their efforts” to cope with the additional reporting challenges of the pandemic.
Retail investing in numbers
The most recent figures from the Office for National Statistics show that individuals owned 13.5% of UK quoted shares at the end of 2018, equivalent to £254 billion. The percentage increased from 12.3% two years earlier, with rest of the world shareholders owning 54.9%.
Individuals had 11.3% of FTSE 100 quoted companies, rising to 25.1% for AIM-traded stocks.
Lobby group ShareSoc believes the number of UK individual investors is substantially higher if shares held in nominee accounts such as ISAs are properly taken into account. It believes a figure of 30% is a more accurate representation.
The influence of retail investors varies by company, with this year's Marks & Spencer Group (LSE:MKS) annual report showing there were about 100,000 of its shareholders — 70% of the total — holding fewer than 1,000 shares. This amounts to just 0.73% of the overall share capital.
In contrast, 178 shareholders, or 0.12% of the total, held one million or more and controlled the equivalent to 83.86% of share capital. This imbalance encourages shareholder inertia.
The position of retail shareholders
Retail investors tend to hold shares for longer and display longer term investment horizons. According to the Investment Association, the average investor holding period was 3.4 years in 2019.
And yet it's clear that retail investors are under-represented in terms of making their voice heard on corporate matters. This is despite individuals having a direct ownership interest, whereas institutions are often acting on behalf of others and may have less interest in highlighting excess director pay or poor corporate governance.
For retail investors, the opportunity to press these concerns comes once every 12 months. In contrast, institutions often have the advantage of being able to liaise with management throughout the year, in the wake of results presentations or at capital markets days.
At the company's annual meeting, investors are usually required to cast their votes before they've had opportunity to hear the thoughts of management. Even being in a position to vote by proxy is a challenge, given that most shares are held in nominee accounts.
Paper voting forms are rarely distributed these days, meaning it is up to investors to actively engage with the voting process or subscribe to services such as interactive investor's Shareholder Voting and Information Service to ensure their participation.
Peter Parry, policy director of the UK Shareholders’ Association said recently that the private shareholder had been ensnared into holding their shares in a way that disenfranchises them from acting as responsible owners of the business in which they have invested.
The takeover of popular retail stock Sirius Minerals by Anglo American (LSE:AAL) caused particular angst. Retail investors complained that the way the takeover was structured meant those who held their shares through a nominee were unable to receive communications about the takeover from both Sirius and Anglo.
Retail shareholders and the pandemic
The peak AGM season from May to July typically throws up plenty examples of companies receiving “bloody noses” on issues of interest for shareholders, usually remuneration. This year, the Covid-19 pandemic placed severe restrictions on public meetings and may have contributed to a lack of shareholder pressure.
A report by the FRC in October found a wide range of approaches to voting and AGMs during the pandemic. Some held meetings with only one or two members present — usually the company secretary and the chair — while others embraced technology to ensure that shareholders were able to participate effectively.
The FRC found that out of 202 AGMs held between March and August, 30 did not enable any shareholder engagement through Q&A before or during the AGM. It added that throughout 2020, retail shareholders expressed their dismay that they have been asked to vote prior to hearing some of the facts required to make their decisions.
Shareholders were also frustrated by the way companies including ASOS (LSE:ASC), WH Smith (LSE:SMWH) and Hays (LSE:HAS) shored up their balance sheets through accelerated placings of new shares with big institutions. While the relaxed rules on capital issuance dramatically cut the time it took to raise new funds, the flip-side was that smaller investors were often shut out of fundraisings.
Investors found their stakes significantly diluted by the new shares on offer.
All shareholders usually have equal rights over new issues above 5-10% of the total share capital, but this threshold was temporarily raised until the end of November following guidance from the Financial Conduct Authority and the Pre-Emption Group.
In recognition of growing shareholder disquiet, more companies have since made use of the PrimaryBid platform to include a retail element alongside the usual institutional placing. This started with the £2 billion raised by catering company Compass Group (LSE:CPG).
How to improve engagement
The FRC wants lessons from this year's AGM season to include a closer look at how technology can be used to encourage engagement from all shareholders, including those who are unable to attend physical meetings due to their location or working patterns.
The group said: “It is easy to envisage a new era for AGMs which incorporates some of the technologies that we have all adapted to and become reliant on, whilst keeping those elements of the AGM that make it an important event for companies and investors.”
It wonders whether there is merit in splitting the traditional AGM into two events.
The first would be for presentations, Q&A, and consideration of matters in the annual report, and the second for voting on the resolutions raised. The first event could be delivered via an audio or visual presentation with the facility for questions and the second could be a much smaller event held with a quorum if necessary.
The FRC says: “This would be a significant departure from the current way AGMs are organised but this in turn would ensure, that like institutional investors, retail shareholders gain similar access to information prior to a vote.”
The report reminds companies that the meetings are not simply about voting but about gaining an understanding of board decision-making on company strategy.
The FRC says: “For retail shareholders, in particular, it is right that they have the opportunity like institutional investors, majority shareholders, or private equity investors, to receive information openly and transparently.”
Making your voice heard
If everyone voted their shares 100% of the time, individual investors could hold tremendous sway over corporate governance and other key issues. The question of whether companies should be doing more to engage and communicate with retail shareholders is currently being considered by the Law Commission.
There are already signs of strength in numbers, however, with tens of thousands of interactive investor customers now using our Shareholder Voting & Information service.
It's a free opt in service that enables you to receive shareholder materials and vote on decisions directly affecting your UK registered shareholdings held in your nominee account. When there is an event, for example voting by proxy, materials will be received electronically directly from the company which you hold shares.
They will be placed into your Voting & Information mailbox which is available in your secure account. You will receive an email notification from us each time there is an event.
Signing up is one thing, getting round to using that vote quite another. ShareSoc has a useful guide on what to look out for when voting, including the different type of resolutions.
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