Shareholder activists and individual private investors might not need to cover their faces in war paint or don masks at annual general meetings (AGMs) any more to make a point, although it can sometimes generate useful headlines. Today, investors with less fiery personalities can select other options to ensure they are making the most of their shareholder rights and keep the companies they invest in on their toes.
No matter what the form of activism - which can span dialogue and formal shareholder proposals - shareholder action can make companies stay on track. Indeed, a JPMorgan report on shareholder activism in companies valued at over £1bn revealed a 90 per cent increase over the first three quarters of 2011. The ultimate end goal is to effect change - whether related to management, strategic direction or the capital and asset structure.
Private shareholders will probably have a hard job emulating US investors John and Lewis Gilbert, who represented the essence of shareholder activism over a 50-year period that saw them attend around 75 company meetings a year in the US at their peak. Nevertheless, sensible steps can be taken to become more involved - as outlined below. And the greater the level of activism, the more pressure can be heaped on any listed company attempting to short-change investors.
In recent years the focus on shareholder activism has largely centred on levels of executive pay and remuneration. For example, almost two decades ago there was an outcry when a huge pay award was voted through for British Gas chief executive Cedric Brown. Annoyed shareholders and activists turned up with a pig at the company's AGM with the word 'Cedric' scrawled on the animal. More recently, in 2012 anger erupted over Trinity Mirror's Sly Bailey's bumper pay award. It is unlikely to be the last such outburst over excessive boardroom pay.
Shareholder activism has extended to campaigning on issues such as long-term incentive plans (LTIPs) for company executives, as well as share consolidations, takeovers and taking listed companies private. And activists have questioned schemes of arrangement, such as the one recently proposed for Hibu (formerly Yell).
The benefits of shareholder associations
There are two active shareholder associations in the UK campaigning on behalf of private shareholders: the UK Individual Shareholders Society (ShareSoc), which was formed in February 2011 and has a membership of around 2,700 members, and the older UK Shareholder Association (UKSA).
Retail investors wanting to take the plunge and join such societies could shape the future and boost shareholder power. Membership is also relatively inexpensive. UKSA offers a discounted membership rate for the first year of £25, which includes invites to meetings with plc directors and a magazine, while ShareSoc touts Associate membership (free) and Full membership (£35 a year). Members typically receive a 16-page monthly newsletter, can access an online investor forum, receive invitations to events to hear company executives speak and obtain free general advice.
Roger Lawson, ShareSoc's chairman says: "Shareholder activism has often tended to be stimulated by specific issues such as excessive pay, which has been a hot topic of late." He adds: "As an organisation we want to represent shareholders as effectively as possible. However, our effectiveness in campaigning and bringing about change is related to the level of our membership."
Both organisations have campaigned on a range of issues apart from the popular issue of excessive chief executive pay. For example, in July 2012 ShareSoc issued voting recommendations on Intercede, an Aim-traded UK software company, which embarked on a LTIP. Just a month later the company U-turned on its plan.
Elsewhere, the society has issued voting recommendations over Rensburg AIM VCT, urging shareholders to vote against the re-election of all the directors. Last October, ShareSoc called for BAE Systems chairman Dick Olver and chief executive Ian King to resign after the collapse of merger talks with EADS. And UKSA has run campaigns focused on investor injustices at banks and VCTs.
UK versus Scandinavian shareholder associations
More than anything else the huge disparity between membership levels of the UK and continental European associations can be attributed to a "cultural problem", according to Mr Lawson. While the UK is catching up, it has a long way to go to match the Swedish and Danish shareholder models.
Sveriges Aktiesparares Riksförbund, for example, boasts around 70,000 members who attend and report back on virtually all AGMs of listed Swedish companies, while the Danish Shareholder Association (Dansk Aktionærforening) recently counted some 15,000 members. Deutsche Schutzvereinigung für Wertpapierbesitz, an equivalent German society, boasts a membership of 25,000.
Mr Lawson notes: "There's an inherent reluctance among the English to complain, tied to a faith that directors are seen as doing the right thing by their companies. It's also generally seen as bad form to challenge the directors or attack them for incompetence. And nobody likes to vote against any resolutions."
Action groups and campaigns
David Blundell, chairman of the Bradford & Bingley Action Group (BBAG), commenting on the situation in the UK, says: "The institutions here [in the UK] such as pension funds have not had a good track record in fighting the cause for retail shareholders. This is particularly so when it comes to smaller listed companies." Mr Blundell adds that "institutions usually give up" and more often than not it falls to retail investors to take up the baton.
BBAG is an example of private investors taking up the challenge to seek redress. The group has been campaigning for over four years on behalf of almost 1m dispossessed Bradford & Bingley shareholders. It has filed Freedom of Information (FOI) requests with the Cabinet Office, the Financial Conduct Authority (ex-Financial Services Authority) and the Treasury to discover the truth behind why Bradford & Bingley was nationalised in 2008.
For those wanting to learn more about the skills needed to take corporations on at AGMs, ShareAction, formerly FairPensions, which campaigns for more ethical investing, offers shareholder activism training days. Members receive a biannual newsletter plus updates on ShareAction's work.
Nominee account dangers
Holding shares electronically in a nominee account through a stockbroker might offer advantages, but it also brings potential dangers.
With the majority of individual shareholders in public companies in the UK holding shares in such nominee accounts (ie, in accounts created by stockbrokers through CREST to record their interest in the shares of companies), the fact is that many retail investors are not actually 'members' of listed companies that they bought shares in. The upshot is that they do not have all the rights and protections afforded under Company Law.
The full extent of nominee accounts is not entirely clear due to the fact that it is hard to identify the beneficial owners. According to a submission by the Association of Private Client Investment Managers and Stockbrokers (Apcims) in 2011 (based on Cass Business School work) to the Kay Review of equity markets, retail shareholders accounted for around 30 per cent of the ownership of FTSE 100 companies. An earlier submission in 2005 to the Department of Trade and Industry pointed to around 4m people holding such accounts.
The truth is that many individuals are only 'beneficial' owners: receiving dividend income, having the right to buy and sell that interest but only sometimes able to instruct their nominee operator on how to vote. However, they cannot necessarily attend AGMs, receive annual reports or shareholder perks unless they take action to rematerialise their electronic holding(s) into paper certificates.
One way around the problem is to hold shares either in a paper share certificate form (not especially handy in the modern age and costly to buy and sell); or, by having a personal CREST account, effectively an electronic share registration system similar to a nominee account but where you are on the share register.
In the event that your broker goes bust, there could also be problems related to the legal claim to shares held in nominee accounts. Matters surrounding nominee accounts are likely to crystallise further given EU plans for the mandatory dematerialisation of share certificates in the next few years.
Mr Lawson is among those campaigners who want to see all clients of stockbrokers "warned about the dangers of nominee accounts when first opening accounts".
Voting on smaller listed companies
There are also problems around nominee account holders being able to vote on smaller listed companies unless their holdings are rematerialised. This has been highlighted with several Aim companies in 2013, where management sought to delist the company and go private. VSA Capital was one such example where the vote was won to delist but only by a narrow margin. Had sufficient retail shareholders been able to vote on the resolution, and in time, it is possible the move could have failed. Another case was Turbotec this April.
Personal CREST account membership
Opening a CREST personal member account is done through the stockbroker that sponsors you, as opposed to dealing directly with CREST. It is an option that has to be requested by the shareholder and currently there are a limited number of UK brokers that offer CREST sponsorship. But it brings a number of benefits provided such accounts can be set up at a reasonable cost.
For starters you will be the direct owner and appear on the register of shareholders in the UK and Irish markets if you have a CREST account. You will also receive reports and other corporate communication by post directly and be able to attend and vote at AGMs. While this does not automatically happen if shares are held in a nominee account, your broker can pass these on to you even if you hold shares in a nominee. But they may charge for it.
Furthermore, corporate actions will be received directly, whereby you can deal with them as opposed to passing instructions to your broker. And use can be made of any special perks for shareholders that the companies you invest in may offer. APCIMs' website lists 13 brokers in the UK offering Crest Personal Membership accounts including Charles Stanley and Redmayne Bentley.
And some stockbrokers are willing to protect your rights and perks. The Share Centre, for example, does not offer CREST personal accounts, but it does facilitate shareholder rights and perks for investors with a trading account. Account holders need to instruct The Share Centre on what corporate communications they wish to receive directly from the companies they have holdings in.
Shareholder education
Shareholder societies such as UKSA and ShareSoc engage in far more than just shareholder activism. They provide investment education, information and policy advocacy.
For example, ShareSoc held an Investor Day in central London in February 2013 with speakers on hand from the London Stock Exchange and Association of Investment Companies, among others. They have also developed an Aim company rating scorecard (free to download) to help investors evaluate small-caps. UKSA produces The Private Investor monthly newsletter and its policy group representatives have spoken at the European Parliament about the future of IFRS.
While many advocate greater shareholder engagement to solve the ills on the corporate governance scene, shareholders who feel short-changed by companies they invest in might ponder the merits of becoming more vocal and join shareholder organisations.
