Take Control

How many of our readers have met and shaken hands with the chief executives of the companies in which they have invested their hard-earned cash? The answer is very few. A significant number of private investors in the UK will never have attended the annual general meetings of the companies whose shares they hold in their portfolios. Sure, they might not want to, but many simply will not have the right to do so. It may come as a surprise, but as a shareholder of a publicly listed company on one of the world's foremost exchanges, you might be turned away at the door, and even refused a vote at an annual general meeting (AGM). It's also surprising that for such a large, active stock market, private shareholders have comparably weak representation and very limited sway over UK plc when measured against their counterparts in places such as Sweden, Australia and the USA. So, it time for change?

The answer is yes, if you ask the two organisations representing UK shareholders. And the starting point for change, according to both the UK Shareholders' Association (UKSA) and the UK Individual Shareholders Society (ShareSoc), is with nominee accounts. The traditional system of holding shares in this country is through registers and paper share certificates. But over the past 15 to 20 years, paper share certificates have declined sharply and most people purchase shares through nominee accounts provided by brokers such as The Share Centre, Hargreaves Lansdown, TD Waterhouse - to name but a few. Personal Crest accounts - which offer full shareholder rights without the inconvenience of paper certificates - are rare beasts these days. Most brokers have scrapped them. Charles Stanley, one of the only Crest providers, levies a £200 annual charge for the service and is loathe to offer it to new investors.

So, what's wrong with nominee accounts? As a shareholder through a nominee, you are not actually on the company's register, so you don't have any shareholder rights, and certainly no voting rights. Those rights are granted to the nominee, who can choose how to vote and what information to pass on to you. That makes it difficult for both the companies, and the organisations representing private investors, to communicate with shareholders about important developments, says Roger Lawson, deputy chairman of ShareSoc.

"If shareholders want to take action it's difficult for them to do so, it's very difficult to attend AGMs and too difficult to vote. In fact, one stockbroker at one point wanted to charge investors to vote until uproar caused them to back down. Almost no private shareholders vote their shares because there are loads of practical obstacles in doing so. It's a major problem."

And while the Companies Act 2006 did provide some rights for nominee shareholders, these were granted via the broker, who can choose to provide those rights and can even charge for them, says Mr Lawson. "But why should they when they don't have to? Many don't care. The Companies Act was therefore very defective."

This 'defective' system also means that while there might be a high rate of private investing in the UK - individual investors are thought to own a fifth of the shares in UK plc - nominee accounts make it difficult to get a precise figure. That creates a major headache for any organisation trying to do any sort of shareholder activism. Organisations like ShareSoc and UKSA can't communicate with individual shareholders, as they don't know who they are, and therefore cannot build critical mass and a body strong enough, and meaningful enough, with enough voting power, for companies to take notice of.

"We would like to scrap the nominee system and replace it so that everyone is on a share register and can turn up at the AGM and vote directly," says Mr Lawson. "But a big problem is that stockbrokers want to retain control over their clients and that is why they promote nominee systems."

Eric Chalker, policy director of UKSA, echoes this, adding: "Sometimes, brokers don't give you access to your shares unless you go through a number of hoops. I know of a broker who stopped sending dividends to a woman because she refused to re-submit a load of documents, despite none of her details having changed. The big stockbrokers are also the ones who vote, so when we see all these big votes in favour of large remuneration packages and wonder who is voting on them, it is yours and mine, held in nominee accounts."

Mr Chalker also claims that companies like to know who their shareholders are and to have direct communication with them, which makes the current system more ridiculous. "The disappearance of individual shareholders is bad for the country and society. When our members have meetings with company directors, those directors are very pleased to have those meetings as they have direct contact with direct investors. One company even approached registrars to exercise its right under the Companies Act to require all nominees on the register to give underlying information on investors and was astonished to discover it had six times as many individual shareholders as it thought."

Three ways to hold shares

1) Paper share certificates: these are very rare now. Most date back 20 years or more. They give you full voting rights and include you on the shareholder register. There are over 1m investors with paper share certificates in the UK.

2) Personal Crest Account: These are also increasingly rare beasts and meant for sophisticated investors, who typically have sizeable portfolios. Few brokers now support personal Crest accounts or make it very expensive to own one. Charles Stanley, for example, charges £200 a year for a Crest account. There are roughly 60,000 to 70,000 personal Crest accounts in the country.

3) Nominee accounts: if you bought shares within the past 10 to 20 years, they will almost certainly be via a nominee account and almost certainly, you won't be aware of the other options. You have no voting rights and it is at the stockbroker's discretion to pass on any company information to you.

Should stockbrokers do more?

But there's a reason why nominee accounts have grown so popular. Brokers say they are cheaper to administer and give individuals a much better service, at a much lower cost. They allow fast settlement. There is also an argument that the organisation running the nominee is there to serve the investor and not the company. The register, by contrast, is run for the company. Users also get all of their shares and funds in one place and access to a user-friendly online platform allowing them buy and sell cheaply whenever they want. Nominee accounts are also the only viable way to hold shares through tax-incentivised accounts, such as Junior individual savings accounts (Isas), Isas or self-invested personal pensions (Sipps). It's estimated that three-quarters of all individual shareholders are now through nominees.

In fact, retail stock broking is probably one of the most competitive service environments in any industry. Prices have fallen drastically in recent years. A quarter of a century ago the minimum commission per trade was roughly £12.50. Now, you can deal from just £5 a trade. If you're risking £10,000 on a stock that can go up and down by several hundred pounds every day, that's a pretty good deal. Service has hugely improved too, helped by mobile technology. It's estimated that three-quarters of all individual shareholders are now in nominees.

Gavin Oldham, chairman of the Wider Share Ownership Council and The Share Centre, argues that nominee accounts are the way forward. A fondness for an old-style system of share administration is misleading, he says, and any shareholder advocacy group must represent the new style of investor. However, he points out that the status quo is far from ideal. Company law defines a shareholder as someone who has shares on a register. Now, share ownership is broader than that and can include nominees. But the law hasn't moved on to recognise this.

"People who choose shares themselves are engaging in investing so one must draw a distinction between organisations which exist to manage others' money, such as traditional brokers, from the retail DIY investor who will do research and find out about a company and make a decision based on that, and has a much greater interest and needs to be supplied with information," says Mr Oldham.

"I campaigned for 19 years to get the law changed in this area and it changed in the Companies Act 2006 which enables nominee shareholders to get reports and accounts and be properly informed about what the company is doing. However, now we have a situation where, provided the nominee operator extends those rights, nominees can get that information. We have done it at the Share Centre. Others haven't done it. It may be they don't earn money out of it and there is not sufficient interest. But I don't think that is a good enough reason at all. Tens of thousands of Share Centre users have opted to get company information passed on and they value that. It's not good enough for retail brokers to sit on their hands. It's even worse for a broker to charge people for doing this."

The mechanism is already in place for stockbrokers to take action: all they need to do is send a list of nominee shareholders to the company registrars and information flows directly from the company to the investor.

"There is very little burden for the nominee operator and I would say the FCA should tell those people who run nominees that they should either comply with the companies act or explain why not," says Mr Oldham.

But Mr Lawson reckons those stockbrokers who think the system must be changed are in the minority. "Most brokers are perfectly happy with the present system. It is cheap for them, they don't have to pass on any rights, they don't have to provide voting systems and they're clients are private so no one else can communicate with them, not even the companies."

Mr Chalker agrees, pointing out that it's quite simple to change the system, and doing so would put the UK on par with other countries. "We are home of investing and have more private investors than any other country and yet increasingly our investors are pushed into the hands of the brokers and feel obliged to use pooled nominee accounts. There is no reason why stockbrokers can't give people designated accounts - they only use nominees because it suits them."

Nominee downsides

It doesn't necessarily suit retail investors, though. It is argued that holding shares in a nominee account is legally risky because it means you forfeit your shareholder rights. And, while some company information must be passed on to nominee account holder by the brokers administering the accounts, much it doesn't legally need to be, including subscribing for open offers - your broker might just take a default view. If a company announces a tentative offer, the broker might not pass that information on, while for an actual bid, it would be a requirement. Profit warnings don't need to be passed on and people in nominee accounts won't necessarily get a copy of the annual report. Shareholders in nominees have no voting rights. Any sensible investor will subscribe to the Regulatory New Service, but many private investors are just not aware of that and tend to rely on the broker for information.

Regulation, regulation

Having carried out extensive enquiries, Mr Chalker says UKSA cannot find any other country, bar Ireland, which suffers from the same individual shareholder rights issue as the UK "When I talk to investors in Europe they don't understand our problem Shares there are registered in their own names, as indeed is the case in the US. Nowhere else do shareholders suffer form the same degree of separation. The financial services industry here makes people feel separate from companies in which they are invested."

ShareSoc and UKSA want the system to be changed, but that requires action from the government. It looks like things will have to change sooner rather than later, thanks to a forthcoming EU directive mandating that all shareholders be on some form of electronic share registration - spelling the death of paper share certificates. The deadline for the directive may be eight years away, but in practice it must be tackled before then.

"The government will have to do something because electronic registration means all these folks with paper share certificates will have to move to something else," says Mr Lawson. "What we would like to see is a proper new electronic share register system, not a nominee system. We want people on the register with all the rights that entails. So what we are pushing for is a new system to do that. I don't expect instant action, but it is likely the government will face up to this problem because of the EU regulation."

Company registrars have already come up with suggestions for a new system, and both UKSA and ShareSoc seem confident shareholders will get what they want in the end. However, another potential reason why the government will have to legislate for full shareholder rights for nominees is to do with compensation. In the UK, if something goes wrong with a nominee account, the compensation available to a shareholder from the organisation is limited to £50,000 for lost assets. In America it is $1m. UKSA argues that compensation for nominees should be raised to the same level for defined contribution pensions, which is 90 per cent with no limit.

"Brokers are bullying people into nominee accounts and make a song and dance encouraging people to surrender their share certificates and place their investments in these pooled accounts, but if they do something wrong, the compensation available is derisory," says Mr Chalker. "And nowhere does it spell out that you are losing your shareholder rights."

He also highlights a document published by a UN body, supported by more than 100 governments, including the UK, instructing emerging markets on how to set up investments. The report says it is important to recognise that when people invest through nominee accounts they MUST be granted full shareholder rights. "So, a document - supported by over 100 countries, including ours and recognised on the Bank of England website and signed by the FCA - is actually telling emerging markets they must offer full shareholder rights to people, even when they use nominee accounts. But here in the UK we are not following that advice. It is such a contradiction and makes a nonsense of any proposal which does not go in the same direction from the British government and we will be doing our utmost to make a fuss about it," says Mr Chalker.

And so it is. Protections for nominee account users and their inability to play a full part in the stewardship of UK companies is an issue UKSA has been drawing attention to for a while. It has even issued its 'Runnymede Declaration for Shareholder Rights', which spells out the type of regulatory change needed and is part of a campaign for change being spearheaded by the association to tackle what it calls a "scandalous" situation and a "uniquely British" problem, putting the savings of countless ordinary investors at stake by denying the rights of ownership.

The Nordic model

"Two years ago we met 12 representatives from the Swedish Young Shareholders Association," recounts Mr Chalker. "12! Blimey! And they were sponsored by JP Morgan, they go around universities in Sweden and talk about investing, all paid for by member fees and the government. We have no such government funding."

Indeed, Sweden's equivalent of ShareSoc and UKSA has real bite. The Swedish Shareholders' Association (SSA) is the largest in the world too. It is a force to be reckoned with, lobbying, campaigning and educating, creating value for minority shareholders. It attends all AGMS, totalling nearly 500 meetings a year. Attend an annual meeting for a big Swedish company, and you'll likely find the chief executive at the entrance, shaking every shareholder's hand, and a member of the Swedish Shareholders' Association in attendance. The SSA is so strong that it has successfully hindered major mergers between large companies and foreign counterparts, which would have been detrimental to shareholders. The SSA also spearheaded the introduction of a tax-friendly investing and savings account, another popular move.

The SSA was founded in 1966 in response to fears that the socialist government would try to gain more control of individual assets. From there, it has blossomed and grown into the 64,000-member strong society it is today, including 10,000 young members. It also runs its own investment platform for shares, low-cost portfolios and funds. Albin Rännar, head of market monitoring for the SSA, says the strength of the organisation is partly down to a Swedish culture. "Everyone is deemed to have a right to voice their opinions. There is a tradition of participating, handling conflict and reaching consensus and developing strategy," he says. "A strong tradition of working together. There is no climate of criticising. We allow everyone to say their peace and influence matters." And the annual general meetings have strong standing in Swedish corporate governance. "Any shareholder, no matter how small, can put a proposal to the agenda, ask a question, make a statement and offer alternatives," says Mr Rännar. "It is an open forum".

Perhaps one reason why UK shareholders have such meek influence over companies is precisely that - cultural. "Englishness means we are very polite, we don't want to rock the boat. We expect companies to act in our best interest, when in fact they don't always," says Mr Lawson.

"We envy what the Swedes and Australians have achieved," says Mr Chalker. "They put the fright on company directors. They might go an AGM to lean on directors to change the direction." And, vitally, in Australia and Sweden, shareholders have their names on the register.

Remuneration issues are settled differently, too. Here, there is a guiding vote on the remuneration report after the remuneration has been decided. In Sweden, it is the opposite. "The UK's 'say on pay' is a nice phrase, but the pay has already been doled out," Mr Rännar points out. "It's more like: what is your opinion?"

Even the company nomination committees are composed of shareholders, chosen at the AGM, which is unique in the world and safeguards shareholders' influence over important matters.

However, it's not all a bed of roses in Scandinavia. Mr Rännar says there are perks to being a UK shareholder too, in particular when it comes to minority protection on the LSE. "When it comes to mergers and cross-border mergers, minority shareholder protection is very strong on the LSE and has been sharpened in recent years. Compulsory bid limits in the UK in particular are more stringent than in Sweden.

"And Swedes try to be nice and flexible and avoid conflict, but sometimes that leaves things open to misuse and abuse from large players," he adds.

ShareSoc and UKSA - unite

Now, there's no denying a weak culture of investing in the UK. Education about stock markets is still distinctly lacking and many people view it with a sort of ideological fear. But things are starting to change - slowly - spurred on by the decline of cushy final salary pensions schemes and the advent of defined contribution schemes, stocks and shares Isas and Junior Isas. Technology making trading as easy as a click of the mouse is further pushing Brits to be more financially-minded. And while the majority of private investors still tend to get stuffed into funds recommended by brokers, some are choosing the DIY method. Either way, it should be encouraged by the government, and certainly, individual share ownership, with the benefits it brings, should be top of the list.

Statistics suggest that if overseas holdings of UK equities are discounted, private individuals hold 23 per cent of UK shares - which is almost equal to that of pension funds and insurance companies combined. So they really should count much more than they do - and be recognised as a big force for good. Many companies understand this and are extremely focused on their personal shareholder base to which they ascribe a considerable amount of value. Private shareholders offer stability and bring liquidity in secondary markets. Where investors have relationships with the board, it keeps directors on their toes. Individuals, in turn, appreciate having a stake in society and forming part of the engine of growth in the economy. As a shareholder of, say, M&S, walking into a store is very empowering.

But currently, the system appears geared towards large institutional investors and intermediaries, much of which can be put down to nominee accounts. The lack of individual shareholder rights has arguably thwarted the growth and influence of the organisations trying their best to represent the interests of private shareholders in the face of UK plc. Whether the solution is to scrap nominee accounts altogether in favour of an electronic register, or enforce stricter rules on nominees is still uncertain. However, this can only be achieved with the help of a strong, united group representing all UK individual shareholders. UKSA and ShareSoc split several years ago following a dispute over details not worth delving into. Now, it would seem that they need to get over their differences and join forces. If ever the individual shareholder needed a robust, united voice, it's now.

So, what should shareholders do?

Well, if you're one of millions in a nominee account, ask your broker - no, demand - that all relevant information be passed on to you and ask for the broker to vote your way on your behalf. Attend the AGMs as often as you can and subscribe to the Regulatory News Service, keeping abreast with all company developments. And finally, without critical mass, individual shareholders haven't got a hope of influencing the boardroom, so please, sign up and become a member of either UKSA or ShareSoc so that one day, UK individual shareholders will have one strong, united and influential voice.

Australian Shareholders' Association

The ASA is an independent, not-for-profit, member-funded organisation that has grown to be the major autonomous body representing retail Australian investors. It is a strong collective voice and votes more than $5bn AUD worth of proxies each year. Boards listen when the ASA speaks. It offers individual and corporate subscriptions, works with the industry, conducts research and analyses company reports.

Founded: 1960

Members: 5,757

Budget: Turnover: $1.03m - AUD - (£0.56m). Profit: $60, 702. Members' equity: $362,453

Employees: three full-time, one part-time, two contractors, 100 volunteers

Population of country: 36.2m

Swedish Shareholders' Association

Founded: 1966

Members: 62,000+

Budget: Income from membership fees: SEK20.5m (£1.74m). Other: SEK4.28m. Total turnover: SEK24.8m

Staff: 40

Population of country: 9.6m

UK Shareholders' Association

Founded: 1993

Members: 500+

Staff: Volunteers

UK population: 63.5m

UK Individual Shareholders' Society

Founded: 2011

Members, 3,000

Staff: Volunteers, unpaid directors, one employee contracted to look after records and accounts

Turnover: £49,000

UK population: 63.5m

UKSA Runnymede declaration

The Runnymede declaration for shareholder rights issued by the UK Shareholders' Association on the matter of equity investor rights and protections.

Shareholder democracy

The UK Shareholders' Association regards the present arrangements under which increasing numbers of private investors are obliged to hold company shares as hostile to their own best interests and to the need for good corporate governance. Shareholder democracy is damaged when investors in company shares are denied shareholder rights and yet that is one outcome of the unrelenting pressure forcing investors to use intermediaries for holding their shares, in the form of pooled nominee accounts.

A direct relationship between investors and companies in which they are invested, which can only be achieved by investors' own names being placed on share registers, is the necessary means of achieving shareholder democracy. Such a relationship should be available for all who want it. It is the best protection for those who save by investing in equities, as it avoids all possibility of loss caused by an intermediary failing, with shareholdings that do not match its obligations. For those that do depend on an intermediary the compensation available must be raised to the same level as that available for pension schemes, because the loss of a portfolio could be similarly catastrophic.

The UK Shareholders' Association accordingly makes the following declaration, to be known as The Runnymede Declaration for Shareholder Rights, to reflect the foundation of all democratic rights signed on Runnymede Island in The Thames 800 years ago.

Declaration

It is inequitable and intolerable that investors whose own money is used to purchase shares in companies of their own choosing can be denied entitlement to the legal rights of ownership.

It is contrary to the public interest that those who by their investment decisions should, as equity owners, be able to hold company managements to account, can be prevented or hindered from doing so.

All citizens of the United Kingdom of Great Britain & Northern Ireland who invest in British companies that are listed on any public market must be able to enjoy identical rights of information, participation and voting as currently enjoyed by shareholders in certificated form.

When the UK Government decides to abolish share certificates (to comply with EU law), this decision must be implemented in such a way that the full shareholder rights associated with legal ownership of company shares are preserved.

UK investors holding their shares through an intermediary must be protected in like manner to pension funds provided by insurance companies, namely 90% with no upper limit.

The UK Shareholders' Association calls upon all political parties to address these matters as a priority, so that remedies can be found and implemented by the UK Government before the end of 2015, the 800th anniversary of the primary source of individual rights, Magna Carta.