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OPINION

Small voices

Small voices
October 1, 2020
Small voices

 

Dilution

Every year, shareholders are asked to give directors the power to allot new shares, and to waive their right to first refusal. This allows companies to issue new shares every year up to a cap of 5 per cent of those already issued, plus another 5 per cent for specific purposes, such as relatively minor acquisitions or investments. Directors claim that they need these powers of dilution so that they can act quickly to take advantage of opportunities, since it saves them the trouble and expense of calling a general meeting to gain shareholder approval.  

The dilution cap was temporarily doubled in 2020 to help companies survive lockdown. This enabled 125 companies, including National Express (NEX), Biffa (BIFF), Hotel Chocolate (HOTC), Hays (HAYS), WH Smith (SMWH) and SSP (SSPG) to raise a total of £23.7bn. While such accelerated fundraising is supposed to be limited to companies under duress (so suggesting a potential red flag for investors), where the share price has already slumped, it can lead to some bounce-back. The new issues reduce the value of existing shares, and it’s galling when private shareholders are excluded from offers that enable large shareholders to buy the new shares at a discount to the prevailing share price. This inequitable policy, backed by the Financial Conduct Authority (FCA), was driven by the Pre-Exemption Group, a body that represents “listed companies, investors and intermediaries”.  

Critics, such as ShareSoc, the private investors society, and this magazine, protested about the discrimination against those with relatively small shareholdings. They pointed out that, for those who own shares directly, PrimaryBid’s technology platform allows everyday investors to participate on an equal basis with large shareholders, as recent offers from Compass (CPG), Taylor Wimpey (TW.), Ocado (OCDO), William Hill (WMH) and IWG (IWG) have demonstrated (where shares are held within Isas, whether or not small investors get a look in depends very much on the policy and technical sophistication of the platform provider).  

 

Dissent

The main thrust of the report (summarised in the table below) suggests that M&G (MNG) and Aviva (AV.) were the most frequent AGM dissenters, closely followed by Legal & General (LGEN). As part of Prudential, M&G used to support almost every company resolution, including pay reports, but FTI says that: “One of the key changes to M&G's expectations” in the first half of this year “was a concern that variable remuneration may have been excessive in light of cuts to dividends and market conditions”.

Legal & General appears to have become more concerned as well, while at the other end of the spectrum, Janus Henderson and also Fidelity appear to be the most resolutely supportive. However, a caveat is needed here since fund managers’ votes, of course, only apply to companies in which they hold shares. The variation between institutions might be due to their different portfolios, or to changes of investments within these portfolios.

Where companies do listen to their major shareholders, and adapt their practices to take their concerns into account, you’d also expect the level of dissent at the following year’s AGM to fall. Judging from the trend in voting dissent, this could be the case with Aviva and Columbia Threadneedle. But of course decisions about whether or not to support resolutions are subjective, so these trends might also be due to changes in fund managers or their perceptions.

 

Rio TNT

Ideally, companies bow to shareholder pressure long before their AGMs. That’s what happened recently at Rio Tinto (RIO), where the internal post mortem into the destruction of two 46,000-year-old rock shelters in the Pilbara region of Western Australia blamed “a series of systemic failings”. These included poor internal communications, possibly due to overzealous cost-cutting. Media outrage at the apparently uncaring vandalism of  Australian heritage was only inflamed by docking the pay of those deemed “partially responsible” – chief executive Jean-Sébastien Jacques, head of iron ore Chris Salisbury and corporate affairs boss Simone Niven. The sackings demanded by shareholders, spearheaded by Australia’s sovereign wealth fund, have since exposed a lack of succession planning.

 

2020 offenders

The FTI analysis was expanded from the Investment Association’s “Public Register” of dissenting votes in listed companies. Of the 14 occasions in the past five years when votes of more than 50 per cent have opposed AGM resolutions in major companies, four – Tesco (TSCO), Pearson (PSON), BP (BP.) and Smith and Nephew (SN.) – were FTSE 100 companies; the rest were in the FTSE 250. Most were advisory votes on their remuneration reports, the exceptions being Weir (WEIR) (a 2016 vote that blocked its remuneration policy), Centamin (CEY) (the 2017 election of Trevor Schultz) and TI Fluid Systems (TIFS) (mentioned below). Of the four that took place this year, if there’s a common strand, it’s that the directors concerned received conflicting feedback from their shareholders before their AGMs.  

 

Tesco, identifying peers 

The spat at this year’s Tesco AGM was about whether or not Ocado is a competitor – Tesco’s directors argued that it’s not. Over the past two years, Ocado's transformation into a technology stock, which rerated its share price, has distorted the peer group used to assess Tesco’s relative TSR performance for its share awards. Include Ocado, and Tesco would have underperformed by 4.2 per cent. The directors chose to exclude it, which made Tesco outperform by 3.3 per cent. The difference? A payout to Dave Lewis, Tesco’s departing chief executive, of about £800,000 more than he would have otherwise received. Following the AGM, the directors claimed that despite the dissenting 67 per cent vote, the majority of Tesco’s larger shareholders “agree that the overall outcome of the [share] award is proportionate given the outstanding turnaround delivered by management”.

 

Playtech, repeat offender

In 2017, shareholders had frustrated a one-off share award to Playtech’s (PTEC) chief executive, Mor Weizer. In 2018, after Mr Weizer received £4m, the dissenting vote was 59 per cent. By 2020, when the value of Playtech had halved, and after he received almost £3m, the dissenting vote was 64 per cent.  Claire Milne, who now chairs the company, is expected to restructure the remuneration committee. A new pay policy is to be proposed in 2021.

 

TI Fluid Systems, blocked dividend

The curious thing about this year’s AGM of TI Fluid Systems is that the vast majority of its independent shareholders (large and small) backed a resolution to pay a dividend. This was after the company had furloughed staff, cut salaries, drawn down most of its revolving credit facility and withdrawn its guidance to investors. Bain Capital, which has been offloading its shares in TI but still calls the shots with its residual 54 per cent holding, had initially indicated that it wanted the dividend paid. But by the AGM, it had changed tack and the subsequent vote distinguishes TI Fluid Systems as the only major company to have a dividend pulled by shareholders.

 

Glimmers

Ironically, individual investors are often the voices most heard at AGMs pressing for sound governance, even though their say on resolutions is limited by the one-share-one-vote method of counting. But despite fund managers expressing less interest about dilution during the AGM cycle this year, there has been some progress. When the higher (20 per cent) dilution cap was recently extended to the end of November, there was an emphasis on companies giving “consideration to the effect of the issuance on their retail shareholders, and how these shareholders may be able to take part in some aspect of the issuance”. Small steps, maybe. But at least some of the concerns have been acknowledged.   

 

The most contested resolutions at FTSE 100 and FTSE 250 AGMs over the past five years

Company

Year of AGM

For

Against

Weir Group     

2016

28

72

Capital & Counties Properties 

2020

32

68

Tesco

2020

33

67

Pearson

2017

34

66

Centamin

2017

35

65

Playtech

2020

36

64

Playtech

2018

41

59

BP

2016

41

59

Crest Nicholson

2017

42

58

TI Fluid Systems 

2020

43

57

Smith & Nephew

2016

47

53

Centamin

2018

48

52

Quilter 

2018

50

50

Micro Focus International

2019

50

50

 

Percentage of remuneration reports opposed by major UK asset managers over the past five years

Fund manager

2020

2019

2018

2017

2016

M&G

32

6

3

4

6

Aviva

32

43

43

44

45

Legal & General

25

22

18

14

11

Schroders

18

19

13

14

19

Columbia Threadneedle

17

27

23

32

24

BMO

14

18

13

13

15

Aberdeen Standard

13

13

12

 

 

Baillie Gifford & Co

11

16

11

15

17

Janus Henderson

7

8

4

6