A glimmer of light has appeared for investors fed up with being treated like second class citizens when it comes to their shareholdings.
Individual shareholders are significant players in the UK stock market: in 2020 they owned around 15 per cent of shares in the main market and nearer 25 per cent of Aim, according to figures compiled by the private investors’ association ShareSoc. Yet they are often ignored by the managements of the companies they invest in when it comes to voting rights and invitations to fundraisings.
However, change is now on the cards following the publication of the UK Secondary Capital Raising Review by Mark Austin. Proposals include involving private investors as fully as possible in all types of secondary fundraisings and using digitisation to ensure that investors are kept informed by the companies they own. But it will take time for mindsets and systems to change. Until then, investors will continue to struggle to fully exercise their ownership rights.
Mark Northway, a ShareSoc director, says some of the market's private investors are short-term investors and traders focused specifically on financial returns; but many others behave much more like long-term owners, interested in the company’s fortunes, taking a long view and often having some sense of responsibility in regard to the company.
The trouble is that this engagement with holdings hasn't translated into either activism or, at a more fundamental level, voting. Northway says that currently: “We think that only between 1 and 6 per cent of individuals’ shares get voted at the moment.”
Yet shareholder stewardship is an important principle, because it strengthens democracy and transparency and means private investors can have a meaningful voice in holding UK plc to account.
As Northway explains, the challenge for those who want to see wider engagement is that this perceived apathy has been used by the investment industry as evidence that there’s no real interest among investors, and therefore that facilitating the voting and stewardship processes would be a waste of time and money.
ShareSoc’s perspective, unsurprisingly, is different. It argues that so many shareholders don’t vote partly because of a lack of education around the importance of exercising their rights and responsibilities, but also because of poor or non-existent communication flows and a clunky process. Customers of many brokers don’t even know when there is an AGM or a vote coming up; and if they do hear about it, they have to actively request the right to vote or to attend the meeting.
“I’m a relatively conscientious, active investor, but I am completely unaware of AGMs or votes across most of my holdings because my broker is Barclays and it doesn’t tell me about them, so my shares don’t get voted,” says Northway. “So you can see why most others don’t either.”
The problem, he says, is that the vast majority of shares are held via nominee accounts (typically run as a separate, ringfenced operation by brokers/platforms), and under the Companies Act 2006 any investor who holds shares via a nominee account is not the legal owner of those shares but only the ‘beneficial owner’.
As a consequence it’s the nominee, not the investor, that has shareholder rights, and there is no legal obligation on it to pass the corporate information it receives on to the end investors. In practice, says Northway, nominees tend to send on information and voting rights around specific corporate actions, but not around AGMs or various other areas, notably communication around third-party investor activism.
The Austin proposals around digitisation could significantly improve matters. ShareSoc has long been fighting for improvements in the flow of information between companies and their end investors. Northway points out that while the old paper-based share certification system made it a big logistical undertaking for companies to communicate with shareholders and for shareholders to vote, digital technology should in theory enable a free flow of instantaneous, cost-free communication between the two parties.
He adds: “The way the nominee system is operated in most cases has allowed these hurdles to persist into a time when there’s no excuse for such inefficiency.”
ShareSoc says much could have been done to improve shareholder stewardship for investors in the nominee system. One simple fix would be to legally oblige nominees to pass all communications provided by companies on to their end investors, unless the investors have indicated they don’t want to receive them. Secondly, companies should have easy access to the names and contact details of beneficial owners without having to go through the current “clunky process” of asking the nominees.
Online investment platforms, as the main interface between private investors and the nominee account system, are clearly also in a strong position to improve transparency and encourage shareholders to exercise their voting rights. So far, however, only interactive investor (ii), the second-largest broker in the UK, has set out its stall to actively make things easier in that respect.
In autumn 2021, instead of leaving customers to request the right to vote on the platform as had previously been the case, it made voting rights the default position – a move that boosted the number of ii registered voters from around 80,000 in the first half of the year to more than 400,000 customers.
Interactive investor customers are also now notified of shareholder events such as AGMs, and alerted when they are eligible to place a vote in the in-house online ‘voting mailbox’ service (unless they unsubscribe). As a consequence, of the total voting opportunities registered with the voting service, around 10 per cent were exercised in the first quarter of 2022 – a significant improvement on the national average, and one that’s likely to rise over time as more customers become aware of the facility.
In contrast, Hargreaves Lansdown, with around 1.6mn customers – described by Northway as the “laggard” in the line-up – leaves voting initiatives entirely to customers’ discretion, should they happen to hear about the opportunity.
As the company’s head of external relations Danny Cox explains: “HL offers a free service so that investors can vote in AGMs should they wish to do so. However, in the vast majority of cases less than 0.5 per cent of investors choose to vote in an AGM for a UK company.” Quite a contrast with the take-up at ii.
Northway reports that relatively new brokers such as Etoro and Freetrade also trail the pack. Other mainstream brokers make some attempts to facilitate shareholder engagement but stop well short of full transparency.
For example, at AJ Bell, another leading player with around 400,000 customers, the level of support depends on the type of vote. “For resolutions that can potentially have a significant change on a customer’s shareholding (ie, EGMs, special resolutions at AGMs or corporate actions such as M&A proposals) we alert customers via their account and enable them to vote online,” explains PR director Charlie Musson.
“For standard AGM resolutions that are unlikely to have a material effect on the customer’s shareholding (ie, director re-elections, etc), customers can request to attend the meeting in order to vote or vote by proxy and we will process that for them. They can contact us via secure message or telephone and the more notice they give us the better – we ask for a minimum of five days.”
Another key development, which emerged from the confinements of pandemic and lockdowns, is the use of hybrid AGMs conducted both online and in person. The registrar company Computershare reports that last year, 52 per cent of its FTSE 350 client companies conducted AGMs using technology that enabled some degree of virtual engagement, whether as a fully virtual or a hybrid meeting. “We’re seeing a similar split between traditional, fully in-person meetings and virtual or hybrid meetings this year,” says governance director John Britton.
He makes the additional point that investors these days more likely to be engaging boards and management on environmental, social and governance (ESG) issues, and that “virtual and hybrid meetings can offer more sustainable solutions” in this respect.
As well as individual equities, the whole issue of shareholder engagement also affects the growing number of retail investors in investment trusts. The Association of Investment Companies, the industry body, is also working to get platforms to up their game. Communications director Annabel Brodie-Smith said: "We launched the AIC Shareholder Engagement Award last year to reward and recognise the platforms that do the best job of enabling shareholders to exercise their rights.
"Our specific suggestions to platforms include notifying customers about all voting rights and AGMs, not just corporate actions. Also we'd like all platforms to move to an 'opt-out' (as opposed to ‘opt-in’) system, to ensure all customers are kept informed about their shareholder rights unless they choose not to receive notifications.”
In addition to the changes proposed in the review of secondary fundraising in the UK for the Treasury, further guidance for companies on best practice for shareholder meetings and engagement is also due in coming weeks from the Financial Reporting Council.
But arguably the single biggest step to enhance stewardship might well be for all retail platforms to follow interactive investor’s lead and make information and access to voting the default position.
As Richard Wilson, ii chief executive, observes: “Shareholder democracy and engagement shouldn’t be inhibited by red tape or time-consuming bureaucracy – especially in today’s world where technology provides simple, time-saving solutions.”