In theory, all shares are equal. Each carries a single vote in company meetings, and in the UK, each normally has the same rights as any other. But this equality also means that those with most shares have most votes, and those who own the largest proportion of the company might be expected to have more influence.
Smaller shareholders often complain that this leads to inequality. Companies hold company days for institutional investors; smaller investors are not invited. The suspicion is that these provide large investors access to vital information not available to others. Ask any investor relations manager, and they’ll point out that part of their role is to make sure that this doesn’t happen. The art involves steering conversations away from rocky aspects that could be price sensitive.
So why have these meetings? They are to build confidence by giving fund managers a greater feel of the company strategy, to enable them to delve into the operational risks and challenges, and to discuss their concerns. Investors often cite the quality of management as an important factor in judging an investment and small meetings give investors a chance to assess executives in person and read their body language. Video calls, via Zoom or Teams or the like, create a barrier; phone calls are a stopgap. For senior executives, the value is in building long-term relationships. Well-informed investors are more likely to stand by the company during lean times, especially if potential issues have already been aired and fundraising is required.
Why exclude small shareholders? That comes down to diary pressure. When I worked in investor relations, we had to reserve dates several months in advance. The largest long-term shareholders had priority. A few were met twice a year rather than just the once. We favoured large potential long-term investors over short-term holders. We vetted those attending – our credibility would be on the line if we fielded fund managers who asked facile questions. Brokers and organisations like ShareSoc, who can muster a group of self-selected well-informed private investors, ought to qualify. And if the doors don’t open, there’s always the AGM.
A recent announcement by Legal and General Investment Management (LGIM) throws another perspective on this. It said that it will no longer provide detailed feedback to companies about their executive pay proposals because, in most cases, its advice is ignored. In future, LGIM will only respond to companies on an individual basis whose proposals are not covered by its published policy.
This is disappointing when you consider that LGIM is the UK’s largest asset manager and prides itself on leading other institutions on ESG matters. Its chief executive, Michelle Scrimgeour, co-chaired the COP26 Business Leaders Group in the 18 months before COP26 and she spoke at the conference. Over the last six months, LGIM has issued updates on diversity and amongst other things, is urging companies to pay all employees a minimum of the real living wage – and advocates offering them all free shares. Wider share ownership is all about inclusion. It encourages employees to understand more of what makes their company tick and it increases their engagement and self-motivation.
On executive pay, LGIM is more stringent than the guidance issued by the Investment Association, the trade body of UK fund managers. And there, perhaps, lies the rub. Managers of funds and investment trusts vary in their opinions about ESG issues in general and executive pay in particular. Some of these different approaches are mutually exclusive, and companies can’t please them all. In 2021, LGIM voted against about two out of every five company AGM resolutions. That’s a higher percentage than ISS, which also issues policy guidelines and backs them up with recommendations to fund managers of how to vote at company meetings. It’s also more than the Institutional Voting Information Service (IVIS) research notes which flag concerns based on the more low-key approach of the Investment Association.
Some think that there could be another reason why LGIM’s advice is often ignored. Many of LGIM’s funds are passively managed. That keeps the fees down, but it also means that the market weighting of the constituents of each index determines its purchases and sales. If a company share price rises, the value of LGIM’s investment will go up with it, but not necessarily in line with the weighting, and LGIM’s passive funds might be required to invest more to maintain the desired balance. Or vice versa. In passive funds, share transactions are driven by formulae and, however well company management presents its strategy and operations, it will have little effect on how many of its shares passive investors own.
Since it would be understandable if company executives respond more to those who apply discretion in managing their funds, there’s an argument that active fund managers have more influence on companies than passive fund managers. We are told that all shares are equal. But it seems that some shareholders are more equal than others.
LGIM’s ESG policy: https://www.lgimblog.com/tags/environment-social-and-governance/
LGIM’s executive pay guidance: https://www.lgim.com/landg-assets/lgim/_document-library/capabilities/uk-principles-of-executive-pay-lgim.pdf
