In the past two months relations between shareholders and three of Britain’s biggest companies have deteriorated to the point where unseemly spats have broken out in public.
Investors in Marks and Spencer are still bitter about the board’s decision to promote Sir Stuart Rose from chief executive to chairman. Royal Bank of Scotland provoked another burst of fury this week, launching a £12bn rights issue in spite of repeated assurances to investors, both publicly and privately, that it did not need one. And at its annual meeting last week, BP failed to win the backing of more than a third of investors for a bonus scheme that rewarded senior executives merely for staying put after losing out in the race to succeed Lord Browne as chief executive.
These cases highlight the fears of large institutional funds that Britain’s biggest companies seem increasingly happy to thumb their noses at shareholders. William Claxton Smith, head of corporate governance at Insight Investment Management, warns of “a breakdown in trust between corporates and the fund managers who represent their owners”.
BP and M&S have seriously irked investors, largely because of a lack of consultation. Commenting on M&S, a large institutional investor, says: “Overnight the board alienated pretty much all of its loyal, long-term UK shareholders, who until then had no reason to fight them.”
The RBS U-turn laid bare cracks that have been forming for years in the bank’s relations with its shareholder base, with questions raised about the strategy of Sir Fred Goodwin, chief executive, the expensive acquisition of ABN Amro and the board’s strength.
Stressing an increasingly vigilant approach adopted by institutions, particularly in light of the deepening economic gloom, Robert Talbut, chief investment officer of Royal London Asset Management, says: “The tone [of investor interaction with boards] is altering …You can expect much tougher negotiations between companies and investors as we go into a more difficult period.”
The last time investor relations with companies broke down seriously was in 2004, shortly after more stringent standards for boards were introduced through the Combined Code on corporate governance. That prompted industry and investor groups to set up a series of dinners to soothe tensions.
By all accounts, the meetings worked. Investors say relations strengthened with boards consulting them regularly and potential disputes resolved quietly. High-profile public rows have, until recently, been rare.
Once or twice a year investor disaffection has, however, spilled over into a formal protest at annual meetings. One of the most public campaigns in recent years has been against the Cable and Wireless board, which for two years flouted objections to a controversial pay plan for the chairman and top executives.
In spite of the recent series of rows involving M&S, BP and RBS, regulators and investor representatives such as the Association of British Insurers, say it would be an exaggeration to say relations had broken down in a similar way to 2004.
“It would be wrong to suggest that current examples of disagreements constitute a trend or a breakdown across the board,” says Peter Montagnon, the ABI’s director of investment affairs. “But there are risks, particularly as the economy starts to deteriorate and we need to be careful.”
Paul Boyle, chief executive of the Financial Reporting Council, which oversees the Combined Code, says: “The key thing is the extent to which companies modify behaviour as a result of shareholder intervention. And there is plenty of evidence that [the system] is working. In some cases the influence of investors is very public. In many other cases it is private and not at all visible.
“If there is an uptick [in public confrontations] it is not systematic and is likely to be correlated to general stress of economic conditions.”
Paul Myners, chairman of Land Securities, the property group, and of Guardian Media Group, agrees: “The intensity with which governance issues are raised is linked to what the equity market is doing. A bear market will lead to more friction than in a bull market.
“There has not been a generic deterioration in companies’ relations with their investors. But perhaps one or two institutions are being more assertive. That is not bad. They are owners and should behave in an owner-like manner.”
He points out wrangles have only become public, with investors threatening to vote against a proposal, when the usual mechanisms of engagement in private have failed.
Even then, votes against management tend to be muted with investors voting through even the most contentious proposals. C&W won 82.5 per cent of votes in favour of its pay plan last year and Richard Lapthorne, chairman, won backing from 89 per cent of voters, an unusually low level of support for a chairman but still an overwhelming majority.
“Voting against the board is a pretty nuclear option,” says a big investor. “We use it in extremis. We expect directors to look after our interests and we have to trust them to do that. We risk destabilising our investment if we vote against them. Our main influence has to be through private discussions.”
However, some leading shareholders suggest this public acquiescence can make company executives complacent. “Perhaps they think the vote is an empty threat,” says one.
One high-profile chairman of a FTSE 100 company does little to dispel this view. He acknowledges the relationship between investors and companies has worsened. But, he says “investors cannot do anything, until a company wants something from them”.
Anita Skipper, head of governance at Aviva Investors, says: “We are beginning to see a polarisation between [companies] who value good shareholder relations and those, at the other extreme, who are pushing it and treating shareholders with disrespect …These companies may need the support of their loyal long-term shareholders one day.”
The danger, warn investors, is if companies do not pay more attention there will be a backlash. Many have already threatened to vote against Sir Stuart at the annual M&S meeting in July. But, possibly worse, his record on corporate relations has been tarnished. Investors will now scrutinise his every move.
Shareholders are not powerless, says the head of one investment group. Investors can sell shares or back a rival’s offer. “The threat of takeover, particularly of big companies, may be less powerful than it was but nobody knows what is round the corner. As RBS shows, you never know when you are going to need your long-term shareholders.”
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