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Magazine Issues » June 2015

OPINION: A vote to nowhere

<a href=Fiona Rintoul" width="250" height="156" />Shareholder activism: is it good or bad? The default position tends to be that shareholders should be active – or at least vigilant.

Vigilant shareholders take responsibility for the performance of their companies. They are, in the words of the European Corporate Governance Institute (ECGI), playing “the role of fire alarms and their mere presence can alleviate managerial or boardroom complacency”. 

There is, of course, an alternative view. It says that shareholders, not being professional managers of businesses, would do better to keep their noses out of things that don’t concern them and that they may not properly understand. 

“Opponents say that ‘shareholder activism’ is a euphemism for disruptive, uninformed, populist ranting or ‘take the money and run’,” explains the ECGI, adding that: “In some countries, organised labour is accused of using shareholder activism tactics as a capitalist tool in the class struggle.”

The class struggle. Golly. Next week’s lesson will be about dialectical materialism. 

But one shareholder right that investors are usually encouraged and, in the case of institutional investors, expected to exercise is their right to vote. The thinking behind this is that they are representing their investors or beneficiaries. 

“In particular, trustees of pension funds and foundations need to invest and engage with companies in line with their own fiduciary duties to act in the best interests of their beneficiaries, and exercising voting rights at companies may be considered part of this duty,” writes Share Action, the movement for responsible investment, in a recent survey of the 2014 UK AGM season. 

But do institutional investors act in the best interests of their beneficiaries? This is a moot point, since we will all have different ideas as to what the best interests of beneficiaries are. However, Share Action believes asset managers side with company management too often on controversial votes. 

In its report on the 2014 AGM season, Share Action homes in on eight controversial votes at FTSE 100 companies. A controversial vote is defined as one where the percentage of votes cast against management was greater than 30% and where this could not be attributed solely to one major shareholder. The movement says it chose to focus on votes relating to the board and remuneration because “we feel that these are most relevant to an investor concerned by the wider impacts of voting decisions”.

The results show a clear pattern. In all but one case, the reason for voting against management was that remuneration was excessive or not adequately linked to performance; in every case, management got its way. This perhaps shouldn’t come as a surprise. Institutional investors are, after all, institutions – part of the business establishment. 

As a journalist, I’ve lost count of the number of times I’ve been told by fund managers that caps on executive pay, such as the €450,000 limit in France for executives at state-run companies, are ridiculous and counter-productive. One nods wearily, but it’s hard not to ask oneself: what kind of a person can’t live very nicely on €450,000?

Share Action chief executive Catherine Howarth says: “Most of us investing with big-name asset managers trust them to vote sensibly on a host of controversial issues at the annual general meetings of the companies we own.” 

But perhaps there is a fundamental disjunct between how people in the asset management business see voting sensibly and how most of those who invest with them would see it. An opinion poll in France showed 83% support for the government’s pay cap. In that case, shareholder activism is neither good nor bad but pointless. 

What every asset manager can do, though, is disclose how it votes. It does come as a surprise, then, to learn that six asset managers – Artemis, Capital International, Invesco Perpetual, J O Hambro Capital Management, Santander and Wellington – do not disclose their votes as a matter of practice. For that, there is really no excuse.

©2015 funds europe