It has been a busy year for shareholder activism. Last week Burberry (pictured) became the latest victim of an investor revolt over its remuneration report, while at the extreme end of the spectrum, Spanish telco Gowex filed for bankruptcy after short-sellers Gotham City Research exposed accounting fraud at the firm.
FTSE 100 giants including the likes of Barclays, Bovis and WPP have all had to face shareholder ire this year. Fidelity alone said it has voted against at least one of the executive pay proposals at 52% of the FTSE 350 companies it holds, the first time it has ever taken action against the majority of the firms it invests in.
The asset manager has been true to its word, after last year warning groups it would vote against long-term incentive plans that were less than three years. It has indicated it will extend this to five years in 2015.
On the face of it, executive remuneration seems to be in the spotlight more than ever in a time of austerity, and has frequently bubbled over into the world of politics. Business secretary Vince Cable’s call for restraint in April followed the introduction of a binding shareholder vote on pay last October.
Besides Fidelity, several asset managers have also made their stands publicly. However, other institutional investors have questioned this strategy, preferring to lobby behind closed doors.
‘We don’t think going public is helpful,’ said Angeli Benham, corporate governance analyst at Legal & General Investment Management (LGIM). ‘We want to have conversations in advance and iron out any issues before the AGM. Going public would hamper our ability to engage with companies.’
She insists there are alternatives, such as talking to other shareholders through meetings at the Investment Management Association (IMA). The IMA itself has been a vocal critic of several firms’ remuneration reports, including issuing an ‘amber top’ alert on Burberry last week.
But for some, a concerted approach from multiple major shareholders is seen as more effective.
Ashley Hamilton, corporate governance manager at Royal London Asset Management (RLAM), said the decision to team up with peers or to go public is taken case by case and will depend on several factors, including the issues involved, the size of its holding and what other market participants are doing.
‘When we are going to vote against a company at its AGM, we will write to them a day or two beforehand explaining our rationale, so we are transparent,’ she said. ‘If it is a governance issue, we will often have conversations through the IMA with other fund managers if they are top 10 shareholders. We don’t take going public lightly.’
Hamilton said when RLAM votes against a proposal (it voted against ITV’s remuneration policy in April), it is to ensure investors get a fair deal. ‘We are thinking about the long-term benefits for the company; we are long-term sustainable investors.’
The big institutional investors will consider several factors before voting down remuneration proposals, such as the performance of the company, the average executive pay for the company’s peer group and whether it fits with standard UK market practice. ‘For example, even if a company’s peer group are mainly US companies, we will not accept US levels of boardroom pay,’ she said.
Similarly, LGIM is against the US-style granting of excess options as part of directors’ remuneration packages. It says the defence that if they do not pay this, they risk losing talent to America has proven unfounded.
‘There hasn’t been any evidence of this,’ Benham said. ‘If anything, we’ve probably seen more CEOs coming across the pond to work here.’
Both LGIM and RLAM said they have seen little, if any, evidence that this form of institutional shareholder activism moves companies’ share prices in any meaningful way, pointing out that as holders of the stock and long-term investors their interests are aligned with smaller shareholders.
It is a mile apart from the episodes involving Quindell and Gowex this year. Both were targeted by Gotham City Research and saw their share prices dive by over 40% on the day that it was announced the short-selling house had initiated coverage.
Gotham was vindicated when it came to Gowex, which this week went into bankruptcy and its former CEO was charged with several counts of fraud after falsifying the company’s results over a four-year period. Quindell seems to be keeping its options open after initially threatening legal action.
But for some, the ability to move a company’s share price so significantly through shareholder activism smacks of market manipulation. Gotham admitted to profiting from the Gowex fall out through shorting the company, but it appears a somewhat grey area.
‘From a shareholder activist viewpoint, where a manager holds a significant quantum of company shares and takes a position on the board, or works closely with management, there is certainly grey areas of information flow, where the investor may be privy to market sensitive or insider information, which could restrict their ability to sell or add to positions,’ said Delyth Richards, head of funds research at Kleinwort Benson.
Indeed, Jeffrey Roberts, a senior partner at Gibson, Dunn & Crutcher, points out the FCA has warned that an activist strategy could itself constitute inside information, for example when a person trades on the basis of knowledge of another investor’s intentions or strategy, or if they make false rumours and take advantage of the resulting share price movements.
‘Once an activist’s presence on a company’s share register is publicly identified, any potential market abuse issues are normally addressed because they should cease to be price sensitive,’ he said.
‘This is the main reason why activists, once relevant shareholdings have been acquired, often use “open letters” to garner support from other shareholders, as opposed to private approaches to them before publicly launching an activist campaign,’ he added.