All bark and no bite: when snarling shareholders become docile poodles

Why do investors sound off at management and then bottle it at AGMs?
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The Independent Online

The share price has plummeted, the company is laden with debt and creditors could seize control. In spite of this, the company's directors received £690,000 worth of performance bonuses.

This is the tale of Telewest, the provider of cable TV and phone services.

Grumpy shareholders had been making quite a fuss about this situation over the last few weeks and the annual general meeting promised to be a feisty affair. But Tuesday's meeting turned out to be a damp squib with just 3 per cent of shareholders voting against or abstaining on the re-election of chief executive Adam Singer.

The lack of action could well be due to confidence in the company's management. Yet it is not uncommon for investors to have more mouth than trousers when it comes to voting. It is rare that the cries of indignation and the angry speeches at the AGM express themselves at the ballot box.

"There is often a discrepancy between the howls of outrage that are seen in the columns of printed journals and what is seen at the voting," says Sarah Wilson, the managing director of Manifest, a company that organises proxy voting for shareholders and also advises on corporate governance. One of the reasons for this, she says, is spin. "Some howls [of protest] will come from one or two shareholders, in anticipation that other shareholders will go along with them."

Shareholder activism is on the increase in the UK. But the vocal minority is having a hard time trying to generate enough support to win a vote against the directors' wishes.

"A lot of votes go unthinkingly in favour of management, as a default," says Colin Melvin, director of corporate governance at the Scottish fund managers Baillie Gifford. "However, there is a growing group of institutional investors who are taking more of an interest."

It seems that a lot of professional investors, who look after billion-dollar funds for our pension and insurance policies, are too used to "box-ticking", without any discussion or debate, when resolutions are being voted for.

"There is still a bit of a cultural issue – people don't like voting against management," says Tom Powdrill, a senior officer in charge of pension fund issues at the Trades Union Congress. "Even some activist investors have a problem in voting against management."

Other issues play their part. One is the antiquated system of proxy voting. As few City fund managers have the time to trot down to the AGM and raise their hand in person, they have to fill in forms, in itself a time-consuming activity.

Even when the forms have been completed, there are many pitfalls on the route to the ballot box. The shareholdings are often held by another "custodian" company, and the journey from fund manager, to custodian, to the company's share register is often fraught. "Our members have often said they have cast their vote, then tried to do an audit, but they can't find out if [the vote] was registered," says David Gould, investment director at the National Association of Pension Funds. "Or if they do find out, they find it wasn't registered. No one seems to know where these black holes are."

A more conspiratorial reason for shareholder apathy is that a particular City fund manager might not want to annoy the management of a company. This could be because, in the background, the fund manager's bank may be pitching for business with the company.

Some fund managers see selling the shares they hold as the best form of protest. "The attitude is that if [they] don't like a company, [they] will sell it rather than engaging with it," says Chris Hirst, investment director at the Co-operative Insurance Society, which is by contrast an active investor.

Taking the radical step of voting against management is often a last resort, according to Michelle Edkins, corporate governance director at Hermes, which manages the pension funds of BT and Consignia. "A lot of professional investors don't see the AGM as the main means of communicating with management," she says.

Dick Saunders, chief executive of the Investment Managers Association, similarly sees voting to influence a company as a desperate measure. "When you get to the point where people have cast votes against management, then you have failed," he says. "Once it becomes public, you are looking to see the market lose confidence and the share price plummet. It's better to do it quietly."

The Government is now stepping in to try to encourage the greater use of the shareholder vote. There are plans to bring in regulation that will force companies to put their directors' pay packages to the vote, which is not always done, and also to place greater pressure on investment fund managers and pension fund trustees to use their votes wisely.

The initiative was started by Stephen Byers when he was at the Department of Trade and Industry. Ironically, as Transport Secretary, he later found himself the target of one of the most vociferous groups of angry shareholders when he put Railtrack into administration.

But it will take more than a nudge from the Government before company directors have real reason to fear the wrath of their shareholders.

Off the hook: four companies that escaped a mauling when it came to the vote


Issue: Part-time chairman Percy Barnevik had formerly been chastised for his performance as chairman of engineering company ABB, where he awarded himself a pension worth more than £50m. AstraZeneca shareholders questioned his ability to run their company.

Action: Shareholders threatened to vote Mr Barnevik down at AstraZeneca's AGM but, in the end, 96 per cent of them voted in his favour.


Issue: Directors, including chief executive James Crosby, received a 72-per-cent increase in total pay (rising to £6.6m) during 2001.

Action: Many howls of outrage, but just 25 per cent of shareholders eventually voted against the remuneration policy.

Cable & Wireless

Issue: Chief executive Graham Wallace was offered share options worth up to £4.5m, which shareholders viewed as excessive.

Action: A surprisingly large 28 per cent voted against Mr Wallace's options, but they were still approved.


Issue: In 2001, shares fell from 100p to 60p; they now stand at 5p. But directors received bonuses totalling £690,000 in 2001, on top of a total £2.2m salary.

Action: Many protests, but in the end 97 per cent of shareholders still voted for the re-election of full-time managers, such as chief executive Adam Singer.