City knives sharpened for the shareholder revolution

Government keen for big investors to flex their muscles more often in the boardroom
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The Independent Online

Shareholders have never been so bold, and yesterday they were in triumphant mood having claimed the scalp of Michael Green at Carlton.

There are more investor revolts boiling over elsewhere in the City, such as at BSkyB and Barclays, and many companies are still smarting from the lacerations they suffered at the hands of their shareholders this spring over excessive executive pay. But the ground swell of activism is now taking a new, more aggressive twist and the knives have been sharpened in public.

The breakdown of confidence between shareholders and the boards of the soon-to-be-merged Carlton and Granada was an extraordinary event, in that it smoked out Fidelity, the fund manager with £600bn under management that normally keeps its lobbying activities staunchly private. Anthony Bolton, one of Fidelity's most successful fund managers, has become known - not entirely to his liking - as the "quiet assassin" of Mr Green.

Sarah Wilson, director of the corporate governance and proxy voting service, Manifest, said: "Fund managers have become increasingly emboldened in the past couple of years. Anthony Bolton must have become very frustrated at the lack of response he was getting from the company to go public. Meek and mild fund managers are no longer prepared to be rebuffed and the dynamics of the relationship between shareholders and boards has changed."

Activist shareholders got their feet in the doors of company boardrooms this year, when legislation came in to effect that forced companies to publish details of directors' salaries and benefits in their annual reports. This was put to a vote at annual general meetings (AGMs).

This has turned AGMs, once the preserve of crusty sandwiches and day-tripping OAPs, into must-see events. Shareholders in GlaxoSmithKline turned up in their hundreds to vote against the £23m pay packet for its chief executive, Jean-Pierre Garnier. Reuters, HSBC, and Corus were also among those that faced a significant shareholder protest on executive pay and rewards for failure. The public vilifying of fat cats is now part of the corporate calendar, as increasingly brave and outraged shareholders take the microphone and demand answers from startled boards. Even the office cleaners, such as those at HSBC, took their chance to round on the bank's directors.

Christine Farnish, of the National Association of Pension Funds, said: "It is a positive development that the owners of companies are beginning to take their responsibilities more seriously. They have a key role to play in making sure UK plc generates value for everyone."

Hence the uproar at BSkyB over the recruitment of a new chief executive to replace Tony Ball. James Murdoch, son of Rupert Murdoch, appears to be in pole position at the request of his father, a 34 per cent shareholder in BSkyB and chairman. Derek Higgs, a former corporate financier, has also given a boost to corporate governance campaigners. His review on the role of non-executive directors created a blueprint for the ideal board and their responsibilities.

But acts of defiance abound. Barclays recently appointed its chief executive, Matt Barrett, as chairman, despite demands from Higgs for chairmen to be independent and not to be selected from within the boardroom without full explanation.

The recent shareholder stand-offs will be of cheer to the Government, which last week revived a threat to legislate on shareholder activism. It may make voting compulsory, a move rejected by many as futile. Shareholders have, in fact, always been a pushy bunch, albeit usually behind the scenes. Fund managers such as Isis Asset Management, Standard Life Investments, Morley, Insight Investment and Fidelity, for example, all have dedicated 'institutional relations' teams that deal with corporate governance issues in the companies they invest in, but in the most part operate in a private forum.

Many a chief executive has departed after "deciding to spend more time with their family" or reaching "a decision with the board that it would be in the best interests of both parties to step down." Statements that otherwise read as, "The shareholders turned up the screws." Ian Harley, former chief executive of Abbey National, fell on his sword after the bank's disastrous foray into wholesale banking. The American corporate schmooze of Bob Mendelsohn, former chief executive of Royal & SunAlliance, had always jarred with the City, and he duly bowed out after posting record losses at the group, albeit with £2.5m in his pocket.

There is an argument, however, that washing your dirty linen in public is not always the best way to produce results. Even the NAPF, which was very keen to name and shame boards this summer, wants to see a toned down approach. "Boards and shareholders have learnt a lot from this year and behaviour on both sides will change," Ms Farnish said. "Companies are more willing to listen to legitimate concerns and investors are also realising that they have to apply more judgement in tackling the issues too."

But pressure to avoid Government intervention is now forcing investors to take more public action. Ms Wilson said: "Shareholders ... have the threat of Government action hanging over them, so they are having to become... more direct with companies."

While these few very public spats may give rise to the impression that shareholders are waving their handbags at every opportunity, many shareholders are still sleeping investors. Figures from the Pensions Investment Research Consultants (Pirc) show that the median percentage of votes being cast in the FTSE 350 fell this year to 52 per cent, down from 57 per cent in 2002. Monsoon, for example, was recently accused of riding roughshod over shareholders by letting the family behind the company try to increase its stake on the cheap. The shareholders objected to the attempt, but only six of them turned up to the AGM to air their concerns.

It is also no coincidence that shareholder activism has struck a chord when stock markets have been in decline for three consecutive years. Shareholders are nursing large losses on their investments and want answers. Fund managers who promoted themselves as market-beaters have had to justify their existence and prove their worth above the index trackers.

David Summerlink, of Pirc, said: "If things bounce back, will there be less interest in these issues? If they don't, then shareholder activism will be the only active part of a fund manager's role and the only way they can make a difference."

If the world of low inflation and low investment returns is here to stay, then directors had better be prepared to see shareholders increase the pressure.