The return of the activist shareholder

Managers are facing more revolts by owners, but too often it's a case of bolting the stable door after the horse has bolted. Simon Evans looks for a long-term solution

Sunday 24 May 2009 00:00

The revolt at Shell last week, which saw 60 per cent of investors vote down the company's generous executive pay policy, sent shockwaves through the oil industry.

Weeks earlier, shareholders at rival BP fired a warning shot across the bows of its board, when 34 per cent of shareholders at the company's AGM voted against pay awards for senior management.

And some 16.3 per cent of investors at Barclays' AGM last month voted against the reappointment of the City veteran Marcus Agius as chairman of the company, angry at his role in bringing in Middle Eastern backers to support the company. Other recent revolts have come at the stockbroker Tullett, and the housebuilder Bellway.

If some of last week's headlines are to be believed, corporate Britain is facing a tsunami of activism – a shareholder backlash like never before.

But the man who has activism running through his veins disagrees. Unless there is a change in the way the City operates, things will remain much the same, says Colin Melvin, the softly spoken Scot who heads Hermes Equity Ownership Services, the corporate advisory service that represents some £50bn worth of equities owned by the public.

Unlike many of the institutions and investors who have suddenly found their voices after years of quietly waving through bumper bonuses, Melvin is a regular thorn in the side of corporate fat cats and greedy boards – a call from the £50bn man typically means one thing for a chief executive. And it isn't going to be good news.

"You can interpret a lot of this recent activity as the slamming of the stable door after the horse has bolted," says Melvin. "What we have at the moment is a series of AGMs where shareholders are more excited than usual and voting against, often justifiably, things they don't like. But this should have been done long ago."

Although Hermes grapples with a range of corporate issues, pay is currently vexing it more than usual. "Pay is important because it represents a classic conflict of interest," says Melvin. "Pay is a measure of status in some way, and you see a lot of concern about this in the US. But those investors crying foul now are often the ones that waved the structures through unopposed during the bull market. You get what you deserve but the people who are complaining now aren't often the ones who have their wealth at risk."

Melvin points his accusatory finger at the City and, in particular, the investment management industry. "For the intermediaries who trade shares, corporate governance doesn't really matter to them," says Melvin. "They generate their wealth through transactions: the more they transact, the more they earn. Are they interested in ownership? No. In fact, ownership behaviour gets in the way of transactions."

He adds: "They get paid on the value of assets under management. They don't really make the connection between the value of companies, the longer term, and the way the compensation – remuneration – is linked to the strategy. So there is a clear problem."

That problem is most acute with fund managers who deal in the most actively traded assets – liquid investments – says Melvin. Logic dictates that the more liquid an asset, the easier it is to sell, and thus the need to engage in longer-term corporate governance change is lessened. Fund managers investing in less tradeable assets, in smaller companies or emerging markets, tend to put greater store in engagement than others, he says.

"Most of the money sat with your pension fund is invested in liquid markets with fund managers who can drop the stocks at any time. And they don't do it for ownership reasons: they do it for trading reasons," says Melvin. "This has to change. Fund managers can say that they had lots of meetings with a company – but what were they talking about?"

The Investment Management Association (IMA), the body that represents the fund management business in the UK, said last week that it planned to improve the way it holds companies to account. Its chairman, Robert Jenkins, said: "It is not our responsibility to manage companies. But we can hold boards accountable for the failure of management and failure to listen. If we don't, who will? Many boards will not listen unless they believe there will be consequences for not doing so. So let us put a body on the street when past engagement fails so that future engagement might better succeed."

Despite protestations from the asset managers, Melvin believes pension funds and other owners of stocks need to flex their muscles further before any real change will be apparent.

"It's fair to say that trustees should do more, but they simply aren't in a position to do it," says Melvin. "Few are professionals and many work on a pro bono basis and they probably need help. We all need to think whether we are setting the right terms for the management of the money. Are we just taking what's on offer when we should be demanding more?"

With 25 staff at his disposal in Britain, and others abroad, Melvin represents eight pension funds counting the BBC's, and has three other clients including the Environment Agency. The group is owned by the BT Pension Fund, although the City rumour mill has suggested BT might be readying itself to sell the business. One pension fund source says: "It would be great if a coalition of pension funds and others actually owned the business. Then it would give some real impetus to Hermes."

Coinciding with this weekend's business leaders' conference in Copenhagen addressing the issue of climate change, Melvin is keen to detail the work his unit has been doing.

"We have a programme of engagement around carbon at the moment," he says. "We have identified eight companies around Europe that are way out of line with their sectors in terms of their carbon emissions. This is a hell of a risk to their businesses. Many of these programmes are window-dressing at best."

But with his underlying clients owning around 7,000 stocks, Melvin has to pick his battles. Waging war with the entire corporate world isn't on his agenda. "One of the first things we ask is whether the company is strong enough to respond to engagement?" says Melvin. "For some companies, it doesn't matter what you say or do: they won't respond. We often see short-term underperformance by a company and its shares as a catalyst to target. We find companies are more amenable to change and you are more likely to get other support from shareholders."

With lots of underperformance out there at present, Melvin has plenty of targets in his sights. "We are at a fascinating point in history," he says. "We have a unique opportunity to change and improve the way our system works. The City grew fat and lazy during the 10 to 15 years in the lead-up to the credit crunch. Companies were never challenged to the extent the underlying shareholder needed. That has to change, not just now, but in the future too."

Owners vs managers

Amec: Samir Brikho can consider himself one lucky FTSE-100 boss. Earlier this month, shareholders in Amec nearly voted down the remuneration report confirming his 13 per cent pay rise to £850,000 a year. Only 54 per cent backed the hike, though the company later issued a statement pointing out the financial recovery Mr Brikho had led over the previous two and a half years.

Tullett Prebon: As Amec shareholders were fussing over executive pay, investors in Tullett Prebon showed overwhelming support for boss Terry Smith's near-£10m pay and bonus award. A rebellion by the Local Authority Pension Fund Forum, which held less than 1 per cent of the shares, was crushed, with nearly 97 per cent of investors approving the remuneration report.

Bellway: Almost 60 per cent of shareholders at Bellway's AGM in January voted against a bonus deal for John Watson, the chief executive, which would have seen him awarded a bonus worth more than half his salary.

LonZim: AMB Capital has joined forces with Damille Partners IV to wage war with the board of LonZim, the Aim-listed Zimbabwean investor. Lonrho, the African conglomerate that, in effect, runs the business, is readying itself for an almighty fight to retain control.

Target Corporation: New York-listed Target is under pressure from Pershing Square Capital Management after a decline in profit. Target is cutting costs by freezing the salaries of senior managers and taking on rival Wal-Mart by expanding its food sales. Pershing, with an 8 per cent stake, wants more substantial moves, such as replacing the board of directors.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Please enter a valid email
Please enter a valid email
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Please enter your first name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
Please enter your last name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
You must be over 18 years old to register
You must be over 18 years old to register
You can opt-out at any time by signing in to your account to manage your preferences. Each email has a link to unsubscribe.

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies


Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in