Making the best of shareholder activism

Navigating the shareholder spring.

Imagine the scene. You’re ready to sleepwalk your way through the yearly AGM ritual, you’re expecting a few shareholders to show up purely for the sarnies and the most exciting part of your day will be deciding what to wear. All of a sudden, reality breaks in and remuneration is in the cross hairs. The Association of British Insurers (ABI) issues a red top alert, ISS (Institutional Shareholder Services) issues a "vote against" recommendation, your shareholders are emboldened by the shareholder spring and vote against the remuneration report. Press coverage is destructive, you face public humiliation and although the vote isn’t binding, there’s so much pressure on you that you become yet another victim of anger about boardroom pay, another name in the hall of shame.

Sound familiar? Ask Sly Bailey of Trinity Mirror or Andrew Moss of Aviva, who are now seeking employment. Or Sir Martin Sorrell of WPP or Ralph Topping of William Hill, both of whom had their pay packets pummelled by shareholder anger.

Smaller companies have also been engulfed by this fury and are, in many respects, even more vulnerable. Cairn Energy took a roasting with 67 per cent votes against and 10 per cent abstentions on its pay report. AIM company Central Rand Gold was rocked by a 75 per cent revolt against its pay policy. Small cap Pendragon faced an ABI red top alert and an embarrassing climb down after a "no" vote.

That was the Shareholder Spring of 2012.

Shareholder votes on pay may only be advisory but directors who don’t listen to the message risk the ultimate sanction of being voted out. And it’s not just votes against which matter. Abstentions are often used to show a yellow card which directors should read as a clear signal to get round the table and talk to investors.

Remuneration consultants may be having a feeding frenzy advising on pay policy but the key area under the spotlight right now is the communication disconnect between companies and their shareholders.

Help is at hand

Investor activism is a way of shareholders flexing their muscles and demanding that you engage. Companies large and small should take to heart the need to talk to and listen to their shareholders so that they don’t end up with battle lines drawn, leadership resignations or picking up the pieces afterwards. Nobody wants to be hauled over the coals in public.

It can be tough being a CEO or an FD. You have to run the company, make hard decisions in a difficult economic climate, get your teams to implement them, deal with multiple claims on your time and somehow still find time to keep your investors happy. There are only 24 hours in a day and if you’re a smaller quoted company, it’s likely that your investor relations team is CEO and FD, both of you running at full stretch with no investor relations officer to support you.

The good news is that help is at hand. CEOs and FDs who want to avoid the sapping skirmishes of the shareholder spring can use a five-piece investor communications kitbag to put themselves on the front foot, selecting tools based on the amount of time available. Forward-planning helps smooth the way and reduces the risk of a public drubbing. And, it gives you a fabulous opportunity to bring your shareholders on side as cheerleaders for your company.

Tool #1 - Shareholder engagement

Dialogue matters. Planned, long term engagement puts companies in the driving seat. Regular dialogue with shareholders creates an atmosphere of understanding and builds trust; it enables directors to inspire confidence in the company and in the integrity of the executive team as you set expectations and educate investors about the value drivers of your business.

ABI director general Otto Thoresen told a recent Treasury Select Committee that company engagement with shareholders is “beginning to change but it’s not uniform and not fast enough”. Companies who only communicate when they have to are missing out on a great opportunity. Let’s face it, if you bump into someone you hardly know each year at an AGM and they ask you to lend them £1,000 for a business you know nothing about, you wouldn’t do it. If you meet a contact on a regular basis who tells you about their business in a way that excites and interests you, explains its strategy, prospects and progress against plan, then if that person asks you to lend them £1,000, there’s a higher chance that you’ll do it.

The reporting calendar provides the perfect framework for shareholder engagement. Quarterly results and interim management statements are part of a regular reporting cycle, giving you the opportunity to showcase your company to the market and helping reduce share price volatility.

Tool #2 - Perception study

Everybody wants to know what other people think of them and companies are no different. If directors want to manage their company’s profile and valuation, it’s essential to understand shareholders’ opinions about the company, the leadership team and the strategy so that you can ensure no nasty surprises at a vote.

John McFarlane, chairman of Aviva, lights the way. As he picks up the pieces in the wake of his former CEO’s resignation, his message to shareholders of 5 July recognises how important it is to find out what investors think about a company. McFarlane emphasises the importance of communicating and of listening when he says “over the past few weeks, I have met with our major shareholders and, in addition to their disappointment over our share performance, I believe there are legitimate concerns”.

Companies must communicate with buy side shareholders, listen to them and understand them, preferably before things get sticky. Even for companies with a good record of active shareholder engagement, a perception study is a powerful tool because it enables the board to take stock of the company’s current positioning in the eyes of the investment audience and it drives out those areas which need to be focused on in their IR strategy. It comes into its own when a board is unsure of where shareholder sentiment lies in the months ahead of a vote and wants to test shareholder mood, with time to act on the findings.

Tool #3 - Engagement with voting agencies

As the time of a vote draws near, companies may be blindsided by proxy voting recommendations. Proxy voting agencies are a section of the market many directors are not aware of and which require a nuanced understanding. They exist in the middle ground between a buy side shareholder and that shareholder’s vote.

Take the case of William Hill, which faced a difficult vote on its CEO’s retention package. Chairman Gareth Davis commented, "We consulted with the majority of our major shareholders and most recognised the importance of what was being put in place for William Hill's future. Whilst many of our largest shareholders supported the Remuneration Report resolution, one of the most influential vote advisory bodies recommended a vote against. It appears that a large number of shareholders across our share register voted in line with this recommendation.”

Savvy directors do not have to sit back and wait for a vote recommendation to happen to them: they can take the initiative and interact direct to ensure that the voting agency is in full possession of accurate information about the company and any areas of concern.

Tool #4 - Take it to the market

When a company has exhausted all other routes and still has concerns about shareholder understanding, then a board which is confident of its position can take it to the market. It can develop a tactical plan to proactively put information into the public domain to ensure full disclosure and transparency amongst all shareholders about any areas which may otherwise prove contentious. A recent example is easyJet, which earlier this year published and explained its remuneration policy and provided justifiable reasons for poor NED attendance at board meetings.

Tool #5 –Be ready for the future proposals on directors’ pay

The final tool in your kitbag is ensuring that your fellow board members are fully up to speed with Vince Cable’s proposals on directors pay. They are intended to address the disconnect between pay and performance and unsurprisingly they move the UK towards the US system of Say-On-Pay. Boards should proactively address the implications of these proposals as they start to firm up.

Conclusion

CEOs and FDs have some great weapons in their kitbag which they can organise like a military campaign to create winning strategies without hostilities. The messages emerging from the current levels of shareholder activism are that investor communication is all. Proactive, high levels of engagement and understanding are essential. Alignment of board strategy and shareholder interest is the guiding principle.

Rachel Maguire is the Investor Communications Director at Arko Iris. This article first appeared in economia.

Photograph: Getty Images

Rachel Maguire is the Investor Communications Director at Arko Iris

Getty
Show Hide image

Universal Credit takes £3,700 from single working parents - it's time to call a halt

The shadow work and pensions secretary on the latest analysis of a controversial benefit. 

Labour is calling for the roll out of Universal Credit (UC) to be halted as new data shows that while wages are failing to keep up with inflation, cuts to in-work social security support have meant most net incomes have flat-lined in real terms and in some cases worsened, with women and people from ethnic minority communities most likely to be worst affected.

Analysis I commissioned from the House of Commons Library shows that real wages are stagnating and in-work support is contracting for both private and public sector workers. 

Private sector workers like Kellie, a cleaner at Manchester airport, who is married and has a four year old daughter. She told me how by going back to work after the birth of her daughter resulted in her losing in-work tax credits, which made her day-to-day living costs even more difficult to handle. 

Her child tax credits fail to even cover food or pack lunches for her daughter and as a result she has to survive on a very tight weekly budget just to ensure her daughter can eat properly. 

This is the everyday reality for too many people in communities across the UK. People like Kellie who have to make difficult and stressful choices that are having lasting implications on the whole family. 

Eventually Kellie will be transferred onto UC. She told me how she is dreading the transition onto UC, as she is barely managing to get by on tax credits. The stories she hears about having to wait up to 10 weeks before you receive payment and the failure of payments to match tax credits are causing her real concern.

UC is meant to streamline social security support,  and bring together payments for several benefits including tax credits and housing benefit. But it has been plagued by problems in the areas it has been trialled, not least because of the fact claimants must wait six weeks before the first payment. An increased use of food banks has been observed, along with debt, rent arrears, and even homelessness.

The latest evidence came from Citizens Advice in July. The charity surveyed 800 people who sought help with universal credit in pilot areas, and found that 39 per cent were waiting more than six weeks to receive their first payment and 57 per cent were having to borrow money to get by during that time.

Our analysis confirms Universal Credit is just not fit for purpose. It looks at different types of households and income groups, all working full time. It shows single parents with dependent children are hit particularly hard, receiving up to £3,100 a year less than they received with tax credits - a massive hit on any family budget.

A single teacher with two children working full time, for example, who is a new claimant to UC will, in real terms, be around £3,700 a year worse off in 2018-19 compared to 2011-12.

Or take a single parent of two who is working in the NHS on full-time average earnings for the public sector, and is a new tax credit claimant. They will be more than £2,000 a year worse off in real-terms in 2018-19 compared to 2011-12. 

Equality analysis published in response to a Freedom of Information request also revealed that predicted cuts to Universal Credit work allowances introduced in 2016 would fall most heavily on women and ethnic minorities. And yet the government still went ahead with them.

It is shocking that most people on low and middle incomes are no better off than they were five years ago, and in some cases they are worse off. The government’s cuts to in-work support of both tax credits and Universal Credit are having a dramatic, long lasting effect on people’s lives, on top of stagnating wages and rising prices. 

It’s no wonder we are seeing record levels of in-work poverty. This now stands at a shocking 7.4 million people.

Our analyses make clear that the government’s abject failure on living standards will get dramatically worse if UC is rolled out in its current form.

This exactly why I am calling for the roll out to be stopped while urgent reform and redesign of UC is undertaken. In its current form UC is not fit for purpose. We need to ensure that work always pays and that hardworking families are properly supported. 

Labour will transform and redesign UC, ending six-week delays in payment, and creating a fair society for the many, not the few. 

Debbie Abrahams is shadow work and pensions secretary.