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5 THE ROLE OF SHAREHOLDERS

I Background

5 .1 6 0 % o f s h a r e s in listed U K c o m p a n i e s a r e held by UK

i n s t i t u t i o n s -pcnsion funds, insurance c o m p a n i e s , u n i t

a n d i n v e s t m r n t t rusts . O f t h e r e m a i n i n g 40%, about

half are owned by indiv idua ls and half by overseas own-

er s m a i n l y i n s t i t u t i o n s . It is clear f r o m t h i s t h at , a

d i sc uss ion of the role ofshareholders in corporate govcr-n a n c e will m a in ly concern t he in s t i t u t ions , particularly

UK ins t i t u t ions .

5 .2

5 .3

Institutional i n v e s t o r s a r e n o t an h om oge n eou s group.

They al1 have an overriding responsibility to their clients,

bu t the y have dif fe rent inves tment objec t ives . The t ime

period over which they seek to perform varies, as do thrir

objectives for income and capital growth. Typically insti tu-

tionsused not to take much i n t e r e s t in c o r p o r a t e gover-

nance. They tr ied to achieve their target performance by

buying and selling shares, relying on their judgement of the

u n d e r l y i n g s t r e n g t h o f c o m p a n i e s a n d t h e i r a b i l i t y t o

exploit anomalies in share prices. Institutions tended not to

vote their shares regular ly, and to intervene directly with

company managements only in circumstances of crisis.

I n s t i t u t ions a t t i t ude s have changed s o m e w h a t r e c r n t l y .

Th e proportion of shares which they own has increased,

and i t is more d i f f icu l t for them to se11 large numbers of

shares wi thou t de p r e s s ing the m a r ke t . Some i n s t i t u t i o n s

n o w a i m t o m a t c h t h ei r portfolio t o the components ofa

share index - i nde x t r a c k ing - whic h the y th ink may

havebetter long-term results t h a n an ac t ive trading poli-

cy. W h e r e an i n s t i t u t i o n is committed, explicitly or d e

facto, to re ta ining a subs tant ia l hold ing in a company, it

s h a r e s t he boards interest in improving t h c compa nys

p e r f o r m a n c e . A s a result, s om e i n s t i t u t i o n s n ow t ake a

m o r e active interest in corporate governance. T h e y cand o t h i s by voting on resolutions in General Meet ings , a n d

informally t h r ough co n t a ct with t h e company.

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Role of Shareholders

5.4 A m a j o r p u b l i c sec to r US f u n d , m o s t o f w h o s e in v e st-

ments are pass ively m a n a g e d , has gone fu r t he r and t a r -

geted a s m a l ln u m b e r o f u n d e r p e r f o r m i n g c o m p a n i e s .

5.5

5.6

In stitu tio n s are not n o r m a l l y e x p e r i e n c e d b u s i n e s s m a n -

agers and cannot subs t i tu te for them. But we believe t h a t

t hey can t ake a c o n s t r u c t i v e i n t e r e s t in , and t e s t , s t r a t e -

gy and p e r f o r m a n c eover t ime.

Pension Fund Trustees

P en s io n fu n d s a r e t h e largest g r o u p o f i n s t i t u t i o n a l

investors. The trustees of the f u n d a re t he o wn e rs of the

shares ; bu t i n m a n y cases they delegate t h e m a n a g e m e n t

of the investments, including relations with companies, to

a fund management group. In these cases the ac t ions of

t he t ru s t ees and t he i r r e l a t i ons wi th t he f u n d m a n a g e r

h a v e an i m p o r t a n t bear ing on cor p or a te governan ce. It is

of ten sa id that t rus tees put fund m a n a g e r s u n d e r u n d u e

p r e s s u r e t o max imi se sho r t - t e rm inves tmen t r e t u r n s , or

to maximise dividend in c o m e at the expense of retained

e a r n i n g s ; a n d t h a t t h e f u n d m a n a g e r will i n t u r n b e

r e l u c t a n t to suppor t board proposals which do not imme-

d i a t e l y e n h a n c e t h e s h a r e price or t h e d i v i d e n d r a t e .

Evidence to support this view is l im i t ed (pa r t i cu l a r l y in

relation to dividends), but we urge t rustees to e n c o u r a g e

i n v e s t m e n t m a n a g e r s to take a long view.

I I Ins t i tu t i ona l Shareholder Vot ing

5.7 Severa1 in stitu tio n s h a v e r e c e n t l y a n n o u n c e d a policy of

votingon a l1 r e s o l u t i o n s a t c o m p a n y m e e t i n g s . T h i s h a s

yrt to be reflected in a significant i n c r e a s e in th e p r o p o r -

t i on o f sha res voted, w h i c h h a s r is en o n ly m a r g i n a l l y

in t h e la s t five years a n d rem ain s a t less t h a n 4 0 % .

Th e right to vote is an i m p o r t a n t p a r t of the assc t repre-

s e n t e d b y a s h a r e , a n d in ou r view an i n s t i t u t i o n h a s ar e spons ib i l i t y t o t he client t o make c o n s i d e r e d u s e of i t .

M o s t vot es will n o d o u b t be c a s t in favour of r e s o l u t i o n s

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proposedby the b o a r d , h u t i t is s a l u t a r y f o r t h e b o a r d

to recognise t h a t t h e support o f t h e i n s t i t u t i o n s is n o t

automatic. We therefore s t r o n g l y recommend institution-

al investorsofa l l k inds , wherever practicable , to vote al1

t h e shares u n d e r t h r e i r c o n t r o l ,according to t h e i r o w n

b r s t judgement, unless a client h a s given contrary

i n s t r u c t i o n s ; a n d ou r recommendation for the publica-

tion of proxy counts ( 5 .14 ( 1 ) be l ow) s h o u l d encourage

higher levels o f v o t i n g b y i n s t i t u t i o n s . Bu t we d o n o tfavour a l e g a l o b l i g a t i o n to vote . No law could compel

proper consideration. T h e result c o u l d w e l l b e unthink-

ing votes in favour of th e boa r d by in s t i t u t ions unwi l l i ng

or u n a b l e to take an active interest i n t h e c o m p a n y .

5 .8 Th e ABI, the NAPF and a n u m b e r o f i n d i v i d u a l institu-

t ions and advisers have adopted vot ing guide l ines . These

havelargely reflected t he C a dbur y a nd Gr e e nbur y codes,

t h o u g h some have gone f u r t h e r . C o m p a n i e s a c c e p t t h e

r ight of ins t i tu t ions to adopt the i r own guide l ines ; but a

numbcr have p o i n t e d o u t t h a t some of these include dif-

fe rent and sometimes m u t u a l l y i n c o m p a t i b l e provisions.

With the best will in the w orld, companies c a nno t c om ply

w i t h t h e m all.We do not see how in the la s t resort t h e

rights of individual institutions to set their own guidelines

c a n b e circumscribed; bu t we strongly ur ge al l those con-

c e r ne d to take account of companiesvery rea l d i f f icu l ty ,

and to review thcir voting guidelines with the aim of elim-

inating unnecessary v a r i a t i o n s . W e suggest t h a t t h c A BIand the NAPF should examine th is problcm.

5 .9 It has been suggested t h a t i n s t i t u t i o n s s h o u l d m a k e pub-

l ic their voting r e c o r d s , both in aggregate, in terms of the

proportion of resolutions on which v o t e s were cast or

n o n - d i s c r e t i o n a r y proxies lodged, a n d in terms o f t h e

n u m b c r s o f voteseast an d proxies lodged on i n d i v i d u a l

resolations.Institutions should, in ou r view, t a k e steps to

ensurc t h a t t h e i r v o t i n g i n te n ti on s ar e be i ng translatcd

into practice; p u b l i s h i n g figures showi ng t h e proportion

of v o t i n g opportunitics takcn woul d be on e w a y o f doing

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5.11 These r e c o m m e n d a t i o n s have been b r o a d l y w e l c o m e d b y

c om p a n i e s a n d i n v e s t o r s , a n d w e very much h o p e t h a t

they wi l l he wi de l y a d o p t e d a n d acted on ,notwithstand-

i n g t h e l i m i t a t i o n s on s ha reho l de r ac t i on wh i ch we have

a l r e a d y noted (1 .19) . We a t t ach par t i cu lar impor tance to

i m p r o v e d b u s i n e ss awareness on the part of investment

managers t h e representative h o d i e s c o n ce r n e d m i g h t

consider how this can he prometed. But we do not recom-

m e n d t h a t e i t h e r si de should be requi red to enter into ad i a l o g u e ; i n d i v i d u a l co m p a n i e s a n d i n v e s t o r s m u s t

remain free to abstain from dialogue; and the sheer n u m -

b e r s on hoth sides w i l l m a k e co m p r e h e n s i v e coverage

imposs ih le .

5 .12 T h e r e is a r i sk tha t close contact b e t w e e n i n d i v i d u a l

companies and shareholders wi l l l ead to d i f feren t share-

h o l d e r s r e c e i v i n g u n e q u a l i n f o r m a t i o n . I n p a r t i c u l a r ,

price-sensitive i n f o r m a t i o n m a y h e given t o i n d i v i d u a l

inves tors , depr iv ing them of the l egal r igh t to t rade the

shares, but some ins t i tu t ions have made it clear tha t they

are wi l l ing to be made ins iders in a p p r o p r i a t e circum-

stances. T h e g u i d a n c e on the handl ing of price-sensitive

informat ion, puhl ished hy the London Stock Exchange, is

h e l p f u l , i n p a r t i c u l a r t h e r e c o m m e n d a t i o n t h a t compa-

nies s h o u l d have a pol icy on i n v e s t o r c o m m u n i ca t i o n ,

idea l ly communica ted to those ou t s ide the company wi th

w h o m i t deals, s t a t i n g h o w t h e c o m p a n y h a n d l e s price-

sens i t ive in format ion .

IV The ACM

5 .13 T h e A n n u a l G e n e r a l M e e t i n g ( A G M ) is o f t e n t h e o n l y

oppor tun i ty fo r the small shareholder to be fu l ly b r ie fed

on t h e c o m p a n y s a c t i v i t i e s a n d t o q u e s t i o n s e n i o r

managers on both operation a n d governance m a t t e r s .

W e belicve there is a r e a l opportunity f o r t h e A G M t o

b e m a d e a m ore meaningful a n d i n t e r e s t i n g occasion forparticipants.

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5.14

5.15

We h a v e two main re c o m m e n d a tio n s for achieving this:

(a ) Some compan ies h a v e a d o p t e d th e p r a c t i c e of m o u n t -

i n g a h u s i n e s s p r e s e n t a t i o n w i t h a q u e s t i o n a n d

a n s w e r s e s s i o n . We s u gges t t h a t o t h e r c o m p a n i e s

w h o s e AGMs are well a t t e n d e d m ig h t e x a m i n e t h e

advantages of e n h a n c i n g the occas ion in th is way.

(h) Companies should count a l1 proxies lodged with themin a d v a n c e of the meeting, and, without a poll b e in g

demanded, should announce the to tal proxy votes for

and aga ins t each resol ut i on once it ha s been dea lt with

by the meeting on a show of hands . This wil l i n d i c a t e

p u b l ic ly t h e proportion of total votes in re sp e c t of

which p rox ies were lodged, and the weight of s h a r e -

h o l d e r opinion revealed b y t h o s e p r o x y v o t e s .

P u b l i c a t i o n is thus likely to e n c o u ra g e an in c re a se in

shareho lder vo t ing .

We considered re c o m m e n d in g tha t compan ies shou ld pu t

a l1 resolutions to a pos ta l vo te , and announce the resu l ts

of the ballot at the beginning of the meeting. This would

avo id d iscus s ion o f th e reso lu t ion s ta k ing p lace on the

false p r e m i s e t h a t d eb a te a t the meeting, fo l lowed by a

vote of those p r e s e n t , w a s l i k e l y t o d e t e r m i n e t h e o u t -

come. But we conc luded tha t th is migb t be seen as a move

to s t if le debate , and that the t ime was not r ipe for a rad-

ical change of th is k ind.

W e a r e a w a r e of a n u m b e r o f o t h e r s u g g e s t i o n s

for im p ro v e m e n ts in the AGM. We h a v e g ro u p e d t h em a s

follows.

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A Changes in the Law Relating to ShareholderReso lu t ions; the Righ ts o f Prox es and theiAppo intm ent o f Corpora te Representa t i ves

5.16 The DTI recentlyconsultedon proposal s to fac i l i t a te the

c ir c n l a t i on of s h a r e h ol d e r r e s ol u t i o n s a t t h e c om p a n y s

cxpensc; t o relax res t r ict ions on the freedom of proxies to

p a r t i c i p a t e i n AGMs; and to permit t h e a p p o i n t m e n t o f

multiple corporate representat ives. These proposa l s were

w i d e l y w e l c o m e d . Greater flexibil i ty in these arcas wi l lhe l p ho t h i n s t i t u t i ona l and private s ha reho l de r s t o par-

t icipate effect ively.

B Procedure a t Meet ings

5.17 Th e practice of bundling different proposals in a s ingle

r e s o lu t i o n h a s been w i d e l y c r i t i c i s e d , a n d in our view

r i gh t l y . We consider t h a t s h a r e h o l d e r s s h o u l d have an

oppor tun i ty to vo te separa te ly on cach s ubs t an t i a l l y sep-arate proposal . We include in this separate votes on t h e

report and accounts and the declarat ion of the dividend;

bu t we accep t t ha t a proposal for a set of changes to the

companys Articles should normally be dealt with in a sin-

gle resolution. A rule to this effect might conveniently be

inclnded in tha t part of a companys Articles dealing with

procedure at general meet ings .

5.18 As well as allowing reasonable t ime for discussion at the

meeting, we consider t h a t t h r chairman should, if appro-

priatc, also undertakc to provide t h e questioner w i t h a

w r i t t e n answer t o any significant question which cannot

be answcrcd on the spot.

5 . 1 9 Cadhury r e c om m e n d e d t ha t the chairman o f t h e audit

committec should bc available to answer ques t i ons about

i t s w o r k at thc AGM (report, A p p e n d i x 4, paragraph

6(f)), a n d Creenbury made a s i m i l a r r ecom m en d a t ion

relat ing t o the chairman o f t h e remunerat ion committee:

( codo , A8) . It wa s suggested t o u s that the chairman of the

nominat ion c o m m i t t e e should make himscl f available in

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5.20

5.21

5.22

t h e sam e way. We believe that it should be for the chair-

man of thr meeting to decide which quest ions to answer

himself and which to refer t o a colleague; bu t in g e n e r a l

we would expect the chairmen of the th ree c om m i t t e e s to

be available to answer quest ions a t the AGM.

T h r d i r e c t o r smus t la y before t h e AG M t h e annual

account s a nd th e d i rec tors repor t (Compan ies Act 1985,

s . 2 4 1 ) . Mos t boards propose a resolution r e l a t i n g t o the

r ep or t a n d a c c o u n t s , t h o u g h t h i s is not a legal require-

ment . We recommend this as best practice, whic h a l lows

a general discussion of the performance and prospects of

the business, and provides an opportunity for the share-

holders in effect to give -or withhold - approval of the

d ir ect or s policie sand conduct of the company.

C Preparat i on and Fol low -up of the AGM

We endors e the recommendation of ICSA that the Notice

o f t h e A G M a n d a c c o m p a n y i n g d o c u m e n t s s h o u l d b e

ci r cu la t ed a t le a s t 20 wor k in g d a y sin advance of the

m ee t in g-i.e. exc luding weekends and Bank Hol idays .

This would significantly help institutions to consult their

clients before deciding how to vote.

It was suggested tou us tha t companies should c i rcula te a

record of the AGM to a l1 sha r e ho lde r s a s soon as pract i-

cable afterwards.We are reluctan to make a recommen-d a t i o n w h i c h w o u l d s u b s t a n t i a l l y i n c r e a s e companies

costs, bu t we suggest t h a t companies s h o u l d p r e p a r e a

resume of d iscuss ion a t the meeting (but not a fu ll a n d

detailed record), together with voting figures on any poll,

or a p r o x y count where no poll wa s called, and send t h i s

to share holders on request.

V Private Shareho lders

5 . 2 3 P riva t e individuals own only about 20% of the shares in

l is t e d c om pa n ie s directly, a n d only a minor i ty of private

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s h a r e h o l d e r s t a k e a n a c t i v e interest in the companies in

which they invest. So the impact of private s h a r e h o l d e r s

oncorporate governance cannot be grea t . Rut we believe

tha t thosc private shareholders who do wish to exerc ise

the i r r ights ac t ive ly should be he lped to do so . Some of

thc improvement w e hav e suggested in thc AGM will con-

t r ibute to this .

5 . 2 4 Wc also consider t h a t , s o f a r a s is practicable privatei n d i v i d u a l s s h o u l d have access t o t h e sa me i n f or m a t i on

f rom companies as ins t i tu t iona l sha reholders . In t ime , a s

it become possible t o c o m m u n i c a t e w i t h s h a r e h o l d c r s

th r ough electronc media ,companies wil l be abl et o m a ke

t h e i r presentat ios t o i n s t i t u t i o n a l i n v e s t o r s a v a i l a b l e

to a w i d e r a u d i e n c e m o r e r e a d i l y . F o r t h e t i m e b e i n g ,

c o m p a n i e s w h o v a l u e l i n k s w i t h private s h a r e h o l d e r s

c u l t iva t e the m by , f o r example arranging br ie f ings for

private cliet b r o k e r s a n d regional s h a r e h o l d e rsemi-

nars. We commend such in i t ia t ives .

5 . 2 5 The launch of CREST and the introduction of rolling set-

t lement have made it more attractive for private investors

t o h o l d s h a r e s t h r o u g h n o m i n e e s . T h i s deprive s t h e

inves tors concerned of the r ight to vote and to receive

c o m p a n y i n f o r m a t i o n , unles ssome special a r r a n g e m e t is

made. A number of companies hav e established their own

in -housc nominee and use it t o restore r ights to private

s h a r e h o l d c r s . We commcd t h i s . T h e ProShare Codeenvisaged t h a t nominees w o u l d extend such d e facto

r i g h t s t o private i n v e s t o r s generally bu t th is code h a s

a c h i r vc d on ly limited support A joint DTl/Treasury con-

s u l t a t i o n document on the Corporate Governance

o f P r i v a t e Shareholders, published in November 1996,

discussed the adequacy of present arrangemcnt a n d t h e

need for the r i g h t s o f privatc shareholdcr holding

t h r o u g h nominees t o b e rcinforced b y statute. Th e

Departmcnts a r e prescntly considcring t h e response to

this consultation.