The financial crisis has awakened retail investors and new technologies are enabling individuals to collaborate in force.
Once a year at an AGM, small shareholders get their chance to meet directors and management face to face. Mom and Pop investors, the gray brigade – it’s an audience many companies seem to tolerate rather than welcome.
Yet these bit-owners of companies are becoming increasingly vocal and organized. This is the case even in Europe, where traditionally few vote at AGMs or express interest in annual reports.
Take the Fortis shareholder meeting at the start of October 2008 when 6,000 livid shareholders stormed a conference hall to confront the board about the decimation of a once-strong financial operator and the attempted appointment of three new board members.
‘It was like a jeering mob, an October revolution,’ recalls Jean-Pierre Paelinck of Euroshareholders, an organization representing European shareholder associations. ‘The shareholders had found out that not all their proxies had been duly registered. We had around 1,400 proxies but the general assembly had only a fraction of those officially under our name. I suppose it had been overwhelmed by the numbers and hadn’t been able to adjust them properly. At least, that’s the nicest interpretation of what happened.’
An extraordinary situation for extraordinary times, especially with dividends being increasingly frozen or slashed completely as companies cope with shrinking budgets and earnings.
The banking crisis, in particular, has thumped many small shareholders hard in the guts. Sir Tom McKillop, chairman of Royal Bank of Scotland, has expressed profound contrition to small shareholders, including 100,000 staff – many of whom had invested their savings in their employer – for leading a bank that recorded £10 bn ($6.6 bn) in profits, then went on to need a £20 bn government bailout, all within 12 months. Hardly surprising that those once-voiceless masses are rediscovering the beneficial art of communication.
Small and strong
To some extent, unit trust fund managers can speak up for smaller investors when the going gets tough, though this is usually done discreetly, behind the scenes. ‘Individual stock holders have little impact,’ acknowledges Adrian Lowcock of investment advisers Bestinvest. ‘But together with other investors they can take action and develop leverage. Managers like Invesco and Fidelity do have influence and, because of their size and scale, they will be listened to.’
Some small investors are beginning to take the initiative themselves, however, and there are rather more of them than many IROs realize. In fact, around a quarter of all shares in public limited companies in the UK are owned by private investors, about double the number normally associated with private share ownership in public companies.
The misconception about retail shareholder strength, says Gavin Oldham, CEO of the Share Centre, arises because companies often look only at the nominee names, usually held by a stockbroker on the share register; they don’t realize the strength of the private investors lying hidden behind such stockbroker accounts.
‘More than 25 percent of capital structures are owned by private investors,’ Oldham points out. ‘Because of the new UK Companies Act, private shareholders can opt for a nominee operator where the account is held electronically. This means shareholders can get all the company reports and accounts sent electronically to them, so there’s information flowing to those who want it.
‘A lot more people are also paying attention to such issues as important votes – and they’re properly informed. That’s a huge step forward. A lot of IR professionals simply have no idea their private investor holdings are so large.’
Digging deep
This may be true, but IROs still need to do some digging to uncover the details because these nominee accounts – often called beneficial accounts in the US – remain inscrutable instruments at the best of times, says Roger Lawson of the United Kingdom Shareholders’ Association. He points out that even when a company looks at a share register, a company secretary won’t automatically know whether entries are institutional or private investors.
‘In some cases you can figure it out,’ Lawson adds. ‘The Share Centre, for example, uses its own nominee account and it has no institutional investors. But that also assumes you know the nominee account name – which can be something cryptic you may or may not be able to work out. The fact is that if you look at a share register, the vast majority of shares are held in nominee accounts, so you just don’t know what kind of owners they are. It’s only when it comes down to a significant or contentious vote that things become clearer.’
Rights and wrongs
The issue is made murkier still because not all UK brokers have implemented the provision of the Companies Act that allows private shareholder enfranchisement, the right to vote, and the right to table resolutions. ‘It remains optional and most stockbrokers couldn’t care less,’ explains Lawson. ‘Barclays Stockbrokers, for example, hasn’t implemented the provisions of the Companies Act.’ (IR magazine contacted Barclays Stockbrokers for comment but no response was offered.)
More generally, Rachel Posner from US proxy solicitation company Georgeson says firms that ignore small investors do so at their peril. She warns that communication tools are making it easier for small investors to publicize their discontent. ‘Internet savvy is no longer something found only in the young,’ she adds.
Certainly the sheer range of available media – blogs, message boards, webcasts – that can help IROs better communicate with shareholders means there is less excuse not to make the effort, especially when things get tough. Although banks, for example, have borne the brunt of the recent economic downturn, they are probably, says Justin Urquhart Stewart of Seven Investment Management, best positioned to communicate responsively with many from their private shareholder base when trouble arrives – and arrive it certainly has.
‘Traditionally many shareholders are ignored, apart from pleasantries and platitudes,’ Urquhart Stewart notes. ‘But many banks have realized that ex-staff and customers make up a lot of their smaller shareholders – and also have the ability to create advocates for their companies. Unfortunately, most company secretaries rarely see eye to eye with shareholder interests; they’re more interested in corporate strength.’
Recovering a measure of trust from small shareholders, then, would likely not go amiss in the current climate. Companies repeatedly talk about trust, observes Paelinck, but mix-ups with, for example, proxy registrations simply fuel the perception that small shareholders are small fry, and should be treated accordingly. He suggests that proxy registration (again, for example) should be handed over to independent organizations so shareholders are assured boards will listen to them.
‘It’s horrible to suggest it but I think it would help,’ Paelinck says. ‘Companies love to talk about transparency – they love that word! – but I don’t know how many even dare to pronounce it since the downturn. Personally, I’d be happier with the word reliability.’
One suspects small shareholders on the financial front line of the current crisis would agree.
Small investors flex their muscle
Small shareholders had a pivotal role when stricken UK bank HBOS was being lined up to be taken over by Lloyds TSB, another UK banking group. In fact, small shareholders could have chosen to blockade the deal, despite owning only a minority of shares.
The HBOS-Lloyds TSB deal was finessed using a legal process called a Scheme of Arrangement. Crucially, this demanded a majority of small shareholders also vote in favor, which – in the end – they did. But if small shareholders hadn’t given their blessing, the mega-merger could have been derailed.
Fortis’ private shareholders have also had cause to celebrate. The Belgian Court of Appeal recently voted in favor of private shareholders when the sale of Fortis’ Belgian assets to BNP Paribas and the Dutch government was temporarily suspended. The Brussels appeal court decision means Fortis’ shareholders have 65 days in which to have a say on the proposed carve-up, possibly demanding a higher offer.
