Shareholder activism is a growing trend in the UK as investors feel more empowered and compelled to intervene in how public companies are managed.
High-profile examples of activism include Knight Vinke Asset Management lobbying for changes to HSBC’s strategy and structure in 2007 and a campaign for improvements to working conditions of Tesco’s clothes manufacturers in Asia.
A survey by The Share Centre found that 70 per cent of private investors would be willing to voice opinions about unethical company activity - but 79 per cent either don’t know their rights as a shareholder or do not know the procedure for bringing their concerns to business managements’ attention.
The poll, which surveyed more than 1,500 experienced investors with portfolios of greater than £10,000, suggests some investors believe big business is unwilling to listen to their complaints as 9 per cent would rather sell their stock than approach a company if they heard of unethical practices.
There is also found there is a wide spread in the number of people who would complain about different moral issues.
While 58 per cent of private investors would want to raise a concern about the use of child labour, only 16 per cent would be put off by genetic engineering.
Half of investors would want to speak out about tax evasion, 45 per cent about pornography, 32 per cent about arms and 25 per cent about tobacco.
Just 21 per cent would be concerned about animal testing and 17 per cent about intensive farming.
However, a significant minority of respondents - some 14 per cent - said none of these practices would cause them to raise concern with company boards or sell their holdings.
So, with the research finding that only 21 per cent of investors know their shareholder rights - and just 3 per cent have exercised them in the past - FE Trustnet has compiled a beginners’ guide to becoming an activist shareholder.
Why become an activist shareholder?
The pursuit of an environmental, social or ethical agenda, such as to challenge the behaviours mentioned above, is a clear reason to embark on shareholder activism.
However, this is by no means the only reason why investors should attempt to influence the businesses they part-own.
Shareholders can attempt to intervene in management’s decisions to force a different corporate strategy to improve performance and profitability, ensure changes are made to a firm’s board, influence the outcome of takeovers and other kinds of M&A activity or improve efficiency by pushing for the sale of under-performing assets.
What tools do individual activist shareholders have?
The truth of it is that individual shareholders’ powers are fairly restricted in the UK. At the most basic level, they are entitled to receive a copy of the company’s annual report and accounts.
While seemingly minor, this can be an important factor in how investors act towards their stocks.
The Share Centre’s research found that 73 per cent of investors who pay attention to communication from businesses said they would feel compelled to act if they became aware of unethical behaviour.
Only 66 per cent of those who do not stay abreast of developments at their holdings would want to raise their concerns, which suggests that regular contact with a business makes an investors more likely to be an active shareholder.
However, one of the most significant powers individual shareholders’ hold by far relates to voting power in general meetings held by a company.
In the past, it was common for shareholders to simply ‘rubber stamp’ proposals put forward at general meetings by directors, with very few questions being asked of the directors.
But as awareness of shareholder activism grows there is an increasing belief that investors should become more active with their voting rights and vote against proposed resolutions when appropriate.
For example, activist shareholders commonly ask other investors to vote against the re-election of directors to demonstrate disapproval of the board’s policies.
Paying attention to the resolutions proposed at general meetings and being aware of how other active shareholders view a company’s actions can be an easy way to fight for changes within a business.
Do larger investors or groups of shareholders have powers?
The powers of shareholders grow if they own a larger stake in the company or can work alongside other investors to pursue their agenda.
Shareholders that own 5 per cent or more of a company or 100 members holding an average of at least £100 paid-up capital have many more avenues to engage in shareholder activism - including the right to propose a resolution at an annual general meeting.
Proposing a resolution is one of the most public ways a shareholders can state their activism, as it requires a vote on the issue to be held at the general meeting.
FairPensions, a charity that responsible investment practices, notes that shareholder resolutions are still relatively rare in the UK, which means it can be difficult for them to gain investor support.
However, it says a number of strategies when proposing a resolution can make them more attractive to larger investors.
These include ensuring it focuses on a single issue, directs the company to do something which is achievable within a reasonable timeframe but not overly burdensome or costly and is based on the protection of shareholder value over the long term.
Larger investors and groups of shareholders can also expect the company to circulate a statement of up to 1,000 words from them on a proposed resolution or other business to be dealt with at that meeting.
This can be a powerful tool in building a platform with other investors.In addition, shareholders holding voting rights representing at least 5 per cent of the company have the power to call a general meeting to be held. This gives them the opportunity to vote on a desired resolution, although it is a serious undertaking that requires a lot of work to be put in.
Gavin Oldham (pictured), executive chairman at The Share Centre, said: “Owning shares is not just about being another number in the room, investing at the right price and releasing a profit. It’s also about owning part of the business.”
“There are many personal shareowners that want to play a more active role in their company’s governance, in order to match their values, but don’t know how to do so. There are also a large number who simply don’t understand what their rights are. Bridging this knowledge gap is crucial to giving personal shareowners a stronger voice in corporate governance.”
