Co rpora te

Governanc e

5
I

THE ROLE OF SHAREHOLDERS

Background
60 of shares in listed % UK companies are held by UK institutions - pcnsion funds, insurance companies, unit an investm rn trusts. d t Of the remaining 40%, about are owned individuals and half by overseas half by ownm ain ly institu tio n ers, s . It is clear from this that, a of the role of shareholders corporat discussion in e govcrnance will mainly concern the institutions, particularly UK institutions. Institutional i n v e s t o r s a n o t an homogeneous re group. They have an responsibilit al1 overriding y to their clients, but they have different investment objectives. The time period over which they seek to perform varies, as do thrir objective for income and capital growth. s Typically institutions used not to take interest in corporate much governance. They tried to achieve their target performance by buying and selling shares, relying on their judgement of the underlying strength of companies and their ability to exploi anomalies in share prices. Institutions tended not t to vote their shares regularly, and to intervene directly with company managements only in circumstances of crisis. Institutions attitudes have changed somewhat recrntly. The proportion of shares which they own has increased,

5.1

5.2

5.3

and it is more difficult for them to se11 large numbers of shares without depressing the market. Some institutions no ai to match their portfolio to the components of w m a share index - index tracking - which they think may have better long-term results than an active trading poliW h e r e an i n s t i t u t i is committed, explicitly or cy. o n de t facto, o retaining a substantial holding in a company, it s h a r e the boards interest in improving s thc companys a result, some now take performance. As institutions a mor e active interest in corporate governance. They can by voting on resolutions in General Meetings, a do this nd with the informally through contact company.

Role of Shareholders

5.4

most A major public sector US fund, of whose investments are passively managed, has gone further and targeted a small number of underperforming companies. Institutions are not normally experienced business managers and cannot substitute for them. But we believe that they can take a constructive interest in, and test, strategy and performance over time.

5.5

Pension Fund Trustees

5.6

funds are the o Pension largest group f institutional investors. The trustees of the fund are the owners of the shares; but in many cases they delegate the management companies, of the investments, including relations with to a fund management group. In these cases the actions of fund the trustees and their relations with the manager have an bearing on corporate governance. It important is ofte sai that n d trustees put fund managers under undue shortpressure to maximise term investment returns, or to maximise dividend income at the expense of retained earnings; and that the fund manager will in turn be reluctant to support board proposals which do not immeshare price or diately enhance the the dividend rate. Evidence to support this view is limited (particularly in relation to dividends), but we urge trustees to encourage investment managers to take a long view.

II Shareholder In s titu tion al Voting

57 Severa1 institutions have recently announced a policy of voting on al1 resolutions at company meetings. This has yrt to be reflected in a significant increase in the proportion of shares voted, which risen only marginally has in the last five years a n d remains at less t h a n 4 0 % . The right to vote is an important of the assct part represented by a share, and in our view ha an institution s a the client to make considered responsibility to use of it. M o s t votes will no doubt be cast in favour of resolutions
I

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Corporate

Governance

proposed by the

hut it is salutary th board, for e board to recognise the support of the no that institutions is t automatic. We strongly recommend therefore institutional investors of kinds whereve practicabl to vote all , r e, al1 the shares threi control,according t h e i o w under r to r n brst unless a h a contrar judgement, client s given y in s t r u c t io n s ; our recommendation a n d for the publicatio proxy (5 . 1 4 ( 1 ) below) s h encourag n of counts ould e higher levels of voting by institutions . But we do not favour a legal obligation to vote. No law could compel proper consideration. The result could well be unthinking votes in favour of the board by institutions unwilling or unable to take an active interest in the company.

5.8

The ABI, the NAPF and a number of individual institutions and advisers have adopted voting guidelines. These have largely the and codes reflected Cadbury Greenbury , t h o u some have further . accep g h gone Companies t the right of institutions to adopt their own guidelines; but a numbcr have pointed out that some of these include different and sometimes mutually provisions incompatible . Wit the will in the world, canno compl h best companies t y wit them all. do not see how la reso h We in the st rt the rights of individual institutions to set their own guidelines can circumscribed; but we strongly all those be urge concerne to account of companies very real d take difficulty,

and to thc voting guidelines with the aim review ir of eliminating variations . We tha unnecessary suggest t thc ABI and the NAPF should examine this problcm.

5.9

It has been that institutions make suggested should public their voting both in aggregate, in terms of records, the proportion of resolutions on v o t e were cast which s or non-discretionary proxies a n d in th lodged, terms o f e numbcrs of votes east and proxies individu lodged on al resolations. should, in our take Institutions view, steps to ensur that voting intentions are being c their translatcd into practice; publishing figures t h proportio showing e n of voting opportunitics takcn would be of one way doing

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I

Role of Shareholders

this. Wc therefore recommend that institutions should, on request, make available to their clients information on proportion of resolutions on which votes were the cast lodged. But and non-discretionary proxies an obligation on sharcholders to go further and to disclose to the world details of individual votes cast could be a disincentive to vot in some circumstances; we e attach greater importance to the casting of the vote than subsequent publicity to (ser also 5.14 (b)) below). III Dialogue Between Companies and

Investors

5.10

Cadbury recommended that Institutional investors should encourage regular, systematic contact at senior executive leve1 to exchange views information and on strategy, performance, board membership and quality of management (report, 6.11). The idea of contact between companies and institutions was developed in 1995 in the report of a joint City/Industry working group chaired by Mr. Paul Myners and titled Developing a Winning Partnership. The main recommendations of this report included:
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investors to articulate their investment objectives to management; investors to be more managements open with in giving feedback on companies strategie ' s and performance; for fnnd managers improvcd training on industrial

and commercial awareness; improvcd training for company managers involvcd in invcstor relations; meetings between companies and institutional invcstors to be propcrly prepared, with a clear and agreed agenda.

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Corporate

Governance

5.11

These recommendations have been broadly welcomed by companie and we very much hope s investors, and that they will he widely an acted on, adopted d notwithstanding the limitations on shareholder action which we have already noted (1.19). We attach particular importance to improve business awareness on the part of d investment manager the hodies concerned s; representative might consider how this can he prometed. But we do not recommend that either side should be required to enter into a dialogue; individual companies and investors must remain free to abstain dialogue; and the from sheer numbers on hoth sides will make comprehensive coverage impossihl e. There risk that close contact b e t w e e n i n is a dividual companies and shareholders will lead to different shareholders receiving unequal information. In particular, price-sensitive information may he given to individual investors, depriving them of the legal right to trade the shares, but some institutions have made it clear that they are willing to be made insiders in appropriate circumstances. The guidance on the handling of price-sensitive information, puhlished hy the London Stock Exchange, is helpful, in particular the recommendation that companies should have a in v e s to r c o m m u n ic policy on a tio n , ideally communicated to those outside the company with

5.12

whom it deals, stating handles pricesensitiv e information.

how

the

company

IV The ACM 5.13

The Annual General the only opportunity for the fully briefed on the companys senior managers on both operation W e belicve there is the AGM be made a more meaningful participants. Meeting small (AGM) is often be shareholder to and to

activities

question matte rs. for t o fo r

a n governance d real opportunity an d interesting occasion

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I

Role of Shareholders

514We have two main recommendations this:

for

achieving

(1) Some companies have adopted the practice of mount-ing a husiness presentation with a question and answer session. We suggest that other companies whose AGMs are well attended might examine the advantages of enhancing the occasion in this way. 8) Companies should count al1 proxies lodged with them in advance of the meeting, and, without a poll being demanded, should announce the total proxy votes for and against each resolution once it has been dealt with by the meeting on a show of hands. This will indicate publicly the proportion of total votes in respect of lodge and the weight of which proxies d, sharewere holde b y th o s e p ro x y v o te r opinion revealed s . to encourage an increase Publication is thus likely in shareholder voting. We considered recommending that companies should put al1 resolutions to a postal vote, and announce the results of the ballot at the beginning of the meeting. This would avoid discussion of the resolutions taking place on the false premise that debate at the meeting, followed by a vote of those present, was likely to determine the out-come. But we concluded that this migbt be seen as a move to stifle debate, and that the time was not ripe for a rad-ical change of this kind.

5.15

W e a r aware of a o f o th e r su g g e s tio n e number s for improvements in the AGM. We have grouped them as follows.

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Corporate

Governance

A Changes in the Law Relating to Shareholder Resolutions; the Rights of Proxies and the Appointment of Corporate Representatives
516The DTI recently consulted on proposals to facilitate the circnlation of shareholder resolutions at the companys cxpensc; to relax restrictions on the freedom of proxies to participate in AGMs; and to permit the appointment of multiple corporate representatives. These proposals were widely welcomed. Greater flexibility in these arcas will help hoth institutional and private shareholders to participate effectively.

B Procedure at Meetings 5 .1 7
The practice proposals of bundling different in a single in our resolution has been widely criticised, and view rightly. We consider that shareholders should have an opportunity to vote separately on cach substantially separate proposal. We include in this votes separate on the report and accounts and the declaration the of dividend; but we accept that a proposal for a set of changes to the companys Articles should normally be with in dealt a single resolution. A rule to this effect might conveniently be inclnded in that part of a companys wit Articles dealing h procedure at general meetings.

5.18

As well as allowing reasonable time for discussion at the

meeting,

we consider that thr chairman should, if appro-priatc, also undertakc to provide the questioner with a written answer to any significant question which cannot be answcrcd on the spot.

5.19

Cadhury recommended that the chairman o f t h e

audit committec should bc available to answer questions about w o r k at thc AGM (report, Appendix 4, i t s paragraph a n d Creenbury made similar 6(f)), a recommendation relating to the chairman o f the committe remuneration e: ( c o d o , A8). It was suggested that the chairman of us to the nomination committee make himsclf available should in

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