The recent economic turmoil has forced a re-think on the importance of corporate governance and the mitigation of risk. The changing financial landscape has brought with it heightened monitoring measures coupled with the additional vigilance of investors – especially institutional investors. Gone are the days of voting sheepishly in line with management. In fact, the last 18 months could be thought of as the beginnings of a new movement towards investor activism, with executive remuneration and bonuses consistently making front-page news for the first time. Never before had activist investors made their voices heard in such numbers on company policy and board appointments alike.
Once the preserve of purely activist investors, it is now increasingly common for institutions to make their views known. Whether this is the result of greater transparency, pressure from the media or indeed greater scrutiny by the ultimate owners of the funds being managed, UK companies can no longer simply assume their AGM resolutions will be passed without incident. While it is true that a majority is achieved in all but the most contentious of resolutions, the reputational damage of a significant level of objections, or indeed abstentions can have a lasting impact on a company’s investor relations efforts. Proper planning of resolutions, together with vote predictions and on-going solicitation with external advisors, is now best practice around the successful implementation of an AGM.
In most instances public voting discord is the culmination of elaborate discussions that had already taken place with management behind closed doors. The UK traditionally favours private engagement of institutions and the companies they invest in – recently even conservative pension funds have become more engaged with the management of their underlying portfolios. Even sovereign wealth funds are getting in on the act. Norges Bank Investment Management (NBIM), the investment arm of the Government of Norway, made headlines late last year by publicly criticising the plans of Volkswagen for a snug takeover of Porsche.
System
It is not surprising that shareholders are choosing to exercise their voting entitlements. Voting is the fundamental means by which investors can assert their influence, and one reality of the actual voting procedure is quite the opposite. As markets have become increasingly diversified and global, proxy voting has become proportionally morecomplex, covering numerous jurisdictions and layers of ownership. The UK regulatory framework and ownership structure has benefitted from being among the most transparent and advanced in the world. The flow-on effect of this ownership model has resulted in diffuse and diversified shareholder bases, with no mammoth block holders dominating share registers. In fact, it is rare to find a FTSE 100 company with holders exceeding 5 per cent of shares. Disclosure of shareholding must be declared above 3 per cent, and section 793 of the Companies Act allows a company to seek detailed information in relation to its stakeholders. This diversity of ownership can make voting patterns difficult to decipher, and as a result, shareholder engagement complicated to gauge. This being said, the UK’s corporate governance regime harks back to the days of the Cadbury report in 1992. Sir Adrian was responsible for the invention of the ‘comply or explain’ concept – either comply with the principles or be compelled to explain why they were not adhered to. Thus, under this structure, the onus remains on the shareholders – it is they who must become the executors of the law and call companies to account through their voting.
A direct recognition of the importance of this ‘regulatory’ responsibility has been the formation of the Financial Reporting Council’s Stewardship Code. The Code makes concrete the seriousness of the relationship between companies and their shareholders. The effect of the Code has already been felt, with increased voting both before and at AGMs.
That said, some argue that this turnout is a result of pre-occupation with executive remuneration, at the cost of other more worthy interests such as strategy, employee relations, capital structure and soon.
Solicitation
In light of these concerns, proxy advisory agencies (PAAs) have enjoyed a renewed prominence. Many companies now look to PAA’s to define their voting policies and delegate their voting decisions. There are valid arguments both for and against such agencies. Whilst they may mobilise votes, they can also nullify the effect of investor relations departments’ communications by issuing blanket voting advice.
As a result of shareholder activism brought about by market conditions and regulatory changes, there has been a growing need for proxy solicitors to adapt their offerings. Proxy solicitors advise companies by providing proxy solicitation services to issuing companies at times of annual or extraordinary general meeting, hostile takeovers and other corporate actions. The role of proxy solicitation has evolved from one of purely ‘vote chasing’ to becoming a viable extension of corporate communications.
Proxy solicitation now begins with in-depth shareholder analytics to identify and interpret the underlying shareholder structure of companies requiring their services. Proxy advisors work within this framework to advise boards on voting behaviour and the best method of communicating with shareholders. Through consultation with the company and the analysis of the resolutions, it is possible to mount a solicitation campaign that is tailored to the shareholder’s specific requirements. By understanding shareholders’ concerns, the proxy solicitation process becomes an active process of communication between shareholder and company. If the company can intelligently engaging with shareholders, it becomes possible to garner feedback that may prove invaluable to senior management.
It is also increasingly important for companies to accurately assess how their corporate governance structure measures up to their peers. Proxy solicitors are well positioned to conduct benchmarking studies to assess performance versus both local and foreign peers. This is a proactive way for companies to conduct internal stress tests and to become leaders in governance best practice.
Furthermore, proxy solicitors are beginning to work more closely with investor relations teams due to the natural overlap of their functions. Proxy campaigns can often yield results equivalent to a perception study, shedding light on investor sentiment around important corporate events. This communication can help to shape an organisation’s future strategy or to mitigate risk in the shareholder base.
In the context of shareholder activism and escalating scrutiny of corporate governance, proxy solicitation has evolved into a more complex function. Practitioners have responded by using their unique access to investors to facilitate shareholder communication and devise new means of adding value to corporations. Proxy solicitation remains integral to achieving corporate objectives and its changing role is helping to bridge the gap between investor and issuer. Surely something that will ultimately benefit both parties.
Máté Krantz is Head of Business Development at Capita Investor Relations Services. He can be contacted on 020 7954 9662 or at mate.krantz@capita.co.uk.
This article first appeared in ICSA Focus magazine, Autumn 2010. Click here to visit the ICSA website.
