Small investors are shut out of democracy – they should find their voice

Most investors do not directly own the shares they buy these days, and even if they do they do not have the rights that should go with it. That should change, says Lucy Loewenberg.

At the start of this year, there was talk of another “shareholder spring” as executive pay, yet again, came under scrutiny. Bosses at companies such as Burberry, Sports Direct, Barclays and Sky all winced as investors voiced their dissatisfaction – unsurprising, given that the average FTSE chief executive’s salary of £5.3m is 386 times greater than a worker on the National Living Wage, according to the Equality Trust. As owners of the companies involved, shareholders should, in theory, be acting as a check on egregious pay packets and “heads I win, tails you lose” bonus schemes.

This is, after all, their money – and on a society-wide basis, it’s particularly important at a time when skewed incentives are taking their toll on productivity and thus real (after-inflation) wages for everyone else (see page 16). And while executive pay is one of the most high-profile issues, the whole idea of stewardship – ensuring that companies are making the best use of their assets for the long-term benefit of shareholders – is, again in theory, a key role of company owners. 

The changing face of share ownership

And yet, despite the issue rising steadily up the political agenda, enthusiastic shareholder engagement is still far from common, particularly among individuals. One reason for this is that investors simply don’t own shares in the way that they used to. In 1963, notes the Office for National Statistics, 54% of shares outstanding (by value) were owned directly by individuals. That’s fallen sharply – share ownership is more widespread, but most people now own shares through funds. In effect, individuals have outsourced the responsibilities of ownership, and have no desire to engage with their portfolio beyond picking up their dividends.

They may not even know exactly which companies they own. As a result, shareholder activists are now typically institutions – often hedge funds, sometimes backed by traditional pension funds. Nevertheless, the potential for activism by individual investors should not be underestimated. After all, individuals still owned around 12% of listed UK shares at the end of 2014, an increase from a historic low of 10% in 2010 and 2012.

Yet, even if you do own shares, chances are you don’t feel particularly involved with the companies you part-own. Today, most of us own shares in a “nominee account” through our broker, rather than having paper certificates. Brokers argue that keeping shares in nominee accounts on behalf of individuals is practical, cheap, and convenient, and it’s true that certificates shouldn’t be necessary in our digital era. “I have shares in certificate form and it’s a real pain,” says John Ditchfield, a financial adviser at Castlefield. “Most investors accept that nominees provide a useful service.”

But when it comes to corporate governance and engagement, the nominee system isn’t ideal. It removes investors from the companies they have a stake in, and complicates the flow of information. Companies can no longer easily find out who their individual shareholders are, because the shareholder register typically only lists the stockbroker that runs the nominee account. Hence, individual investors are not automatically sent annual reports or invitations to AGMs.

Indeed, as John Hunter, chairman at the UK Shareholders’ Association, points out, investors who hold their shares via a nominee account “have no right to vote – you can only do so if your broker chooses to transfer his vote to you”.

Stand up for your rights

So how good are brokers at passing on information on individuals’ rights to vote, attend AGMs, receive annual reports and benefit from shareholder perks? “From a practical perspective we ensure our customers are able to vote on key issues that might affect their investments,” says AJ Bell’s Charlie Musson. “For corporate actions such as mergers and acquisitions we alert our customers to the proposals and enable them to vote online via their AJ Bell account. Customers can also request to vote and attend AGMs via their account and we ask for a few days’ notice to facilitate that. We don’t send customers annual reports on the basis that these are readily available via company websites.”

Danny Cox of Hargreaves Lansdown says that, when it comes to corporate action, “we contact [nominee account] holders to make them aware and give them their options. For voting rights, requesting reports or attendance at AGMs, clients can simply contact us and we can make the necessary arrangements, or put votes in on their behalf.” But he adds that very few clients take advantage of this service. “ShareAction has suggested an electronic system to help investors vote, but currently we haven’t seen any demand from clients for this.”

A nation of absentee landlords?

When asked how many investors make use of their shareholder rights, Cox says: “We average about two people wanting to attend per AGM and much fewer who just vote, a couple of hundred a year (compared with nearly a million clients).” In terms of corporate actions, he says, it depends on the specifics – but we’re still talking anything from a few hundred responses to “just a couple”. So you can see why brokers might feel that this is not a pressing issue.

However, Cliff Weight, director at small-investor group ShareSoc, counters that the voting system provided by brokers is hardly likely to encourage activity. “If this was Gmail, voting would be easy and user-friendly with simple clicks and lots of icons – but currently their voting systems are not fit for the 21st century.” He considers the times that he has voted through his investment platform: “Whenever I’m voting online, it’s difficult and time-consuming. There are 20 or more resolutions, and no guidance or support. By the time I’ve finished clicking all the boxes, my shoulder hurts.”

Claiming your perks

Small shareholders are disenfranchised by the nominee system, argues Hunter, because it “involves some administration and most investors are aware, or believe, that voting is dominated by institutional intermediaries”. He says that in very rare cases, usually involving emotional issues such as executive pay, private investors will make the effort to vote, even if only to make a point. But it might also be a cultural issue, he says. “A subtler point is that, particularly in this country, individuals are not encouraged to exercise their responsibilities as owners but are encouraged to think of a share as a tradeable asset.”

There is also the matter of shareholders’ perks. These aren’t as common as they once were, but several companies, including M&S and Next, offer shareholders discounts. Meanwhile, National Grid offers a “shareholder networking programme”, which includes visits to operational sites and presentations by senior managers. But whether your broker makes you aware of these varies between providers. Moreover, some “household names such as Intercontinental Hotels and BT offer shareholder perks, but do not extend those to nominee shareholders”, says Richard Stone, chief executive at The Share Centre.

In theory, the Companies Act 2006 granted investors who hold shares via nominee accounts the same rights as direct shareholders, says Stone, but “there is no obligation on brokers to offer these rights to underlying shareholders”. And while many brokers do pass them on, “from our experience… not all registrars have necessarily been as swift as they could be in updating their data, and in some cases the companies maintain their own data and the necessary exchange of information directly from the underlying brokers is not possible”.

A better way

How could the system be improved? Hunter notes that “a very simple start would be to have nominee investors’ names and addresses on the company’s share register, to enable the company to know and communicate directly with all its beneficial owners”. Weight agrees. He also argues that Britain should look to Germany, which has a very strong shareholder association – the DSW, which has around 30,000 members and provides guidance to individual investors.

Here in the UK, ShareSoc is campaigning for the establishment of small-shareholder committees, to serve as a kind of focus group of individuals, who can then make their views heard by boards. These committees could also provide guidance and voting recommendations to larger groups of individual investors, who could then vote as a block on hot topics such as pay, enabling them to exercise their potential clout more effectively, particularly in smaller companies with more disparate ownership. 

In the meantime, you should check what your broker’s policies are as regards making you aware of what’s going on and what you should be entitled to as a shareholder – and if you’re not satisfied with the answer, look at switching provider.

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