Directors and shareholder activists

Shareholder activism often attracts a bad press.

Depending on whose side a journalist’s sympathies lie, directors are portrayed as belligerent, barely competent and money-obsessed; investors as aggressively interfering, short-termist and money-obsessed.

Yet the truth is often much less headline-grabbing.

Most active shareholders prefer to work behind the scenes, making representations to company boards about how things look from the perspective of those with capital at risk.

Boards are usually interested to learn how their strategy and achievements are judged by interested parties outside the boardroom. And, usually, directors and shareholders have a common interest in the long-term success of the company.

Ironically, it seems that there are not enough truly active owners (rather than active traders) of company shares. Companies have made great strides in the last decade or so to improve their communications with shareholders.

The best annual reports and web sites give the reader a clear sense of the business, its performance and its prospects. Reporting on how the relevant corporate governance standards have been applied has become more discursive and informative.

And leading companies will actively seek input and feedback from major shareholders on key issues for the company.

But many directors express frustration that shareholders do not return the effort. It seems that stewardship, the age-old concept of diligently managing assets entrusted to one’s care by a third party, is still not practiced by enough institutional investors.

Even those investors expending resources on governance appear to spend more time talking than taking action.

This is disappointing because the “comply or explain” model of governance only works if there is intelligent oversight of companies by share owners.

One of the reasons there is still widespread scepticism that stewardship adds value is that too many practitioners and commentators confuse the activity of voting at company meetings with the action of stewardship.

Voting is an important “care and maintenance” activity. The discipline of reviewing a company’s performance and governance at least annually is useful but it is difficult to make the link to shareholder value.

Shareholder activism, when it is done well, is about getting constructively involved with a company on issues where share owners have a legitimate role.

It is increasingly evident that UK values are setting a global standard poised between Europe and the US.

It is not just about claiming scalps of chief executives and chairmen. Just as often it is about appointing additional directors. It also involves questioning the board on its strategy in order to check that it is sensible and deliverable.

It is about supporting management to deploy financial resources on profitable projects that give the company a sustainable future, rather than pushing them to follow the latest fad. It is about making sure that remuneration structures incentivise directors to achieve goals that add long-term value for shareholders.

It is about taking action, rather than idly sitting by watching a company gradually drift into decline.

So where do we go from here? We need more and better shareholder interaction with boards and management. Investors need to get more involved in the appointment of directors.

In some markets, mechanisms need to change so that the board is fully and genuinely accountable to the owners.

The trend for greater participation outside one’s home market seems set to continue. If it makes economic sense to be actively involved in domestic companies, it has to make sense to get involved in the companies you invest in abroad.

This will lead to another trend, namely, greater consultation between investors internationally. Most long-term owners have limited resources to dedicate to stewardship activities. Working together, or pooling those resources, means you get maximum bang for your buck.

There is still concern in certain quarters that shareholder activism means shareholder primacy, which arguably does not fit the more socially-orientated economic models in many European countries.

Yet, it is in the public interest that owners be intelligently involved in the companies in which they invest.

Our objective is to facilitate the agglomeration and focus of as many institutional investors as possible.

This mitigates the barriers of cost involved in collective action.

In any case, “the public” is very often the investor through pension schemes and other long-term savings. Improved understanding of this dynamic will lead to greater recognition of shareholder activism as a positive economic force.

For investor relations professionals, the future will be in acting as a conduit for shareholder views into the boardroom. Insight into who the share owners are and what motivates them will help boards get their message across.

Ensuring that the board knows about and deals with share owners’ concerns will help avert the type of shareholder activism that we read about in the press. Thus, investor relations professionals will make a key contribution to long-term value creation by companies for their owners and the common weal.

Robert A G Monks is the publisher of www.ragm.com, a source of global corporate governance information. He is board chairman of Governance for Owners (www.g4owners.com), a share-ownership services venture and is also the founder of Lens Governance Advisors, a law firm that advises on corporate governance in the settlement of shareholder litigation

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