Comment w/c 29th May

“Out in the open wisdom calls aloud, she raises her voice in the public square; on top of the wall she cries out, at the city gate she makes her speech.”

Proverbs 1:20-21

When we speak of democracy we think of political elections and referendums, but everyday life is run by the companies in which we work and whose products we purchase – and their shareowners, both personal and institutional, have democratic rights too. Do you own shares? Do you vote on company or shareholder resolutions?

The effectiveness of democratic capitalism relies on wisdom calling out, at least in the annual general meeting, and on votes being cast. The law makes provision for this whether your shares are ‘on register’ or in a nominee, but the processes aren’t always there to let it happen. 

Last week I attended a seminar on the subject of ‘Redeeming Capitalism’, which was held to celebrate publication of a new book of that name by Kenneth Barnes. Its call was for a new moral compass for business - a set of virtues which can lead to a form of capitalism designed to serve humanity better. Its opening chapter has a particularly succinct and helpful analysis of the collapse in 2008 of Lehman Brothers, which started the great financial crash.

The point was made that capitalism reflects the morality of the age, and many of the reflections at the seminar echoed content from our past weekly commentaries. There was widespread acceptance that the polarisation of wealth has become excessive. With much pushing capitalism can and should become more egalitarian, not just for reasons of morality but also logic: excess concentration of wealth will otherwise always be countered by death, and by wild political swings from right to left.

However, the effectiveness of personal share ownership involves people finding out about the businesses of which they own a part, and voting. Also, while capitalism should be disintermediated as far as possible, there will always be institutional investors owning shares - and they also must vote. Currently there are not nearly enough investors, personal or institutional, voting: and that needs to change.

Last Saturday’s Daily Telegraph featured a good article by James Connington (‘How to be an ‘activist’ investor if you don’t have billions in the bank’), and this week we’ll take a look at the question: “Is the voice of the personal shareowner being heard in the boardroom?”, and “To what extent are shareowners seeking to be heard in the first place?”

Over the past 30 years there’s been a massive shift in the organisation of personal shareholdings in the United Kingdom, from ‘name on register’ certification to nominee administration (mainly operated by retail investment services). This has been because automation has enabled the separation of service for investors from maintenance of company registers (the list of who owns them).

When their shareholdings are administered by a nominee, not only can an investor view all his/her holdings in one place in a single portfolio statement; but also swathes of cost can be stripped out to both companies’ and shareowners’ benefit, by keeping the detail of shareholdings in a pool nominee operated by their retail investment service.

I declare an interest here - I have been possibly the leading advocate of this change for the past 30 years, initially with the establishment of Barclayshare, but more significantly with The Share Centre. Successive governments have also done much to encourage the move to nominees: firstly with Personal Equity Plans, then with Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs).

BIS research published in January 2016 estimated the methods of holding shares used by investors, and the end column of the following table derives an analysis of the underlying shareholdings:

Because the number of shareholdings per investor varies between these types of administration, my derived analysis of shareholdings would indicate that those held in nominee administration may be in the order of 62% of the total.

The same survey also asked respondents whether they believed they had shareholder rights. The perception was: whereas for all types of administration 32% believe they have no rights for any shares, for nominee shareholdings this proportion rose to 53%.

That’s a particularly sad fact for me because I campaigned hard for over 19 years for the enfranchisement of nominee shareowners, and eventually succeeded in 2006 with Part 9 of the Companies Act 2006: we celebrated this with a small demonstration at the Houses of Parliament in July 2006. However, it was made optional for nominee operators to pass on those rights - on the basis that investors could always move to an investment service which provided them if they were not offered.

But only a few nominee operators (including The Share Centre) have chosen to operate Part 9: hence nominee investors’ perception that shareholder rights are not accessible to them.

Experience at The Share Centre is completely different: approximately half of all active investors opt in for the rights, under which they can receive company reports and vote online. Three quarters of opted-in investors choose electronic communication and a further 19% opt for short form reports; so it’s very cost-effective for companies, while providing a streamlined and responsive service for investors.

Capitalism works best when shareowners take an active interest in the companies in which they are invested. Some of the best evidence of this comes from church investors, who have vigorously and successfully engaged with energy companies in order to press them to set targets for moving away from fossil fuels.

For personal investors, of course, it makes a difference whether the individual or their stockbroker has selected the investment. Few ‘discretionary investment clients’ show active interest in shareholder engagement, but the major self-select investment firms should all be passing on shareholder rights and making full use of Part 9: and they’re not. This may be because it’s not a revenue earner for them, but it needs to change.

So, in order to get better shareholder engagement, I would advocate:

• that the FCA should make Part 9 mandatory for all regulated nominee operators, and publish a best practice guide for the voting process;
• that BIS should extend Part 9 to cover AIM stocks, and give attention to the bizarre ‘£100 nominal threshold’ level for shareholder circularisation and resolutions;
• that company boards should communicate better: by webinars/videos, by nominating a specific board member for personal shareowners, and by adjusting company constitutions (their Articles) and corporate actions (e.g. IPOs) to encourage individual share ownership.

Meanwhile we should do all we can to disintermediate investment, putting companies within reach of the people who are invested in them.

That’s popular capitalism working properly.

Gavin Oldham

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