FDs ignore investors at their peril

There haven’t been any protest meetings and there aren’t likely to be any red banners waving, but shareholders are on the march and FDs ignore this at their peril.

More militant institutions, egged on by a tabloid press working itself up into a fresh frenzy of ‘fat cat’ headlines, have been exercising their new found right to vote on remuneration policies at AGMs.

Last year, Vodafone sparked investor fury when it awarded former chief executive Sir Christopher Gent a £1.5m bonus.

The biggest casualty so far has been GlaxoSmithKline, whose remuneration report was rejected by investors after a row over the severance package awarded to chief executive Jean-Pierre Garnier. But other companies have been forced to justify arrangements that don’t seem in tune with governance best practice.

Supermarket chain Safeway has been on the back foot over chairman David Webster’s contract, which runs to 2005, longer than the 12-month best practice recommended by the Greenbury report. It is also under pressure because of the two-year contracts of FD Simon Laffin and group services director Richard Williams.

Investors voted down the remuneration report at Shire, Britain’s third-largest pharmaceutical company, over concerns about the pension payoff for former chief executive Rolf Stahel. And institutions criticised a £4.2m payoff to Brian Gilbertson, former chief executive of mining company BHP Billiton.

‘Shareholder activism seems more intense now because of the visibility given to remuneration issues,’ says Robin Key, a partner in the investor relations practice at Financial Dynamics. Yet while remuneration issues are grabbing the headlines, Key points out that much of the more important shareholder activism has been going on behind the scenes for some time on issues such as corporate strategy, capital structure, cashflow and balance sheet issues.

This is likely to continue and be more important than public rows over remuneration.

Even so, boards shouldn’t take the remuneration issue lightly, whatever the fate of Rewards for Failure, the much-criticised consultative paper produced by trade secretary Patricia Hewitt. The National Association of Pension Funds and the Association of British Insurers say the advice contained in their statement on executive contracts and severance pay is starting to have an effect, making the need for legislation less pressing.

NAPF recently hired Matthew Gaved, former editor of the mag-azine Governance, to work on a root-and-branch revision of NAPF’s governance guidelines.

Geoff Lindey, strategic adviser on corporate governance at NAPF, calls it a taxonomical approach.

Lindey believes the work could result in a new set of corporate governance guidelines by the end of the year. NAPF is also reviving its use of case committees. The idea is that any institution with concerns about an investment can make informal contact with other investors with similar concerns before approaching the target company for private discussions.

A third area that could lead to more shareholder activism of this kind is NAPF’s joint venture with US-based governance organisation Institutional Shareholder Services. From January 2004, the new company will offer a service to NAPF’s existing clients and ISS’s UK customers. Advice will be based on voting recommendations determined by NAPF.

Given that US and Canadian companies own about 30% of UK shares, the new service will strengthen NAPF’s influence considerably. Significantly, the service will for the first time extend beyond the FTSE-350 to the All-Share Index. Between them, NAPF and the Association of British Insurers could represent as much as 70% of the equity market.

This concentration of power could prove even more potent if the Co-operative Insurance Society’s policy of publishing its complete voting record catches on among other institutions. Last year, the CIS voted on 12,043 motions at 1,551 agms.

‘Institutions should reveal how and why they have voted on any one issue,’ says chief operating officer Finion O’Boyle.

Not all institutions see it that way. Michelle Edkins, head of institutional relations at Hermes, told an NAPF conference that discussions with companies should remain private. ‘We want to support our investments, not damage them through public spats,’ she says.

But whether they are public or private, shareholder activism is going to be a potent new force and FDs will need to learn new skills to manage it.

  • Peter Bartram, a freelance journalist. This is an edited extract of an article that first appeared in Financial Director July/August 2003.

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