ShareSoc Chairman's Blog

Posted by ShareSoc at 09:12, October 23 2012.

ShareSoc Calls for Change at the Top of BAE Systems Plc

Following the collapse of the merger talks between £BA. and EADS, ShareSoc is launching a campaign which calls for the Chairman and Chief Executive of the company to step down. In our view the idea that this merger would gain the widespread support of shareholders (including the votes controlled by other European Governments in EADS) was misconceived from the beginning. In addition we have seen no good business justification put forward for the merger, and it potentially creates major threats to the high cash flow and dividend streams from which shareholders in BAE benefit.

ShareSoc therefore invites Chairman Dick Olver and Chief Executive Ian King to step down as soon as possible, and if they do not do so we will oppose their re-election at the next Annual General Meeting. We also suggest that all the non-executive directors who supported this merger should resign and be replaced before the next AGM (it is they who should have provided the wisdom to call a halt to this idea at an early stage).

In summary, this merger was misconceived, mishandled and simply a mistake. The directors of BAE who promoted it should accept responsibility and resign. BAE clearly needs a new leadership team that can develop an alternative solution to the strategic challenges the company faces.

ShareSoc has issued a Press Release which gives more details and justification for our comments. See www.sharesoc.org/press_releases.html.

Note: our press release was written before the article was published in this morning's Financial Times, indicating that a group of institutional investors had written to BAE calling for the resignation of Dick Olver and Sir Peter Mason (the senior independent director). The reported content of the letter seems to be similar to our reasons for demanding change. We welcome the support of institutional investors for some action.

In reply to ShareSoc, post #169

Note: our press release was written before the article was published in this morning's Financial Times, indicating that a group of institutional investors had written to BAE calling for the resignation of Dick Olver and Sir Peter Mason (the senior independent director). The reported content of the letter seems to be similar to our reasons for demanding change. We welcome the support of institutional investors for some action.

Isn't that a rather self-aggrandising remark?

I've been away over recent days but even I had noticed that institutional investors were reportedly unhappy with management in the wake of the failed merger and had picked up some institutional calls for at least one resignation many days ago.

I'm also intrigued at your idea of replacing the Chairman, CEO and all supportive non-execs at the earliest opportunity. Wouldn't that be a tad destabilising for a large and complex business and would such wholesale change somehow guarantee increased shareholder value? You can't make a silk purse out of a sow's ear, as the old saying has it - and BAe is faced with a difficult challenge in trying to grow despite the overwhelming political constraints imposed by the nature of its business. Wholesale sackings are unlikely to provide the magic bullet to extricate BAe from a strategic bind.

Posted by ShareSoc at 16:28, October 25 2012.

Rising Director Remuneration – Not just a UK Problem

The ERR Bill which introduces a binding vote on directors pay is going through Parliament at present. In the Commons one speaker had this to say:

“As I mentioned in Committee, in 1980, the median pay of the highest-paid directors in FTSE 100 companies was £63,000, and median wages were £5,400. By 2010, the median pay of FTSE 100 directors was £2.99 million, while median wages had risen to £25,900. The ratio of directors’ and employees’ median pay had risen from 11:1 to 116:1”, and:

“In that environment of growing pay, there is no meaningful correlation between high pay and high corporate performance. Empirical evidence from research carried out in 2009 concluded that companies that pay their chief executive officer in the top 10% of remuneration earn negative results of -13% in terms of both profits and share price in the next five years.”

An interesting reflection of this problem is also present in the recent book by John Bogle called the “Clash of Cultures: Investment v. Speculation" which we hope to publish a review of in a future ShareSoc Newsletter. Mr Bogle reports that in 2011 the median compensation for the 100 highest paid CEOs in the USA was $14.4 million, 320 times the average American salary of $45,230. In comparison the same ratio was only 42 to 1 in 1980. In other words the ratio had risen from 42:1 to 320:1, so if you think it cannot get any worse in the UK, then think again.

Mr Bogle also tackles the issue of why institutional investors have not supported votes on this problem. As ShareSoc said in our response to the Government’s consultations on pay, having a vote on pay is a key element in the solution, but is not by itself sufficient to establish change.

Posted by ShareSoc at 13:16, October 30 2012.

Improving “engagement” – it’s not easy!

ICSA are currently undertaking a consultation on “Improving engagement practices between companies and institutional investors”. It may be a serious topic, but it does contain some amusement.

To quote one sentence from it: “Index investors were a vital part of the market, and often had the desire and capability to be stewards, but companies sometimes dismissed them as unimportant”. What does that mean? It surely is arguing that although index tracking funds should have a strong interest in corporate governance and shareholder engagement with management because they cannot simply dump a stuck at their own whim, in reality companies can often ignore them because there is no threat they will do so. Or perhaps they don’t have the resources to engage, often being such low cost focussed funds.

Another sentence reads: “Companies said they were frustrated by investors who presented a divided face on company performance and governance issues”. In other words, one could interpret that as meaning the investors complain about governance when the positive performance justifies the company’s lack of adherence to such standards in their eyes. Surely this is an excuse of the form of “anything goes” so long as the results are OK (which of course might be down to many other factors than good management).

But are private investors any better at engagement? Probably not based on the results of a survey issued by Equity Development in which some ShareSoc Members participated. One question asked “do you as an investor exercise your right to vote at AGMs and EGMs?”. Only 27% said YES, and 44% said SOMETIMES, but 29% said NO. So patchy at best and one suspects that the actual number voting is even lower as those shareholders who may not have the time or inclination to respond to a survey may likewise not be bothered to vote. A fuller report on the survey will be in the next ShareSoc newsletter. But clearly the nominee system frustrates a lot of private investors from voting and discourages shareholders from engaging because they don’t receive information and cannot attend AGMs which is why the "sometimes" figure is so large, and why we need reform of that system.

So improving engagement between shareholders and companies is obviously not going to be an easy task. The culture of high stock turnover and speculation as opposed to longer term investment remains a major problem, particularly so long as institutional fund managers do not have the ownership ethos. One solution might be to encourage retail investors to invest directly rather than via fund managers. Just remove all the tax benefits in pension funds, insurance policies and in ISAs, and give them to retail investors directly. Then one might see a sea change in the level of direct investment by real owners! Too revolutionary for you? Why should tax reliefs only be obtainable via an institution when the system has clearly been designed for their benefit, not for the investors or for the good of the market? Answers on a postcard to (or via email now) to ShareSoc.

In reply to ShareSoc, post #172

the nominee system frustrates a lot of private investors from voting and discourages shareholders from engaging because they don’t receive information and cannot attend AGMs which is why the "sometimes" figure is so large, and why we need reform of that system.

This is by far the most important issue in relation to defending the rights of private shareholders, vastly outweighing all other matters (many of which would become redundant if shareholders could actually exercise their vote more easily).

This year I believe I was the only investor to exercise his vote via the Selftrade nominee in a company where I suspect there are hundreds of private shareholders and where there must surely be (at the very least) scores of private investors who hold via Selftrade. If a voting system could be provided via the nominee (perhaps via automated mailouts to holders in their system, giving a link to a simple page listing the resolutions in which shareholders could vote online by simply checking a box for each resolution) then I think turnout could be capable of huge increases.

I'm a big fan of Stocktrade (trading name of Brewin Dolphin) and for years have used their sponsored CREST service specifically because of the ability to (a) have many of the advantages of a nominee service but (b) retain legal title. I've noticed recently though that that they've introduced an electronic voting service for clients who have their stock in their nominee account (including in an ISA):

Vote Your Shares
https://apps.brewin.co.uk/vys/

Is this the sort of service that you want all nominees to offer?

JakNife

In reply to JakNife, post #174

That's impressive! And it's a great example to others of what can be done.

Peter

In reply to JakNife, post #174

Yes, Jaknife, very much along the right lines.

We know of 5 brokers offering this type of service, Brewin being one. The others, shown on our nominee accounts page are: Killick & Co., Natwest Stockbrokers, TD Waterhouse (who I use myself for my ISA and am happy with) and The Share Centre.

Cheers,

Mark

In reply to JakNife, post #174

Is this the sort of service that you want all nominees to offer?

That looks very straightforward!

I'd suggest that other nominees should be lobbied to provide similar facilities in respect of voting!

ee

In reply to marben100, post #176

I wonder if there is a showstopper (albeit removabe) in terms of the record keeping system and/or trade management sysem technology/platform used by the broker. I know that Killik uses the TDW platform and wonder if perhaps Natwest, Share Centre and Brewin do likewise. Obviously the necessary functionality has been incorporated in the TDW system, but that may not be the case wrt other systems. The cost of modifying systems to introduce such functionality as a retro-engineered enhamcement could well be sustantial. For brokers who use packaged software or who outource such system operations, the feasibility/cost of changing a system that they are a minority user of, could easily be totally uneconomic.

If that is the case then the only way to get the change is by imposing a legal obligation on the user community.

Posted by ShareSoc at 10:07, November 1 2012.

ISDX Launch – A breath of fresh air perhaps?

Following the takeover of the Plus Markets Exchange by ICAP (LON:IAP) , they have relaunched it under the name ISDX. This market always provided a listing for smaller companies, some of whom were either too small for even the AIM market, did not wish to qualify under their listing rules or incur the costs of the Nomad/Broker system. But investors developed a lack of confidence in the companies listing on Plus Exchange, simply from experience, and the number of companies and their trading liquidity never really achieved a viable level to attract investors to the exchange. There were probably even more failures and delistings than in the AIM market, where it is quite bad enough. Let us hope that it is different in future.

There are some positive signs. The announcement by ICAP mentions two major points: 1) the provision of increased liquidity to the market by two leading market makers (Peel Hunt and Shore Capital), and 2) a focus on increasing the quality of companies listed on the exchange with a new admissions framework. Let us hope that this new market does gain the confidence of investors because there is a real need for a good but low cost capital market for SMEs in the UK. The AIM market does not really provide that in an attractive way at present and has the same problems of lack of company quality and questionable regulation. If ISDX is successful in achieving their objectives, the AIM market might learn something from them. But ISDX does need to provide a capital raising opportunity to growth companies, not just provide a share market for existing shareholders which results in a minimal free float.

Incidentally I attended the AGM of a company that had recently moved from Plus Markets to AIM yesterday. This is Ideagen (LON:IDEA) , a software company in the compliance sector. A report on the meeting has been posted on the ShareSoc Members Network*. The share price has certainly moved up since it moved to AIM with much more liquidity in the shares. ISDX will need to build confidence in their market to retain these kinds of fast growing companies rather than have them move to other markets.

*You need to be a member of ShareSoc to access this, but can join free here: http://www.sharesoc.org/membership.html

Posted by ShareSoc at 10:51, November 7 2012.

Improving non-executive directors

Improving the standards and performance of Non-Executive Directors is surely one way to improve UK business performance. They were seen as the solution to many corporate ills when first introduced, but the results have been disappointing. Major problems have continued to arise where Non-Executive Directors either failed to understand what a company was doing, or failed to control the enthusiasm and risk taking of Executive Directors. Likewise they have failed to control excessive pay packages. Strengthening their role and their independence may help to solve some of those ills.

Major corporate failures such as RBS, Railtrack, Northern Rock, AIG and Enron often have a common cause – namely the inability of the Non-Executive Directors to exercise influence or control. There are four main reasons for poorly performing Non-Execs in the UK:

1. Many are appointed without going through a proper interview process, very often because they are well known to the Chairman or CEO;
2. Many do not comply with the “truly independent” criteria;
3. Many are clones and are “more of the same” meaning many Boards have a distinct lack of diversity on them;
4. A high percentage of Non-Executives have too many roles to be effective.

To try and tackle these issues, ShareSoc and First Flight have issued a Recommended Code of Conduct for Non-Executive Directors. It is present here: www.sharesoc.org/Non_Execs_Code.pdf . For example it suggests that Non-Executive directors should always be recruited by an external search or open advertising, and that none of them should have more than 4 such roles if they are going to have sufficient time to do a competent job.

We hope that by introducing such a code, boards of companies will adopt the recommendations therein and hence avoid the problems that investors see on a daily basis in UK companies. 

Posted by ShareSoc at 00:00, November 8 2012.

Dunedin Enterprise GM Summary – Significant Votes Against the New Performance Fee

The extraordinary General Meeting of Dunedin Enterprise Investment Trust (LON:DNE) took place today which was called to approve the proposed Tender Offer and a New Performance Fee for the fund manager (Dunedin Capital Partners Ltd). ShareSoc opposed that performance fee in a press release (see www.sharesoc.org/ShareSoc_Press039_Dunedin_Enterprise.pdf ) and recommended shareholders vote against it. In summary we could not see why a performance fee should be paid which was effectively compensating the manager for the downsizing of the fund as a result of exiting third party funds. The change of investment policy and return of cash to shareholders had of course been decided upon by the board and approved by shareholders.

The first resolution (to approve the tender offer) was passed by 98.9% FOR to 1.07% AGAINST, so no doubts there. On the second resolution on the Performance Fee, proxy votes were given as 15.3m FOR (83.4%) and 3.0m AGAINST (16.6%), representing an approximate 67% turn-out assuming there were few abstentions. There were more votes against than expected given the limited impact of our press release, short time to canvas shareholders and no specific campaigning otherwise by ShareSoc on the issue. It is clear that at least one institutional shareholder voted against and the Chairman mentioned that PIRC opposed it also. It was suggested to the Chairman that the board should take note of the substantial opposition.

A full report of the meeting including questions and answers is present on the ShareSoc Members Network.

It is interesting to point out the following, bearing in mind the publication by ShareSoc of some recommendations on Non-Executive Directors. Firstly director Brian Finlayson had been involved in the discussions on the performance fee even though he had past connections with Dunedin Capital Partners (former Managing Director and Chairman up until 2002). He said as he had left that long ago he was considered independent when he joined the board of the investment trust, but this is a far from ideal situation, particularly as he may personally know the staff of the fund manager, and is contrary to our recommendations on non-executives.

In response to another question, Mr Gamble said he had a total of 8 directorships including pension funds plus also 2 consultancies. ShareSoc’s “Non-Executives Code” (see www.sharesoc.org/Non_Execs_Code.pdf ) recommends that no non-executive director of a public company should hold more than 4 directorships and gives sound reasons for that. Even if some of Mr Gamble’s directorships may not be particularly time consuming, one has to ask whether the issue of the performance fee might have had more lengthy consideration if Mr Gamble had fewer commitments.

Posted by ShareSoc at 08:05, November 10 2012.

Wisdom or stupidity? One or the other.

Would you as an investor be so wise/stupid (delete as per your preference) to hold half your portfolio in bonds and cash? At least that was my first thought on reading a recent report from the Pensions Regulator on defined benefit schemes which shows just that investment split for the average fund. It’s surely very doubtful that any private investor has made the same investment choice despite their similar objectives of obtaining long term returns and saving for retirement. With negative real yields on Government bonds (and a lot of the bond category is undoubtedly invested in UK gilts and often even index-linked gilts) is it not astonishing that pension trustees now have such portfolios?

In fact the proportion in equities has gone down from 53% in 2006 to 44% in 2012 so there is a consistent trend to move away from equities and into fixed income. There are two things that have encouraged this: 1) ever tighter regulation to ensure that pension schemes can meet their liabilities; 2) trustees being unwilling to take the risk of having to call on their company funders for increased contributions and 3) an ageing cohort of members as defined benefit schemes are closed to new members. The more mature the scheme (in terms of more people drawing pensions or nearing retirement age), then the higher propensity to have assets and liabilities perfectly matched by being in index linked or other gilts. Unfortunately of course this means that the returns achieved on behalf of the pensioners are appalling low.

So company pension schemes, which historically have a good reputation, may soon become the pariahs of the investment world so far as those employed are concerned as they deliver low returns in future. But it may not matter because defined benefit schemes are dying a death for other reasons as companies become unwilling to take on the risk of funding them.

The conclusion is not that pension fund managers have fallen out of love with the “cult of equity” but that their portfolio changes have been driven by unintended consequences arising from risk aversion in the regulatory and corporate arenas and “financial repression” by the Government (i.e. forcing financial institutions to fund govt. debt combined with high inflation to erode its value). Of course as a private investor you can make your own wise or stupid decisions about what you put in your pension fund if you have a SIPP, but at least it will be without Government coercion.

Posted by ShareSoc at 11:27, November 14 2012.

Redrow – the type of company to avoid?

The housebuilder Redrow (LON:RDW) is the subject of much debate of late following a possible bid for the company which was supported by 40% shareholder, and Executive Chairman, Steve Morgan. The proposed offer, which was backed by Toscafund, was at 152p which many investors considered inadequate but that has now been withdrawn.

A particular focus has been on the role of the non-executive directors led by Alan Jackson. At the recent AGM, five of the biggest shareholders voted against his re-election and if abstentions are counted then 28% voted against. Bearing in mind that Mr Morgan and Toscafund hold 54% between them, it is clear that most minority shareholders voted against him.

Investors were reported as being “furious” at the role of Mr Jackson in supporting what they considered a “cheap” bid by Mr Morgan and another non-executive director, Mr Hampden-Smith, resigned recently allegedly because of disagreements with Mr Jackson over the bid.

Comment: The UK Corporate Governance Code is not daft when it suggests there should be an independent non-executive Chairman. These kinds of problems arise so frequently when you have a major shareholder who also acts as an Executive Chairman and who effectively dominates the board. I recall being taken out of DFS when it was taken private in similar circumstances at what I considered a low price and it has subsequently continued to prosper. If the Executive Chairman backs a bid, then he may be doing so based on inside information and knowing whether it is a fair valuation or not is often difficult to determine. But clearly many minority investors in this case thought otherwise. Regrettably building companies seem prone to these kinds of poor corporate governance arrangements due to their origins which is why I tend to avoid them. And incidentally the fact that the recent AGM was held in Flintshire (north-east Wales) is another very negative sign. 

Posted by ShareSoc at 16:27, November 15 2012.

Vodafone and Share Buy-Backs (they don’t get much bigger)

Vodafone (LON:VOD) announced their half-yearly results this week, a curate’s egg mixture of good and bad news, but perhaps because there were a few surprises the share price fell 3% on the day. The interim dividend was increased by over 7%, but there were substantial write-downs on the value of their operations in Spain and Italy due to poor revenues.

It was also announced that they expected to receive a dividend of £2.4bn from Verizon in the USA before the year end, and £1.5bn of that will be applied to a market share buy-back. That’s on top of the £4.0bn buy-back programme completed earlier in the year following the sale of an interest in SFR.

So in total they will be buying back shares worth £5.5bn this year, which is equivalent to 11p per share. Compare that with the historic dividend figure for last year of 9.5p (current yield 5.67%) and you can see how truly enormous this operation is. Would not individual shareholders have preferred a special dividend if the company really had no other use for the cash?

Now the length of this article is insufficient to cover the pros and cons of share buy-backs in full, but telecoms are surely supposedly still a growth sector. Is the company really saying that it cannot obtain a sufficient return by reinvesting that cash in new businesses and hence feels it needs to give it back to shareholders? One almost gets the impression that institutional investors feel the company has grown too large and needs downsizing (assuming they were consulted). With it being such a large share of their portfolios, perhaps they want to sell some through the market. But even a tender offer would have been more equitable than a market share buy-back so that all shareholders could participate.

Perhaps ShareSoc members who hold Vodafone shares might like to state their views on this?

In reply to ShareSoc, post #184

Now the length of this article is insufficient to cover the pros and cons of share buy-backs in full, but telecoms are surely supposedly still a growth sector. Is the company really saying that it cannot obtain a sufficient return by reinvesting that cash in new businesses and hence feels it needs to give it back to shareholders?

Surely the company is effectively saying that it regards investing in itself as a better proposition for shareholder value than either returning the cash to shareholders or investing in some other business? And, if it really is the case that telecoms remains a growth business ......and if Vodafone is well positioned to take advantage of that growth....then what on earth is wrong with that?

Vodafone is a significant investment in my portfolio. I am most annoyed by this decision. Buybacks frequently are of little benefit to long term holders. This is especially so in Vodafone's case. Whilst telecoms revenues may be growing globally, telecoms companies like VOD face numerous challenges: regulatory (e.g. rising spectrum charges, tariff controls), intense competition and rapid technological change, requiring substantial ongoing CAPEX. I regard VOD as a "cash cow" (with a measure of inflation protection), rather than a growth investment, and want my divvy maximised, but without constraining the company from making sensible CAPEX and without taking on excessive debt.

An increased dividend is far more likely to result in share price gains than temporary artifical support, in the form of buybacks.

Most importantly, I want the choice of whether to reinvest my dividend (and that decision will depend on the share price available and outlook), rather than the company choosing for me and, as so often happens (e.g. Halfords) paying an excessive price for shares bought back.

Of course, managements love buying back shares... it makes it so much easier to meet EPS targets that unlock hefty bonuses.

In reply to marben100, post #186

OK Mark. You regard it as a "cash cow" - hence prefer dividends.

But whoever made the previous post thinks of it as a growth business - and if it is really a growth business then reinvesting in it is a perfectly reasonable thing to be doing, especially if it remains well-positioned compared to its competitors.

I'm in complete agreement with you that cash cows (which, by definition, are companies that have gone ex-growth) should pay out cash to shareholders - but the problem seems to be that shareholders don't agree on what stage of development the company is at....even amongst the Sharesoc posters!

Why don't you discuss it amongst youselves and agree, before someone pontificates on behalf of Sharesoc?

In reply to emptyend, post #187

ee,

Couple of points:

1. This is the ShareSoc Chairman's blog. As a Board, we do not discuss/agree every post made. Doing so would be unwieldy/impractical.
2. The post is not "pontificating", it is stating the facts of the buyback programme, expressing an opinion and inviting feedback (I have given mine, on a personal basis!).
3. The blog generally is intended to stimulate debate and raise awareness about issues affecting individual shareholders and what ShareSoc is doing to address them. All views welcome - including yours!

This last point is the most important one. We are contemplating whether this is an issue that merits a shareholder campaign. Whether it makes sense to do so, or not, will depend on the views of other individual shareholders. It would only make sense if there is a strong feeling against the buyback programme from other individual shareholders.

Any decision to formally launch a campaign, and any associated literature, are reviewed and approved by the full Board.

Cheers,

Mark

[ShareSoc Director]