Unsatisfactory Avast AGM, and Designated Accounts

I “attended” the Avast (AVST) Annual General Meeting today. This was of course held on-line using Zoom with only one director in physical attendance (Warren Finegold) who chaired the meeting. Zoom seems to be becoming the de facto standard for on-line meetings.

The Chairman of the company, John Schwarz, gave a brief presentation backed up by some slides. To summarise, it was another strong year of growth and profitability. A new CEO is now in place. EBITDA was up 8% with strong cash generation and hence there was a steady reduction in debt. They added 400,000 paying customers making a new total of 12.6 million. There were numerous new product releases and dividends are up 8.1%.

But nobody could raise questions at the meeting. In addition, although shareholders could submit questions in advance, these were not answered at the meeting. Overall this was a totally unsatisfactory way of conducting an on-line AGM.

Votes were taken on a poll to be declared later, but the proxy counts were quickly flashed on the screen. I noticed Belinda Richards managed to get 13.7% of the independent shareholder votes against her. I wonder why.

The whole meeting was over in 15 minutes.

Apparently customers of The Share Centre have been notified that there are new terms and conditions which cover the future use of designated nominee accounts. This will be a major step forward in investor protection and shareholder enfranchisement. Most brokers, like the Share Centre, use only “pooled” nominee accounts where your holdings are jumbled up with those of all their other customers. It relies on the brokers sorting out who owns what, which can sometimes prove to be not at all easy if a broker gets into financial difficulties. Designated accounts contain both the broker and end customer identification on the share register and hence are by far preferable.

It will be interesting to see how they support such accounts, and whether it will be affected by the proposed merger with Interactive Investor. This was approved by a vote on the 8th April but there has been no further news.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Brexit – Over and Out – and Why Shareholder Votes Matter

Last night Brexit got done. We exited the EU after 47 years. Our last words to the EU bureaucrats were surely “over and out”. But we will need to resume the conversation to secure a trade deal. That still leaves room for many more arguments within the UK and with the EU.

Some people seem to think that there is a hope we might rejoin the EU some time in the future. But while the EU is dominated by bureaucrats and real democracy is so lacking in the EU institutions that seems exceedingly unlikely to me. Hope of any reform to the EU is surely forlorn.

It might be preferable to have some alignment on product and financial regulations but in the latter area the EU either follows well behind the UK anyway, or creates regulations like MIFID II that are over complex or simply incomprehensible.

One area that the EU could have been a leader in was to improve financial regulation such as on shareholder rights. They have produced a Shareholder Rights Directive but it is so badly written that it can and is being effectively ignored in the UK. Just take the area of shareholder voting and the problem of nominee accounts.

The Investors Chronicle (IC) have published an article by Mary McDougall this week entitled “Why Shareholder Votes Matter”. It shows how the nominee account system has disenfranchised most individual shareholders as they either cannot vote their shares, or it is made so difficult to do that they don’t bother.

I contributed to the IC article because I have a lot of knowledge of this area having pioneered the ShareSoc campaign on the issue and having experience of using multiple platforms over many years (see https://www.sharesoc.org/campaigns/shareholder-rights-campaign/ ).

The article mentions Sirius Minerals (SXX) which is currently subject to a takeover bid via a scheme of arrangement. A very large proportion of the shares are held by individual investors in nominee accounts but because of the voting rules on Court hearings all of them will only get one vote by the nominee operator who might not even vote at all. That’s because nominee accounts are generally “pooled” with only one name on the share register as a “Member” of the company – and that name is that of the nominee operator (i.e. the platform).

Another example that shows where votes are important is that of the forthcoming AGM scheduled for the 12th February at RWS Holdings (RWS), an AIM company. You might think that this will be a routine matter with just the standard resolutions. But not so. There is actually a resolution to waive the need for a Concert Party that might acquire more than 30% of the shares to make an offer for the company under the City Takeover Code. The Concert Party comprises Chairman Andrew Brode, Diane Brode and a Trust they control. They already hold 32.8% of the shares but as there is also a share buyback resolution that might increase their holdings, and hence trigger the need for an offer, a waiver is required. I voted against both resolutions – I always vote against share buy-backs unless there are very good reasons, and I don’t like public companies to have shareholders with more than 30%.

You can see that just a few private shareholders in nominee accounts might affect the outcome as the Concert Party cannot vote on the waiver. But will they?

Regardless I encourage shareholders in RWS to vote their shares – if you hold shares in an ISA your platform operator has a legal obligation to cast your votes.

The IC article mentions that the Law Commission is currently looking at the problems and legal uncertainties created by nominee accounts, but it also discloses that they only expect a “scoping study” on intermediated securities to be published in Autumn 2020. No great urgency there then!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Why Shareholders Have Little Influence

There was an article in The Times newspaper this morning by Mark Atherton which covers the subject of shareholder voting and the nominee system. I am quoted as saying “The nominee system needs a total rewrite to reflect modern reality and restore shareholder democracy”.

As is pointed out in the article, only 6% of private shareholders vote the shares they own. This is mainly because of the obstruction of the nominee system. The US system is not perfect but they get 31% of shares voted. Everyone agrees that ensuring shareholders in public companies return votes for General Meetings is important. This ensures good corporate governance and “shareholder engagement”. But very few people, and hardly any institutional investors, actually attend such meetings in person. So most votes are submitted via proxies.

Fifty years ago most shares were held in the form of paper share certificates which meant two things: 1) All shareholders were on the register of the company with a name and address recorded and 2) All shareholders would be issued with a copy of the Annual Report and a paper proxy voting form. This ensured a high turnout of votes.

Due to the growth of on-line trading via “platforms” and the “dematerialisation” of shares in Crest, most shares held by “direct investors” (see below for indirect holdings) are now held in electronic form. For retail investors this means a very high proportion are held in pooled nominee accounts. This has resulted in very low numbers of investors actually voting the shares that they “nominally” own. The problem is that the nominee system obstructs both the information flow to investors and their ability to vote easily and quickly.

For institutional investors the turn-out is higher – typically above 60% but such investors often have a low interest in the outcome so tend to vote in support of all the resolutions. Institutions suffer from the “agency problem”, i.e. they are commonly not owners in their own right and thus may have other motives. For example, they may not have the same interest in controlling the pay of directors in companies which has got out of hand of late for that reason. They are keen to retain access to management which can be made difficult if they oppose management proposals or pay.

The nominee system as operated in the UK also undermines the rights of shareholders, creates major problems when stockbrokers go bust (as they regularly do) simply because of the legal uncertainty of who owns the shares. The “pooled” nominee system is particularly dangerous because it means that it is impossible to know who owns which shares in a company.

The nominee system also undermines shareholder democracy (i.e. the influence of shareholders on companies). When every direct investor was on the share register of a company, under the Companies Act one has the right to obtain the register so as to write to all shareholders to raise your concerns or invite support or resolutions (e.g. if a requisition to remove or add directors has been submitted). This is now almost impossible to do as the register simply contains mainly a list of nominee names and the nominee operator will not pass on communications to their clients. The other problem associated with the current system is that it makes it very difficult for even the companies themselves to communicate with their own shareholders.

The high cost of postage also now frustrates communication with shareholders except for very wealthy organisations or individuals. The Companies Act has really not been updated to reflect the modern digital world and the reality of how markets operate and how shares are now held and traded via electronic platforms. It needs a total rewrite to reflect modern reality and restore shareholder democracy.

Many investors and savers now hold shares indirectly via their interest in pension funds, insurance funds or mutual funds of various kinds (OEICS etc).

At the end of 2014, and based on “beneficial” ownership, the Office of National Statistics indicated that individuals held 11.9% by value of shares listed on the LSE. That compares with 16.0% held by pension funds, insurance companies and other financial institutions. But 53.8% of shares were held by foreign investors, which presumably would also be mainly held by institutions. Direct ownership had been falling for many years but seems to have increased somewhat lately perhaps due to more interest in “self-select” ISAs.

Institutions do suffer from the “agency” problem mentioned above and the underlying investors have little influence over the actions of the investment managers. Indeed one problem with funds is that investors often know little about what the fund is invested in – see the recent problems at the Woodford Equity Income Fund for example which most holders of the fund simply did not know about until it was too late. Pension funds are even less “transparent”. This results in perverse outcomes. For example a trade union pension fund might have no influence on the affairs of companies in which the fund is invested even though that might be of very direct interest to the union members.

Mark Atherton suggests investors in funds should have the right to influence how fund managers vote the shares in the fund. But how to enable underlying investors in funds to influence how the fund manager votes their shares, or otherwise influences a company, is an exceedingly complex and difficult problem. Funds can own interests in hundreds of companies and have hundreds of thousands of underlying investors. The latter are never likely to understand or take a close interest in the affairs of individual companies held by a fund. One reason they are investing in funds is so they can ignore the details and rely on the fund manager to look after corporate governance issues.

Even direct investors often don’t bother to vote because they don’t wish to spend time considering the issues or filling out the forms. Making it easier to do the latter by providing on-line voting systems would help but would only be a partial solution. Some collective representation of private investors (such as by organisations such as ShareSoc) might be one answer. Investors would simply give ShareSoc a standing mandate to represent them. But that is currently impossible because of the nominee system as the investors cannot appoint proxies themselves – only the nominee operator can do so.

Clearly it would help to encourage direct investment rather than reliance on funds. This would reduce investors costs (intermediation costs take a very high proportion of investment returns in public companies). Note that the risk of amateur investors underperforming the professionals should be discounted. Professional fund managers mostly perform no better than a monkey with a pin and many funds are now “tracker” funds that simply follow an index. Tracker funds are particularly problematic regarding shareholder democracy as they have no interest in influencing management whatsoever. Their share trading is solely influenced by the market, not by their views on the merits of the company or its management.

The UK, although we have one of the largest stock markets in the world, has very poor legal and operational systems for recording and representing shareholder interests. This probably has arisen from our tendency to stick with Victorian traditions when we were the leader in such matters. The Companies Act, which was last revised in 2006, still primarily assumes paper processes with rather half-baked additions to support digital systems. Stockbrokers have avoided regulation and as a result have implemented electronic nominee systems that protect their own interests rather than that of their clients in ensuring shareholder rights and democracy.

Major reform is needed!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Intermediated Securities – You Need to Respond

The Law Commission is undertaking a review of Intermediated Securities. What’s this about and why is it important? It is important because the use of nominee accounts has undermined your rights as a shareholder in public companies.

Nominee accounts have made it difficult to vote your shares at General Meetings, taken away other rights, and defeated shareholder democracy. The inability of companies or anyone else to communicate with all shareholders has also made it exceedingly difficult to tackle management when they are paying themselves too much or are simply not acting in shareholders interests. Individual shareholders have been particularly damaged by the use of nominee accounts which have taken over from paper share certificates for most holdings.

Another issue is that an EU Directive will soon be mandating “dematerialisation” of share certificates. All trading will need to be done in electronic form which implies nominee accounts only unless you happen to have a Personal Crest account (of which there are only 5,000 now) or unless a new “name on register” electronic account is devised.

ShareSoc has issued some information on the Law Commission public consultation on Intermediated Securities which you can read here: https://www.sharesoc.org/sharesoc-news/law-commission-review-of-intermediated-securities-consultation/

IT IS REALLY IMPORTANT THAT AS MANY PEOPLE AS POSSIBLE RESPOND TO THIS CONSULTATION SO PLEASE DO SO!

You can read my personal submission to this consultation here: https://www.roliscon.com/Intermediated-Securities-Consultation.pdf

One interesting point made in the Commissions consultation document is that it says “intermediaries are obliged to offer investors the option of a segregated account” – see page 8. This is now EU law and I understand it is effective in the UK. That means that all ISA and SIPP holders should be offered the option of a segregated, i.e. designated,  account where your name and address are held on the share register and not just the nominee operator’s. Such accounts are much better than “pooled” nominee accounts which almost all brokers use at present and which are positively dangerous as your assets are not separately identified. That means that when your broker goes bust there is frequently a shortfall and recovery of your assets in full is not easy. I am looking into whether my ISA and SIPP operators actually are compliant with the EU legislation and do offer designated accounts. I will advise later on the answer.

However a designated nominee account is still not the ideal solution – all shareholders need to be on the share register of a company, which is what my consultation submission says.

PLEASE MAKE SURE YOU SUPPORT SHARESOC AND RESPOND TO THE LAW COMMISSION’S CALL FOR EVIDENCE

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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SVS Securities Update – Another Example of the Dangers of Nominee Accounts

ShareSoc have published an update on the situation at broker SVS Securities which went into administration recently and has affected 21,000 clients – even more than the number at Beaufort. As has happened before, it looks like some clients will lose money as a result of the “Special Administration” regime and there will be the usual long delays before clients are able to regain control of their shares and receive dividends on them. Read the update here: https://tinyurl.com/y6q82ekp

Yet again this displays the danger of the nominee account system which I have repeatedly campaigned against – see the ShareSoc web site here for more information: https://www.sharesoc.org/campaigns/shareholder-rights-campaign/

Please do support ShareSoc’s campaign on this issue, and support them by becoming a member. Nominee accounts are positively dangerous and do not protect your investments regardless of what the broker tells you.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Shareholder Rights Being Eroded

There is a good article in the Financial Times today (Saturday 22/6/2019) which is headlined “UK shareholder rights being eroded”. As the article says, almost no investors who buy shares legally own the shares they have bought, which rather surprises them. That’s because most of them buy via nominee accounts operated by stockbrokers and platforms. Not only that, but most nominee accounts are “pooled” accounts so even identifying who are the “beneficial owners” is not always easy.

Does it matter? Yes it does as investors apparently holding shares via Beaufort Securities soon found out, and there have been a number of similar cases. If brokers go bust or cease trading, your investments will be frozen and reclaiming them may not be easy. It also undermines your rights to vote, to attend AGMs and other rights that those on the share register of the company have as “Members”.

The Law Commission has announced a review of this system – see here for more details: https://tinyurl.com/yyhm3mf9 .

There are some good quotations from Cliff Weight of ShareSoc and Peter Parry of UKSA in the FT article. However there is this quote from Russ Mould of AJ Bell: “It is debatable whether this [nominee account system] makes it harder for shareholders to cast their votes any more than the old paper share certificate regime”. That is clearly wrong as those on the register can easily vote via submitting a paper proxy form or via the registrars’ on-line systems. Submitting votes if you are in a nominee account is rarely so simple and AJ Bell do not provide an easy to use method so it would require significant effort by investors to vote. The result is that most do not bother.

The other claim in the article is that the nominee account system has made trading easier and cheaper. That is not true either. The electronic Personal Crest system is a better alternative and as all trades go through Crest anyway (even those done via a nominee account), there is no cost difference in reality. The reason brokers and platforms have promoted nominee accounts is simply because there are other commercial advantages for them.

There is a lot more information on this subject which explains the real facts and includes a video from me on the subject on the ShareSoc web site here: https://www.sharesoc.org/campaigns/shareholder-rights-campaign/

A minimal if partial solution to this problem would be to have all beneficial owners on the share register. But in reality the whole system needs reforming so that investors are not forced into nominee accounts where they lose a lot of their legal rights, and shareholder democracy is fatally undermined.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Worldwide Healthcare Trust and Investor Voting

I recently received the Annual Report of Worldwide Healthcare Trust (WWH). This is one of those companies that has stopped sending out proxy voting forms for their AGM. The Registrar is Link Asset Services who seem to be making it as difficult as possible for shareholders on the register to vote. You either have to contact them to request a proxy voting form, or register for their on-line portal. I don’t want to register (and the last time I tried it was not easy), I just want to vote!

But as I have mentioned before, I have provided a form that anyone can use to submit as a proxy instruction – see here: https://www.roliscon.com/proxy-voting.html. There is an option you can use if you are not on the share register but in a nominee account.

As regards WWH, performance last year was OK with net asset value total return up 13.7% although that’s less than their benchmark which managed 21.1%. Relative underperformance was mainly attributed to being underweight in the global pharmaceutical sector. The fund manager (OrbiMed Capital) believes there are better opportunities elsewhere such as in emerging markets and biotechnology. We will no doubt see in due course whether those bets are right.

But I do have some concerns about corporate governance at this trust. Not only are the directors highly paid, but two of them have been on the board for over 9 years, including the Chairman Sir Martin Smith. He also has a “number of other directorships and business interests” without them being spelled out. The UK Corporate Governance Code spells out quite rightly that directors who have served on the board for more than 9 years cannot be considered “independent”.

In addition Director Sven Borho is a Managing Partner of OrbiMed so he is clearly not independent either. So 3 of the 6 directors cannot be considered independent. I therefore give you my personal recommendations for how to vote on the resolutions at the AGM (or by proxy of course) of the following:

Vote AGAINST resolutions 2, 3, 7, 9, 14 and 15. Vote FOR all the others.

This is not “box ticking”, it’s about ensuring directors of trust companies do not become stale, not too sympathetic to the fund managers and not too geriatric. The excuses given for the directors I am voting against to remain do not hold water.

Nominee Accounts and Voting

As regards the difficulty of voting if you hold your shares in a nominee account (as most do now for ISAs etc), ShareSoc has some positive news after years of campaigning on this issue (including a lot of personal effort from me).

The Government BEIS Department have commissioned a review of “intermediated securities” by the Law Commission. See this ShareSoc blog post for more information: https://tinyurl.com/y4wk4edz . Please do support the ShareSoc campaign on this issue.

It is important that all shareholders can vote, whether you are in a nominee account or on the register, and you need to be able to vote easily. Bearing in mind the furore over the proposed requirement for voters in general elections to at least show some id before voting, which has been criticised, wrongly in my view, for possibly deterring voting, it is odd that this issue of disenfranchising shareholders has not been tackled sooner.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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