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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Meeting with Link Asset Services

I recently attended a meeting with Link Asset Services who claim to be the largest UK share registrar. In addition to me there were two senior managers from Link and two ShareSoc directors (Mark Northway and Mark Bentley). ShareSoc and I do of course have a long-standing interest in ensuring shareholders can and do vote their shares at General Meetings. Other matters discussed were the problems created by nominee accounts, in the Shareholder Rights Directive (SRD), in the Central Securities Deposit Regulation (CSDR), in dematerialisation, and many other issues related to shareholder’s rights. I hope that rather technical, long-winded sentence does not put you off reading this note because there were many important issues discussed.

We first discussed one of the personal issues I had raised with Link – namely the issue of paper proxy voting forms not being issued by many companies. See previous blog post on that subject at one company here: https://roliscon.blog/2018/09/20/worldwide-healthcare-trust-agm-but-no-proxy-voting-form/ . One of the reasons we are getting poor corporate governance and wildly excessive director pay in some companies is because private shareholders generally do not vote at General Meetings.

It was explained that one reason for this change is that it does actually increase the percentage of shareholders who vote. It seems if investors receive a paper proxy card, they often put it aside to deal with later but never do, or perhaps can’t be bothered to go to a post box. Link’s experience is that investors are more likely to vote when prompted to do so by email (even more so, if SMS can be used).

Link gave us some figures on proxy voting which as we already knew are astonishingly low. For shareholders on the register only 5.5% actually voted in the last year, out of 5.6 million holders. The percentage of shares that were voted was much higher at 63% but that is probably because institutional investors do vote more reliably.

The low turnout of individual shareholders I would guess is for a number of reasons. Some think they have no influence on the outcome which will be determined mainly by institutional shareholders so don’t vote except on critical events, those on the register may be long-standing holders of one or two paper share certificates, but the big problem by far now is the number holding their shares in nominee accounts where the broker does not provide an easy to use proxy appointment system. More on this issue later.

I did express an aversion to using the Link app (SignalShares) to vote but was assured it was easy to use and I would still get paper annual reports if requested. However, I have since tried to register for the app and as a Personal Crest member it’s damn difficult. It asks several questions which were difficult to answer. It not just requires your Investor Code (which will be on dividend payments, IF the company pays a dividend). But it also asks for your Crest Id, which no Personal Crest member normally ever needs to know and I could not easily find, and your Crest Member Account Number and I have no idea what that is at all. So I gave up. I still feel that paper proxy voting forms should therefore be sent to shareholders, particularly Personal Crest Members. If a Notice of a General Meeting is being posted, as is legally required, it’s not much more cost to include a proxy voting form.

I have had problems with registering for voting services with other registrars so I still feel it is unsatisfactory to remove paper proxy voting forms. Suggesting you can phone up to get one if necessary is not a satisfactory solution. Just time wasting. Even if I could manage to register for their app, that would still leave the problem of having multiple accounts and multiple log-ins for different holdings. It’s just too complicated. I might have to use my own form as I have previously suggested if Link and the companies that employ them persist with this approach – see https://www.roliscon.com/proxy-voting.html . Link stated that they were perfectly happy with this (as they are legally required to do), as long as the form was filled in clearly.

If all the registrars could get together and provide a common electronic voting system for all share holdings that was easy to use, and register for, then I would welcome it. But at present it’s a dog’s breakfast of a system.

Other matters discussed with Link were:

Impact of Brexit. One issue here is that companies listed on the Irish stock exchange are currently registered within the Crest system but that would no longer be approved if the UK exits, particularly on a “hard” Brexit. There may need to be an alternative clearance system put in place for Irish listed companies.

Dematerialisation: Nothing is happening, as usual no progress it seems. It would be required if we had stayed within the EU or agree regulatory compliance of financial services with them, but the Government has other things on its mind at present.

Ensuring all shareholders in nominee accounts are enabled to vote via their nominee operator. This requires a simple change to the Companies Act which again is not likely to happen in the near future. Note that some brokers do provide an easy to use service in this regard – e.g. the Share Centre with their own system and others via Broadridge. But investors still have difficulties with AIM companies and knowing when a vote is due. It was suggested it would be helpful if registrars or nominee operators could advise shareholders when a vote was due via email. Even those nominee operators who don’t offer a voting service legally have to do so for ISA accounts under the ISA regulations. It was agreed that it was key to getting people to vote that they be notified by email or text message when a vote was due, although personally I would not be keen on text messages.

An alternative is for all nominee accounts to be uploaded to the share register before a vote takes place and then registrars could solicit votes from everyone. But there are potential timing issues here.

Improving voting turn-out. Another reason why many shareholders do not vote, in addition to the reasons given above, is because they do not understand the resolutions on AGM agendas, or cannot easily decide how to vote. For example, Remuneration Reports can now run to many pages. Will private shareholders spend the time to read that part of the Annual Report and understand it? Unlikely particularly as many will not even see the Annual Report. ShareSoc is working on an initiative to tackle this problem which is for them to provide a proxy advisory and voting service that will actually vote an investor’s shares based on ShareSoc recommendations if they register for the service.

The impact of the CSDR. This is being implemented in UK law. The problems at Beaufort were discussed and the fact that nominee holdings are generally “pooled”, i.e. undesignated and hence there are no individual holdings recognised in the Crest system. This means there can be problems when a broker collapses because the shares held by clients may not have been recognised in the pooled share registrations. In fact this did not seem to be a significant problem at Beaufort whose records were generally accurate but has been at other failed brokers. There needs to be some regular reconciliation of client holdings to pooled Crest holdings it was suggested. Needless to say this would not be a problem if designated (i.e. personal named) accounts were used, which are supported by Crest already. One aspect that might help is that one of the new CSDR regulations (38.5 was mentioned) requires an account to be designated if the client requests it. But will the brokers even tell their clients about this?

The trend in share registration was discussed. The numbers of individual shareholders on share registers is not falling apparently, which contradicts what I was told by one broker a few years ago when he said that dematerialisation will not become a problem as soon all paper share certificates will disappear. That appears not to be the case. We do need dematerialisation, i.e. a new electronic share registration system. But Personal Crest members are declining rapidly as brokers are now actively discouraging the use of that system and withdrawing it.

Attendance at General Meetings. Not only are the number of proxy votes submitted by shareholders low but attendance at AGMs is also low. In small cap companies there are often no ordinary shareholders present – and that’s not just companies who hold their AGMs at inconvenient times or inconvenient locations. It was generally agreed that “hybrid” AGMs were the way to go, i.e. having both a physical meeting and on-line interactive web-cast where you can ask questions. In the short-term just web-casting an AGM can be helpful to some investors.

Regulation of share registrars was discussed. This is something I have advocated recently. Registrars are a key component in the UK financial system so it is odd that they are not regulated. I suggested that possibly some informal code of practice could be developed – perhaps sponsored by ICSA – as a step in the right direction.

In summary it was a useful meeting and no doubt some of these issues will be discussed in future meetings.

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

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IPOs, Platforms, Growth Stocks and Shareholder Rights

I agreed with FT writer Neil Collins in a previous article when discussing the prospective IPO of Aston Martin (AML) – “never buy a share in an initial public offering” he suggested because those who are selling know more about the stock than you do. We were certainly right about that company because the share price is now 24% below the IPO price.

Smithson Investment Trust (SSON) did rather better on its first day of trading on Friday, moving to a 2% premium. That’s barely enough to have made it worth stagging the issue though. But I think it will be unlikely to outperform its benchmark in the first year simply because as the largest ever investment trust launch it might have great difficulty investing all the cash quickly enough. On the other hand, if the market continues to decline, holding mainly cash might be an advantage.

One company that is lining up for a prospective IPO is AJ Bell who operate the Youinvest investment platform. They reported positive numbers for the year ending September recently but I suspect the IPO may be delayed given recent stock market conditions. One symptom of this is perhaps their rather surprising recent missive to their clients that discouraged some people from investing in the stock market. This is what it said: “In this year’s annual survey we had a small number of customers who identified themselves as ‘security seekers’, which means, ‘I am an inexperienced investor and I do not like the idea of risking my money and would prefer to invest in cash deposits’. If this description sounds like you, please consider whether an AJ Bell Youinvest account is right for you. If in doubt, you should consult a suitably qualified financial adviser”. It rather suggests that a number of people have moved into stock market investment after a long bull run and have not considered the risks of short-term declines in the market.

An interesting article was published on another platform operator, Hargreaves Lansdown (HL.), in this week’s Investors Chronicle. Phil Oakley took apart the business and showed where it was generating most of its profits – and it is undoubtedly highly profitable. Apart from the competitive advantage of scale and good IT systems it enjoys, it also benefits from promoting investment in funds, and running its own funds in addition. The charging structure of funds that it offers means it makes large amounts of money from clients who invest mainly in funds – for example £3,000 per annum on a £1 million SIPP portfolio. Other platforms have similar charging structures, but on Youinvest Mr Oakley suggested the charges on such a portfolio might be half.

His very revealing comment was this: “It is not difficult to see how this is not a particularly good deal for customers. It’s the main reason why I don’t own funds at all”. That goes for me also in terms of investing in open-ended funds via platforms.

Hargreaves Lansdown has been one of those typical growth stocks that do well in bull markets. But with the recent market malaise it has fallen 20% in the past month. Even so it is still on a prospective p/e of over 30. I have never invested in the stock because I was not convinced that it had real barriers to competition and always seemed rather expensive. Stockbroking platforms don’t seem greatly differentiated to me and most give a competent and reliable service from my experience. Price competition should be a lot fiercer in this market than it currently appears to be.

Almost all growth stocks in my portfolio have suffered in the last few weeks as investors have moved into cash, or more defensive stocks such as property. One favourite of private investors has been Renishaw (RSW) but that has fallen 35% since July with another jerk down last week. The company issued a trading statement last week that reported revenue growth of 8% but a decline in profits for the first quarter due to heavy short-term investment in “people and infrastructure”. According to a report in the FT Stifel downgraded the company to a “sell” based on signs that demand from Asian electronics and robotics makers has weakened. But has the growth story at this company really changed? On a prospective p/e now of about 20, it’s not looking nearly as expensive as it has done of late. The same applies to many other growth companies I hold and I still think investing in companies with growing revenues and profits in growing markets makes a lot more sense than investing in old economy businesses.

Shareholder rights have been a long-standing interest of mine. It is good to see that the Daily Mail has launched a campaign on that subject – see https://www.dailymail.co.uk/money/markets/article-6295877/We-launch-campaign-savers-shares-online-fair-say-company-votes.html .

They are concentrating on the issue of giving shareholders in nominee accounts a vote after the recent furore over the vote at Unilever. But nominee account users lose other rights as well because they are not “members” of the company and on the share register. In reality “shareholders” in nominee accounts are not legally shareholders and that is a very dubious position to be in – for example if your stockbroker goes out of business. In addition it means other shareholders cannot communicate with you to express their concerns about the activities of the company which you own. The only proper solution is to reform the whole system of share registration so all shareholders are on the share register of the company. Nominee accounts only became widespread when it was necessary to support on-line broking platforms. But there are many better ways to do that. We just need a modern, electronic (i.e. dematerialised) share registration system.

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

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