As names go, it couldn’t sound more innocent. But last year the Children’s Investment Fund (TCI) stuck the knife hard into Deutsche Börse’s $2.5 bn offer for the London Stock Exchange. Calling on muscle from heavyweights like Fidelity Investments, TCI successfully derailed Deutsche Börse’s bid, and the German exchange’s CEO, Werner Seifert, resigned soon afterwards.
In light of the Deutsche Börse coup, how does IR keep shareholders ready to fight when predators like hedge funds try to thwart management’s ambitions? Internal shareholder revolts are a relatively new phenomenon, with shareholder opposition historically coming from the target’s shareholders.
One blue-chip IRO who recently experienced a failed hedge fund-led attack says it’s important for IR to stick to the basics. ‘Decide whether dialogue will take place directly between shareholders and yourselves or via the media bear pit,’ he advises. ‘We decided immediately that we wouldn’t engage in mudslinging. We then had to make shareholders aware of the basic facts. If you follow that route, it’s easier to see the legal picture, and how it could ultimately be resolved. What you don’t want is a great pot of litigation. Sticking to the facts of the situation and talking only about these helped us.’
Extra hand-holding
It’s often the case that smaller shareholders need a bit of extra hand-holding when the media is hot on the story. ‘We did take a lot of trouble with our smaller shareholders; this was tough compared to our institutional shareholders, who are far easier to reach,’ says the IRO mentioned above. ‘Phone helplines for retail holders, as well as aiding these holders to understand the facts of the situation, helped rebuff the hedge fund raptors eventually.’
The issue of reaching smaller shareholders is complicated by the fact that it’s hard to know who sits behind nominee accounts held by brokers. ‘If the brokers are in charge of the nominee accounts, it’s damned difficult to talk to smaller shareholders,’ notes Roger Lawson of the UK Shareholders Association (UKSA). ‘One thing an IRO can do is ensure smaller shareholders are enfranchised, and companies could try and support the enfranchisement campaign we’re running.’
The UK government is being lobbied by the UKSA to ensure shareholder rights are improved via the new Company Law Reform Bill. As things stand, many nominee shareholders are denied the chance to attend or vote at meetings because their shares are effectively invisible within broker accounts. ‘Some companies don’t want to make it easier for retail shareholders to vote because of costs,’ says Lawson. ‘But most, if they had any sense, would.’
One issue is the fact that some boards are under the illusion that the institutional vote is all that counts. ‘Some directors still think that if they have a problem, all they have to do is invite their institutional shareholders in for a chat,’ adds Lawson. ‘But look at what happened to Marks & Spencer when Philip Green put in his offer! Twenty-five percent or more of M&S shareholders are retail, and when it came to the crunch, it was private shareholders that helped M&S reject Green’s bid. M&S do try very hard to communicate with their private shareholders, and it’s paid off.’
Playing favorites
A history of favoring institutional holders makes engaging with smaller stakeholders challenging. Whether trying to encourage shareholders to vote their proxies or come to the AGM, it can be very difficult to get smaller investors involved. Many AGMs are tightly arranged, predictable and dull affairs in which larger shareholders dominate on topics that may have already been touched on behind closed doors.
To its credit, the European Union is pushing forward proposals to make it easier for shareholders to flex their rights. Its directive will facilitate cross-border proxy voting and end share blocking, a major deterrent to shareholders. Share blocking requires banks to certify that they have blocked a holder’s shares for a given period prior to the AGM.
EU internal market and services commissioner Charlie McCreevy claims that a third of all share capital of EU-listed companies is held by non-residents. ‘Our proposals will introduce a range of key minimum standards to facilitate cross-border voting using modern, reliable technology,’ he says. ‘All this will help to strengthen the role of shareholders and spread EU investing.’
Building a fan base
Jane Fiona Cumming of corporate governance consultancy Article 13 notes that better communications with retail shareholders won’t be automatic. ‘Even electronic voting, which is a good idea, could perpetuate a move toward more box ticking,’ she says, adding that this could lead to companies ‘avoiding or misunderstanding shareholder concerns.’
Pushing AGM attendance may not be the most proactive move, Cumming says: ‘Everyone says shareholders should attend AGMs, but sometimes you have to take the debate to the people rather than expecting them to turn up to an AGM.’
For companies that are ambivalent about retail shareholder communications, the web is a no-brainer, says Peter Walker of governance consultants Pielle Consulting Group. The theory is that if it works for rock groups reaching out to their fan base, it can work for corporates too.
‘Some companies want to deter everyone from coming to the AGM for the goody bag, but at the same time they want to engage them,’ suggests Walker. ‘Companies could ask shareholders if they want the full set of quarterly or annual documents or tighter, briefer comments on a quarterly basis. Both can go on the web site. It should be one of the principle vehicles you have in dealing with shareholders and stakeholders.’
Cultural nuances
Until shareholder rights are more consistent across nations, it will be difficult to get cross-border voting in full swing. ‘In terms of cross-border voting, there can be different legal backgrounds,’ explains Richard Singleton, director of corporate governance at F&C. ‘Until 18 months ago, French companies had to have a chairman and a CEO. You weren’t legally allowed to split the role. So, if you were a British shareholder saying you had to split that role, that was very difficult.’
Board structure makes a difference too. Some supervisory boards may be more removed from day-to-day management issues than unitary boards where the chairman’s committee oversees day-to-day issues.
While the push to get the vote may be mired in cultural baggage, European issuers are making great strides. Sarah Wilson, managing director of proxy voting agency Manifest, is quick to praise much European IR and its attitude to smaller shareholders. ‘The quality of info can be very good in Europe,’ she says. ‘But IR professionals should be asking the board why they’re not using a registered share route. The transparency of the share register is such an important concept for good quality dialogue between companies and shareholders, as well as getting shareholders to talk to each other.’
