Shareholders, eh? They’re just one long list of problems. They interfere, they don’t understand the business, they can’t be bothered to engage properly, and half of them are conspiring with activists who are plotting against the management. This, apparently — according to a new report* — is the considered view of chairmen of a third of the FTSE 100 companies.
Mostly, these miscreants are not real shareholders, in the sense that they have invested their own money in a business. Like the chairmen themselves, they are the hired hands of 21st- century capitalism, running other people’s money and often getting rich in the process.
They are the institutional shareholders who dominate the registers of most listed companies. Some of them actively do not want to engage with the managements of the companies whose shares they hold, fearing a loss of the freedom to sell out, or perhaps worrying that they might find it hard to plot against such nice people should their performance disappoint.
The interviewed chairmen were particularly fussed by the proxy voting agencies, which have managed to make a good living by inserting themselves between the shareholders and the boards. The agencies have exploited the burgeoning business of disclosure, compliance and best practice which have helped make today’s bloated annual reports almost incomprehensible to ordinary mortals.
Dozens of pages of these documents are devoted to explaining how the executive bonuses are calculated. The surveyed chairmen complained that the verdicts from the agencies sometimes contained mistakes, delivered too late to fix ahead of the annual meeting, or were merely box-ticking exercises which failed to understand the reason for the incentives.
Yet considering how often it turns out that the executives have earned almost the maximum, it is hardly surprising that the holder/custodian of the shares is grateful to be told how to vote at the annual meeting. The latest survey from accountant PwC found that the average FTSE CEO was paid £3.9 million last year, or 86% of the maximum possible reward. Perhaps it just shows how good they all are at their jobs.
The gap between those running a business and the fund managers has grown much wider in recent years. The rise of tracker funds, which hold shares in proportion to their weighting in a given index, has made assessment of management irrelevant for a large swathe of shareholders. If a share does badly enough to fall out of the index, then it has to be sold. There is no incentive for these fund managers to try and see why the price fell, or to encourage better performance from those running the business.
It is easy to see why the trackers have prospered. Few individuals have the time or inclination to construct and run their own portfolio, and the introduction of compulsory workplace savings has forced employees into becoming shareholders at one remove.
It’s so much easier to give the capital to Vanguard, joining millions of others. Its low fees are something which everyone can understand, especially since paying more for active management is no guarantee of better performance. These investors are simply betting on the stock market: the fortune of any individual company is almost irrelevant.
Underlying all this is the poor long-term performance of UK shares, particularly when measured against those in the US. The presence in the index of a few large and lowly rated companies like Shell, BAT or Lloyds Banking is partly to blame, but new listings have gone to New York, where they are rated more highly than in London. That London investors’ scepticism, particularly towards technology stocks, has frequently turned out to be justified is little comfort to those promoting the City as the place to list a business.
There is no easy way out of this slough of despond. Were big companies to take a leaf out of Warren Buffett’s playbook and treat the annual meeting as an opportunity to interact with shareholders, rather than an irritating formality to be got through as fast as possible, the shareholders might be more inclined to see things from the management’s point of view. Well, we can all dream.
Neil Collins and Jonathan Ford publish A Long Time In Finance, a weekly podcast. On Apple, Spotify or Acast
* The State of Stewardship, sponsored by Tulchan