Corporate activism: why more shareholders are showing executives the red card

The concerns of shareholders have long been a low priority in many companies. Few shareholders are prepared to go public with their negative views about a company and then watch the share price slide, and many executives have been happy to listen politely and then do nothing. But shareholders now appear prepared to take things that crucial bit further, and both executives and non-execs are learning to sit up and pay attention. Richard Brass writes

Shareholders used to be such a well behaved bunch. Not many years ago, unless the share price went into sudden freefall, the only time most company executives expected to hear from their shareholders was at the AGM, when they would show up, dutifully approve everything, then shuffle off home to wait for their dividends. There might be the odd crank who liked to get up and make some noise, but the big investors, the pension funds and insurance companies that really mattered kept nice and quiet.

Those tranquil days became history last summer in the wave of shareholder rebellions that crashed through the AGMs of some of the biggest corporate names. At the first opportunity, after the Government gave shareholders the right to hold an advisory vote on companies' remuneration policies, such giants as GlaxoSmithKline, Reuters, HSBC and Corus found themselves staring down the wrong end of large disapproving votes from shareholders. It was the biggest rebellion in British corporate history, and the message from investors was that it wouldn't be the last.

But, away from the high drama of these big moments, day-to-day corporate activism, mostly conducted behind closed doors, is also becoming bolder. While spectacular shareholder rebellions in the very public environment of an AGM may be brand new, groups of powerful investors have been quietly expressing their concerns about the direction of companies in private for a long time. The difference now, however, is that they're prepared to go further and, if necessary, to go public.

Whether triggered by the new-found vigour of shareholder activism over remuneration, or by the shadow of such corporate disasters as Enron, WorldCom and now Parmalat, the cases of behind-the-scenes activism that have come to light in recent months are a sign that, if company executives were happy to overlook their big shareholders in the past, those days are over.

When rebel shareholders claimed the scalp of Carlton chairman, Michael Green, last October, they took corporate activism to a new level. Never before had the head of a big Plc been so publicly humiliated by investors, and the rebellion, which scuppered Green's plan to be executive chairman of the new ITV company formed by the merger of Carlton and Granada, was a clear case of what can happen when companies don't listen.

The rebel group, led by Anthony Bolton of Fidelity, included such powerful names such as UBS Global Asset Management, Legal & General and Schroders, and together represented 36% of Carlton's equity and 33% of Granada's. They made it clear as soon as the merger plans were announced in 2001 that they would not accept being overlooked, but the companies' executives believed the fund managers wouldn't take it to the wire, knowing that to do so would expose their problems to the public gaze and put the value of their shareholdings at risk. They were wrong. The obliging fund manager had turned into something completely different.

In the US, high-profile corporate activism has long been a feature of the business environment, but a month after the Carlton dispute it too claimed one of its most spectacular scalps when the dogged persistence of the New York private investment company, Tweedy Browne, unveiled to shareholders and the world at large the real state of things at Conrad Black's Hollinger empire. The unseated Black is no doubt now ruing the fact that he didn't pay more attention to the investors.

Rebellion

Such an outbreak of public disputes between investors and companies is unprecedented. Yes, the occasional argument has gone public before, but very rarely. Perhaps it's no coincidence that one of the most prominent of such cases was once again in the media, in 1999, when Hermes, the pioneering UK activist fund manager, joined forces with American activist fund Lens and, with Phillips & Drew Fund Management and the Prudential on side, took on Mirror Group's chief executive, David Montgomery, over the state of the company under his stewardship and his opposition to merger plans. Montgomery was forced to resign and a merger went ahead.

The bulk of discussions between corporate activists and company executives, however, take place behind closed doors, and that's the way both sides like it. The UK's National Association of Pension Funds took a prominent and public role in last summer's remuneration votes, but its strategic adviser on corporate governance, Geoff Lindey, says that when it comes to ironing out most problems between a company and its investors, discretion is the best policy.

'Activism only really has a part to play when the accountability breaks down and the management aren't doing their job properly, which will thankfully only be a minority of cases,' he says. 'Our view is that when these things take place, unless there's a very powerful reason to do otherwise, they should be confidential.'

Since taking up his post last March, Lindey has responded to the heightened mood for corporate activism by reviving a system of case committees, whereby the NAPF facilitates meetings of shareholders in a particular company who are concerned over a specific issue. This structure, which was used until the 1980s but fell into disuse, provides a formalised system for investors to share their concerns and then approach the company. The idea has, he says, gone down very well with the NAPF's members.

'There has been a lengthy period when institutional investors have been fairly supine, but over the past couple of years they've taken a greater interest. When activism is required, institutional investors now are prepared to step up to the plate in a way that they weren't two or three years ago.'

The upsurge in activism has also been noted on the other side of the fence. 'In the past a lot of shareholders were very inactive,' says Patricia Peter, corporate governance executive at the Institute of Directors, 'and probably for that reason companies almost never heard from them, never saw them and probably spoke to very few of them. The tiny volumes on many votes at company general meetings shows that they sometimes don't even exercise the simplest influence. But not now.'

Companies are prepared to listen to their investors, she says, and many have formalised structures for taking their shareholders' concerns on board. 'The larger the company, the more likely that is, partly because investors generally have quite small teams of people able to engage in this dialogue, and they get fairly thinly spread. So sometimes it's a bit difficult, particularly for companies further down the FTSE index, to get a lot of time with their shareholders.'

Many fund managers, including Isis Asset Management, Standard Life Investments, Morley, Insight Investment and the now-notorious Fidelity, have dedicated institutional relations teams dealing exclusively with corporate governance issues in the companies in which they invest, which helps smooth the process.

'But then of course,' says Peter, 'when you get beyond shareholders, to pressure groups and things, one has to look more at whether it's relevant for that organisation to be listening to them and participating in dialogue. At least we haven't quite got to the stage, as in the US, of litigation sometimes being the first step rather than the last, but shareholders are less supine than they were, and that isn't a bad thing.'

Those less supine shareholders are getting involved in companies' activities as never before, and the wise company will pay attention. The surge in corporate activism could cause boards endless headaches, or it could be the healthiest development in Britain's business culture for a long time. Either way, this is one tiger that's not going back in its cage.

Richard Brass is a freelance columnist and feature writer, covering general and business issues for magazines and newspapers including The Times, the Daily Telegraph and The Observer. He is a former editor of Punch magazine.