Shorting Shares – An Example of Motives

One of the most peculiar stories in the last week was the revelation that the attack on the Borussia Dortmund football team’s bus was not a terrorist attack after all. According to German police it was done by an individual investor who hoped to profit by shorting the shares. By killing or injuring their star players, he expected their publicly quoted share price to fall sharply.

Indeed the share price did fall by 3% but as the injuries suffered were relatively minor to one player, it did not fall further. But it was only luck that meant the injuries were not worse and there could well have been fatalities.

The perpetrator (named as Sergej W. by the police) bought 15,000 put options a couple of days before the event at a cost of 79,000 Euros while sitting in a hotel room overlooking the scene of the attack. Both that and suspiciously worded notes left at the scene led to his arrest.

Let us hope that this scenario is not repeated by others. But being able to sell short provides a lot of opportunities, not just for creating “fake news” which is of widespread concern at present, but as in this case of actually creating negative news. It’s a lot easier to create negative news than positive news. Was the BP Macondo oil well disaster (total cost over $60 billion) an accident or driven by someone shorting the stock? Conspiracy theorists need look no further for a good story.

Perhaps investors will need to look carefully at negative news in future.

Roger Lawson

A General Election – What Should Be In the Manifestos?

There is to be a General Election on the 8th June in case you have not heard. That has the unfortunate consequence on freezing Government business, with the prospect of changes of Ministers thereafter. Any formal consultations – for example on improved Corporate Governance and remuneration restraints – will be deferred. So the key question now is what would we like to see in the manifestos of the leading political parties? Here’s my list:

  1. A commitment to ensure that private shareholders in nominee accounts are fully enfranchised by changes to the Companies Act and a low cost “name on register” system mandated to be provided by all brokers with specific warnings about nominee accounts.
  2. The mandating of Shareholder Committees to improve Corporate Governance and ensure there is more restraint on pay. In effect return some more control on some matters to the owners of public companies, namely the shareholders.
  3. To cancel the proposed changes to dividend taxation and stop the double taxation of company profits (i.e. revert to the tax credit system) and properly index link capital gains taxes.
  4. To stop the proposed changes to Probate Charges so they more properly reflect the service being provided. It should not be turned into a tax, i.e. a fund raising measure to subsidise other Government legal services as recently proposed.
  5. To reform the insolvency rules so as to stop the abuses arising from Pre-Pack Administrations and ensure administrations are not just about protecting the interests of bankers.
  6. To improve the oversight of the auditing profession and strengthen the FCA and SFO so that frauds and false accounting are vigorously pursued. To ensure that companies and their directors are also accountable to shareholders by reform of the Companies Act and removing the Caparo judgement from law.

Now that would be a manifesto that would get my support, and no doubt that of many other people. It is of course very much the manifesto adopted by ShareSoc when it was set up – see http://www.sharesoc.org/ShareSoc%20Manifesto.pdf, and other issues have been covered by our campaigns on Shareholder Rights, Remuneration and Shareholder Committees. But progress on achieving our aims do date has been slow. Here’s a good opportunity to move them along.

Roger Lawson

Voting Your Shares – ISAs

One of our Members has responded to our previous note on voting your shares held in nominee accounts and in particular ISAs by saying that when he requested they submit votes on his Rolls-Royce shares the Idealing company said there would be a £30 administration charge for doing so. The ISA regulations make no provision for such a charge so I have advised that he should tell them this is illegal.

Below is the relevant part of the ISA Regulations which some brokers do not seem to be familiar with:

From the ISA Regulations pages 19/20 (see http://www.tisa.uk.com/regulations/84_ISARegs_2017.pdf

  1. (6)(c)     that, in relation to a stocks and shares component, qualifying investments for an innovative finance component, a Lifetime ISA component and qualifying investments falling within sub-paragraph (h) of regulation 8(2), the account manager shall, if the account investor so elects, arrange for the account investor to receive a copy of the annual report and accounts issued to investors by every company, unit trust, open-ended investment company or other entity in which he has account investments;
  2. (6)(d)     that, in relation to a stocks and shares component, qualifying investments for an innovative finance component, a Lifetime ISA component and qualifying investments falling within sub-paragraph (h) of regulation 8(2), the account manager shall be under an obligation (subject to any provisions made under any enactment and if the account investor so elects) to arrange for the account investor to be able –

(i) to attend any meetings of investors in companies, unit trusts, open-ended investment companies and other entities in which he has account investments,

(ii) to vote, and

(iii) to receive, in addition to the documents referred to in sub-paragraph (c), any other information issued to investors in such companies, unit trusts, open-ended investment companies and other entities;

You will also note that the first paragraph above actually enables you to request that you will be sent copies of Annual Reports from Companies which you hold within an ISA. By doing so you would of course know when to vote your shares. Again this is a little known provision which ISA operators like to ignore.

Roger Lawson

Hornby, BHP Billiton, Pan African, and Share Radio

A few items of miscellaneous news worthy of comment:

  1. Investor Alexander Anton has launched a campaign to have Chairman Roger Canham removed from the board of Hornby (HRN) and get himself appointed as director. A requisition for a General Meeting of the company has been submitted accordingly. Hornby, the maker of train sets and toys, has had a poor financial performance in recent years with production difficulties, consistent losses, and a turnaround plan that is not obviously working. Mr Anton was involved in the revolution at Victoria a few years ago, with a very positive result, so he has experience of boardroom coups. He complains that Mr Canham’s position as Chairman of Hornby is inappropriate when he is also Chairman of Phoenix Asset Managment, who are the largest investor in Hornby. More will follow on this story.
  2. Another activist investor which ShareSoc has been involved with in the past is Elliott Advisors. They are attacking a much bigger fish than Hornby in that they have suggested that BHP Billiton (BHP) should be broken up. They wish to simplify the company, such as dropping the dual UK/Austalian company set-up, and suggest disposing of certain assets such as its US oil business and concentrating on its Australian mining activities. The company did spin off some of its metals businesses as South32 in 2015. Elliott has a 4% stake in BHP at present. This may be a long-running saga if the past tactics of Elliott are repeated, so we will no doubt hear more on that also.
  3. South African gold mining company Pan African Resources (PAF) announced a placing today (12/4/2017) to raise cash for the development of a new “tailings” project. The placing was at 14p when the previous day’s close was at 16p, i.e. a 12% discount. The share price trend also suggests that news about a possible placing had leaked out some days before, as happens very often. This is a placing, not a rights issue, with no accompanying “open offer” so minority shareholders are diluted and prejudiced in favour of institutions. The brokers involved were Numis, Hannam and Peel Hunt. ShareSoc has made lots of negative comments in the past about such placings in AIM company shares which we think should be reformed. It is particularly annoying when one personally holds the shares as I do in this case. I shall be complaining to the company Chairman.
  4. Financial news radio station Share Radio is apparently to close. Gavin Oldham, who set it up in 2014 and personally funded it, has apparently decided it is not financially viable according to a press report. It is disappointing to learn that a service that some people found useful is to disappear although I cannot say I used it much myself. Audio is a slow way of communicating information in comparison with the printed form which I suggest is one of the difficulties of the concept. Plus actually establishing a new business always requires enormous investment in building a customer base (an audience in this case). Well at least it’s not listed on AIM where unproven business models still abound.

Roger Lawson

RBS AGM Voting Recommendations

ShareSoc has today issued the following press release giving voting recommendations for the Annual General Meeting of the Royal Bank of Scotland (RBS):

ShareSoc recommends voting against the following resolutions at the Annual General Meeting (AGM) of RBS: 2 Remuneration Policy, 3 Remuneration Report, 4 Chairman Howard Davies, 12 NED Penny Hughes and 24 General Meetings at 14 day notice.

RBS have continued to resist our request for a shareholders’ resolution to be put to the AGM for the establishment of a Shareholder Committee, and have steadfastly refused to share their legal opinion.

We consider the behaviour of the RBS board in this matter to be undemocratic. Shareholders should be able to consider our resolution and decide for themselves whether the company should implement a Shareholder Committee. RBS will have seen how seriously the concept of a Shareholder Committee has been taken by many players in the financial world, and that there is a good possibility that the idea will gain further traction.

ShareSoc has observed a more conciliatory tone in communications with RBS in recent weeks; however we note with regret that this has not resulted in the tabling of a motion to discuss the benefits of a Shareholder Committee. This is a missed opportunity for RBS to lead from the front.

Mark Northway, ShareSoc Chairman, said “It is very disappointing that RBS are effectively taking the position that they will only make substantial improvements to their governance models and shareholder engagement processes if such improvements become mandatory. This is a missed opportunity for RBS to lead from the front”.

Voting recommendation re Resolutions 4 and 5 (re-election of Howard Davies and Penny Hughes): VOTE AGAINST

ShareSoc cannot simply ignore the fact that RBS is refusing to put a validly requisitioned members’ resolution to the AGM. The legal reasons given for such refusal are tenuous at best, and make it clear that the board’s issue lies more with the concept of the Shareholder Committee than with the form of the resolution; alleged minor technicalities are being used as a foil to prevent a discussion and a shareholder vote on an important matter (see below).

It is not reasonable to expect shareholders to simply roll over on this matter when we believe that the company is actively obstructing our legal rights on both counts. We recommend a vote against the company Chairman Howard Davies who has ultimate responsibility for this action; and against Penny Hughes who chairs the Sustainability Committee, whose ambit covers stakeholder engagement.

Remuneration Resolutions 2 and 3: VOTE AGAINST

Target pay for the CEO is £3.8 million versus a going rate of around £7 million for a company of this size so RBS should be praised for adopting a pay policy which follows ShareSoc’s remuneration guidelines that FTSE100 CEO pay should be reduced to roughly half of current levels.

However, RBS have adopted an inadequate share ownership guideline of 400% of salary. This means that the CEO is able to sell all but £4million of his shares whenever he likes. Where is the alignment with shareholders in this approach? How can shareholders be sure that he will be retained and motivated? CEO MacEwan does not have enough skin in the game. He should be highly incentivised to manage and resolve the legacy issues for the benefit of shareholders. These questions are not discussed in the remuneration report, which fails to get to grips with the key issues of motivation, alignment and succession.

RBS should require executive directors to hold their shares until 2 years after they leave. Such time will enable any legacy issues to show through before the executives cash in their shares. That is the best way to create alignment with shareholders.

Resolution 24, permission to reduce notice of general meetings to 14 days: VOTE AGAINST

ShareSoc disapproves of such provision for any company as we believed it reduces shareholders rights. We recommend that shareholders vote against this resolution.

More Information

More information on our campaign to obtain a Shareholder Committee at RBS and the benefits of such committees is present on our web site here: http://www.sharesoc.org/rbs.html . Shareholders in RBS can register their interest on that page.

Roger Lawson

BP – Pay Cut or Downward Discretion

I seem to be spending a lot of time talking about pay at companies of late. It would be better if we could concentrate on more important matters, like their strategy, the lack of productivity in UK companies, how they are revising their plans to cope with Brexit and exchange rate changes, and all those other matters that affect shareholder returns. But it seems everyone wants to talk about pay. So here’s the latest story.

The BP Annual Report has been published and the Remuneration Report shows that the CEO, Bob Dudley, had his pay reduced by 40% last year. That was after a revolt at the AGM last year where there was a majority of shareholders against the Remuneration Report, albeit only an advisory vote. That followed a pay rise for Mr Dudley after horrible financial results in 2015.

The Remuneration Committee have “exercised downward discretion” to reach their decisions on the pay cut, which as Matthew Vincent in the FT has pointed out is a major innovation in the invention of a new euphemism by BP. Let us hope other companies also find it a useful new paradigm.

But even after the reduction, Mr Dudley still received total single figure remuneration of $11.5 million last year.

For 2017 a new Pay Policy will be voted upon at the AGM. The basic pay of Mr Dudley will be unchanged at $1.85 million. But it is proposed that there will also be an Annual Bonus of up to 225% of salary, and the award of Performance Shares (a form of LTIP) of up to 500% of salary. So despite the suggestions of some simplification, this is in essence yet another complex formula with many different measures of performance in use and which could result in total pay of over $15 million. And that’s excluding other “benefits”.

The Chair of the Remuneration Committee, Professor Dame Ann Dowling reports “substantial engagement with shareholders during the year”, and with proxy voting agencies. That’s sixty eight meetings or telephone calls in all. But did they consult private shareholders? Not so far as I am aware.

So the outcome which we are being asked to vote on at the AGM on the 17th May in London is hardly a revolution at all it appears to me. A lot more work clearly remains to be done to simplify and reduce pay at major public companies it seems to this writer. More “downward discretion” must be exercised to put it bluntly!

Roger Lawson