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 – It’s Important!

The main Annual General Meeting season is now upon us and those investors who hold their shares on the register will have been receiving Annual Reports on paper or electronically. If you hold your shares in a nominee account, some brokers will send you an Annual Report or notify you of when an AGM is coming up. Otherwise you’ll need to monitor company announcements. But the key thing is to VOTE YOUR SHARES.

You are after all a part owner of the company and the votes at an AGM enable you to determine who should be the directors, what they get paid, whether they can issue more shares and many other important aspects. The voting by institutional investors used to be sloppy, but now it is often over 70% while they frequently meet the same difficulties as private investors in actually submitting votes. But private investors are now laggards and need to up their game.

Yes it would help if the shareholding system was reformed (see our Shareholder Rights campaign here for more information on that: http://www.sharesoc.org/shareholder-rights.html ) . But in the meantime here are some tips to assist you:

If you hold a paper share certificate or are a Personal Crest Member then it is easy. You will be sent a paper voting form or can opt in for electronic notification. You can then vote by post or electronically. Incidentally even if most of your shares are held in a nominee account it’s worth holding at least one share on the register because that ensures you will be notified of AGMs and can attend the meeting without question.

If your shares are held in a nominee account, as most are nowadays, then it gets a bit more complicated. In essence you will have to get your nominee operator (stockbroker) to submit your votes on your behalf because they technically own the shares not you (i.e. their name is on the share register). You just have a “beneficial interest” in them. But the voting rights are still yours.

If your shares are held in an ISA account then the ISA rules require that the nominee operator will vote your shares when requested, i.e. they have a legal obligation to do so. The best brokers provide easy electronic systems to enable you to do that. But others will do so upon request. For non-ISA nominee accounts, the legal position is not as clear cut but in general all good brokers will vote your shares when requested.

If you wish to attend the AGM in person then you will also need to ask for a “Letter of Representation” if your shares are in a nominee account.

Now you may find the “Notice of the Annual General Meeting” which lists the resolutions to be voted upon a complex and daunting document at first glance. But in reality most of the resolutions are standard ones that appear every year. However that does not mean that you should vote “Yes” to all of them or blindly follow the directors recommendations. There is a lot of guidance on how to vote at General Meetings on this page of the ShareSoc web site: http://www.sharesoc.org/voting%20at%20general%20meetings.html

We also provide guidance on attending General Meetings on this web page: http://www.sharesoc.org/general_meetings.html with a comprehensive document on “How to Run a General Meeting” which you can give to company directors or the Company Secretary if you think the meeting was badly run (and lots are).

These areas may appear complex to new investors but they are worth learning about. Some General Meetings are particularly crucial as regards who is running a company and its future direction; and we all want to control outrageous pay levels that have been appearing in many companies. The votes enable you to do that. One of the key benefits of Full Membership of ShareSoc is that you can phone us up and ask for advice on how to vote and how to attend an AGM. The latter is always worth doing if you can spare the time. But if you cannot attend in person, just make sure YOU GET YOUR VOTE IN.

ShareSoc does sometimes issue general voting recommendations via Press Releases in particularly extreme cases – for example on Persimmon and Alliance Trust recently.

REMEMBER VOTING AT COMPANY GENERAL MEETINGS IS LIKE VOTING AT GENERAL ELECTIONS. IF YOU DON’T VOTE THEN YOU ARE LIKELY TO GET LEADERS WHO YOU DON’T LIKE AND WHO PAY THEMSELVES TOO MUCH. SO SHAREHOLDER DEMOCRACY IS AS IMPORTANT AS POLITICAL DEMOCRACY AND THOSE WHO DON’T VOTE BECAUSE THEY CAN’T BE BOTHERED WILL LIKELY SUFFER THE CONSEQUENCES. SO PLEASE DO VOTE.

Roger Lawson

Government Action on Dormant Accounts

The Government has today reported that as much as £2 billion is sitting idle in dormant accounts such as share trading accounts, ISAs, pensions and insurance products. That includes £715 million alone in investment and wealth management accounts.

This is noted by the Independent Dormant Assets Commission set up by the Government which has looked at whether the existing scheme for dormant bank and building society accounts should be extended. Minister for Civil Society, Rob Wilson, suggests that this money could help change millions of lives if it was donated to charities.

Readers may not think they will ever lose track of accounts but as folks get older, move house or emigrate, accounts are often forgotten. Regrettably the use of nominee accounts to trade shares hardly encourages stockbrokers and platform operators to follow up on inactive accounts. Any dividends on shares simply accumulate within the client account but presently the account operator gets interest on that which they retain. This can continue for ever (even after the client has died) unless inactive accounts are chased up. The lack of even regular postal communications to the last recorded address now that everything has moved on-line makes it easy to lose track of clients and the longer it is left, the more difficult it is to trace account holders. With digital communication being the norm, and people changing email addresses regularly, so that messages to them just disappear into the ether you can see why this is a growing problem and why the sums involved have become so large.

When investors are on the share register, dormant accounts and the associated dividends return to the company who issued the shares eventually so they revert to the benefit of other shareholders. Whereas with nominee accounts the nominee operator gets the benefit.

So this is yet another dubious aspect of the nominee system and why stockbrokers are so keen on nominee accounts perhaps. ShareSoc has of course been complaining about the iniquities of the nominee system for some time.

The Commission has suggested that the introduction of a scheme to ensure these dormant accounts are donated to good causes should be voluntary, but it would surely be better that it was compulsory. Note though that no client can lose money as a result if they reappear. They can always reclaim the lost assets in any case.

Roger Lawson

AIC Response to Green Paper

The Association of Investment Companies (AIC) have published their response to the Government’s Green Paper on Corporate Governance. One recommendation contained therein is that “The AIC also recommends that a detailed study to assess retail investors’ access to voting services on platforms and other nominee account services is undertaken to identify any necessary reforms”. This is of course a very positive endorsement of an issue that ShareSoc has been campaigning upon for some time – see our campaign page here: http://www.sharesoc.org/shareholder-rights.html

In addition if you read the detail submission, they say “Additionally, the study should assess any barriers to switching providers that may be preventing shareholders, that do want to vote but are unable to, from moving to a provider that does offer this service”. This is indeed a very important issue also as currently it takes way too long to switch between brokers or platforms. For example, my latest broker switch has now been running since last October. And that’s not the first time I have experienced such delays. Anyone who experiences this problem should complain to the FCA as I have already done in the past – but they clearly do not get enough complaints about it because no action has been taken and the response did not likely indicate any will be.

Otherwise the AIC’s response to the Green Paper can be read here: http://www.theaic.co.uk/sites/default/files/hidden-files/AICBEISCorpGovReformresponseFeb17.pdf

Roger Lawson

Press Release – Response to Green Paper on Corporate Governance

ShareSoc has today issued the following press release:

How to fix the ills of the UK Corporate Governance scene? ShareSoc and UKSA have given their solutions in a response to the Government Green Paper on Corporate Governance Reform. We have emphasised that the following are the key issues:

  1. Engagement between shareholders and companies is not working. Shareholders are not exercising effective stewardship and control, and boards are failing to fulfil their fiduciary obligations to members. As a result, public trust in business is low. This is bad for business and for long term investors. It needs to be addressed.
  2. The ownership structure of public corporations is a problem. It means that beneficial owners’ interests and views are not represented adequately. The bulk of public company shares are controlled by institutions whose interests are often not aligned with those of the beneficial owners.
  3. Shareholder Committees: We strongly support the concept of Shareholder Committees, provided that they represent the interests of all shareholders, including private investors and investors in employee share plans.
  4. Problems in the voting chain: This is not highlighted in the Green Paper. The proliferation of shareholders who are not directly interested in the companies in which they own shares– for example, intermediaries, ETFs, tracker funds and other index-related funds – corrupts the governance and stewardship process and the associated governance checks and balances. This is exacerbated by stock-lending. This prejudices the concept of corporate governance based on shareholder oversight, and places too much influence over our companies in the hands of traders – the ultimate cause of short-termism.
  5. Disenfranchisement of individual shareholders: The Green Paper recognises the problem that most private investors are now obliged to hold their shares in pooled nominee accounts wherein shares are legally owned by an intermediary. The ability and rights of informed individual investors to influence the affairs of companies in which they have invested is fundamental to good governance.
  6. Complexity of boardroom pay: Systems of remuneration for directors have become excessively complex, as a result of the structural governance weaknesses identified in the Green Paper. The mechanisms for triggering bonus payments have become opaque, the quantum of the payouts is often impossible to predict, the true motivational impact has become questionable while the reporting to shareholders has become cumbersome and often obscure to the point of incomprehension.
  7. Weaknesses of long-term incentives: Boards and their advisors have taken advantage of the lack of voting integrity to implement complex LTIPs as a major part of the overall remuneration package. It is widely accepted that the longer a reward is deferred the less motivational impact it has on the recipient. It is also accepted that for performance incentives to work, the achievement of outcomes must be within the control of the recipient. The current system of long-term incentives fails both these tests. It can encourage perverse behaviour which we do not want from those who run our companies.

Shareholder Committees are a core part of the solution to the problems of corporate governance. There are many other elements of governance and control that can be improved and we have commented in our response on those where we have specific knowledge. However, without Shareholder Committees, and concomitant reform to restore the rights of individual shareholders, other changes to corporate governance are unlikely to produce meaningful change.

More Information

Our responses to the specific questions set out in the Green Paper are given here: http://www.sharesoc.org/ShareSoc-UKSA-Green-Paper-Corporate-Governance-Response.pdf  (the submission was a joint one from ShareSoc and UKSA).

Roger Lawson

Losses From Withholding Taxes on Dividends

An issue that has come to the notice of ShareSoc is the problem of the Withholding Tax introduced on dividends in South Africa. Even though Pan African Resources Plc (PAF) is registered in the UK, it is dual listed on AIM and the Johannesburg Exchange (JSE). Because of the way South Africa introduced the tax change, any shareholder is going to get 15% deducted before payment (or 10% for UK residents under a dual tax treaty).

To get the lower rate, you need to submit a “Tax Resident Beneficial Owner Declaration Form” to the company’s registrar (Capita). So far, so good, if your shares are held directly (i.e. you are on the register).

However, if your shares are held in a nominee account (i.e. in an ISA or SIPP), your broker would have to submit such a claim for you (and any other clients for which they are holding the company’s shares in a pooled nominee account).

Checking with a couple of brokers, AJ Bell Youinvest and the Share Centre, they are refusing to submit such claims on the basis that they never reclaim such taxes. That’s despite the fact that they do reclaim tax deducted on UK listed REIT dividends.

This seems somewhat unreasonable even if it would be some effort to ensure the 5% of dividends were not lost. At least investors should be warned of this. Pan African is not likely to be the only company affected by this.

This is of course, yet another example of the negative aspects of nominee accounts. The fact that you are not the registered owner of the shares if you hold them in an ISA or SIPP account, or indeed in most broker accounts, undermines your legal rights including your dividend rights!

Roger Lawson

Shareholder Rights Directive Agreed – But It’s Still Defective

There has been agreement within the EU on the final form of the Shareholder Rights Directive. What follows is the press release issued by Better Finance (a body that represents individual investors across the EU and of which ShareSoc is a Member).

PRESS RELEASE

PRESIDENCY AND PARLIAMENT AGREE ON REVIEW OF SHAREHOLDERS RIGHTS DIRECTIVE: LIMITED IMPROVEMENTS FOR SHAREHOLDERS

14 December 2016 – On 9 December 2016 the EU presidency and the EU Parliament agreed on the final version of the new Shareholders Rights Directive (SRD). Better Finance welcomes the completion of the new SRD which took years to finalise.

This final version provides limited improvements in shareholders rights, in particular in the critical areas of shareholder identification and of the exercise of cross-border voting rights.

Companies will be able to identify their shareholders and to obtain information on shareholder identity from any intermediary in the chain that holds the information. But Member States will decide that companies within their borders are only allowed to request identification with respect to shareholders holding more than a certain percentage of shares or voting rights which will not exceed 0.5%. If such a high threshold of 0.5% is set by Member States, only a very small minority of shareholders of EU companies will be identified. In addition this right is reserved to issuing companies and not to their co-owners (its shareholders). Better Finance asks that Member States set a threshold that is as low as possible and that the shareholders of the listed companies have access to the same information as easily as those companies do.

An important barrier to cross-border shareholder engagement within the EU will virtually remain in place despite Better Finance’s efforts, since intermediaries will still be able to charge higher fees to shareholders wanting to exercise their cross-border voting rights, but admittedly subject to certain conditions: “any differences in the charges levied between domestic and cross-border exercise of rights shall only be permitted where duly justified and shall reflect the variation in actual costs incurred for delivering the services”. Better Finance asks that the EU Commission and the Member States effectively enforce this provision.

Furthermore, no action is really taken against nominee and omnibus accounts where the economic /beneficial owner of shares still does not get the voting rights, except perhaps for very big shareholders: those who own more than 0.5% of the company or over the threshold to be set by Member States. More generally, it remains doubtful that financial intermediaries will reveal the identity of the EU shareholders who are not resident of the same Member State as that of the issuer.

Finally, the new SRD does not recognize shareholder associations and their right to represent small shareholders in listed companies: this is a significant barrier to the engagement of small shareholders.

“It is doubtful that these new rules will encourage European individual shareholders – who are long term investors – to engage more with listed companies: a pity as this was precisely the stated aim of this review”, said Guillaume Prache, managing director of Better Finance.

<END>

Comment: A lot will depend on how individual states implement the Directive and it will be some time before it is needed to be introduced into UK law, by which time we may have left the EU. Indeed many of the provisions of this Directive, for example on remuneration votes, are already present in UK law although it would require some changes to comply with it. However, as the above press release points out, the Directive is deficient in many respects and would certainly not guarantee that all shareholders (e.g. those in nominee accounts) have the rights they should receive. Neither does it guarantee access to those shareholders by third parties so shareholder democracy is still hopelessly undermined.

In essence, this is a typical example of EU bureaucracy as applied to financial services. A basic lack of understanding of the market environment , particularly in the UK, and the proposals excessively influenced by large financial organisations. The political process and democratic input to EU decision making is also grossly deficient, resulting in a half-baked compromise which satisfies nobody.

The directive may improve matters in some countries in some areas. But so far as the UK is concerned, it is not particularly helpful and does not even catch up with UK thinking and regulations in this area. After years of work on this directive (and more to come), it is a very unsatisfactory outcome.

Roger Lawson