It’s Getting More Difficult to Vote

It’s certainly getting more difficult to vote of late, and I am not talking about voting at General Elections but just for resolutions at the General Meetings of companies we own. This seems to be a particular problem with Capita Registrars. Here’s some examples:

  1. Whitbread: As a personal crest member, I am on the register and expect to be sent an annual report and proxy voting form (and at least the latter on paper). But no longer it seems. Whitbread only sent me a single page letter advising me that the Annual Report and AGM Notice were available on-line and I could vote on-line. No paper Annual Report when I had not opted to not receive it. So I phone them up to ask for a paper copy and a proxy voting form. They (twice) sent me the previous year’s annual report by mistake and no voting form until reminded.
  2. National Grid. Similarly I only received a single page letter. So I tried to vote on-line. Even though the instructions were unclear, after speaking to Capita on the phone, they could not advise me how to get it to work. Simply rejected my ID. They seem to have a technical problem and clearly the system has not been adequately tested.

Is it not ridiculous that one should have such difficulties with voting, getting a notice of the meeting or an Annual Report? This is another example of how shareholder democracy is being undermined.

I will be raising these issues at the AGMs of these companies. But it is really annoying to have to waste time on such matters. If everyone on the register (or in a beneficial holding) was sent a paper proxy voting form, that would be one simple solution and should be mandated in law.

Roger Lawson

Expensive Dividends – National Grid and Electra Private Equity

National Grid (NG.) are returning some of the cash received from the sale of their stake in a gas distribution business to shareholders via a large special dividend. And some will be returned via market share buy-backs, the wisdom of which may be questionable. But the real concern for private investors is that dividends are taxed as income even though this is in essence a “return of capital”. It is not being paid out of operating profits, but simply from the sale of part of the business.

In the past, companies would recognise this fact and the tax problem faced by private investors by offering a “B” share alternative that could then be redeemed and turned into a capital gain (as capital gains are less highly taxed than income for many investors). But this was outlawed in the 2015 Finance Act – there is a good article in the Daily Telegraph today that explains this in more depth.

But consider the plight of retail investors in Electra Private Equity which is much worse. They recently announced a similar return of cash via a special dividend of 2640p per share. The share price the day before it went ex dividend was 5,110p so effectively half the value of the company is being returned as a dividend. One investor who contacted me invested £20,000 in the company many years ago, and his holding is now worth near £150,000 so he will receive an enormous income tax bill. Needless to say he is not happy.

A particularly iniquitous aspect is that a lot of the “profit” he is being taxed on actually simply results from asset price inflation over the years.

Could the company have considered alternatives? Spreading the return of more than one tax year may have helped, but another possibility would be to return the cash via a tender offer to shareholders. Those taking it would realise a capital gain, while those not doing so would see the value of their existing holding unaffected (the share price would adjust to reflect the lower asset value per share and the proportionally similar fewer number of shares in issue).

There may be other possibilities that a tax and accounting expert could advise on, but unfortunately it’s probably the impact on institutional investors that is driving this desire to pay dividends and private investors are being prejudiced.

I may raise this issue at the National Grid AGM in July, but it will be too late to affect this and dividends can be declared by a company’s directors without a vote of shareholders. Similarly on Electra Private Equity, it is too late to object as the dividend has been declared and so will be paid.

This is yet another example where the taxation of capital gains and dividends is irrational and deeply prejudicial to the interests of investors. The solution, without prejudicing the Governments need to receive tax, would be harmonisation of dividend and capital gains taxes. But the latter should be index linked to avoid taxing fictitious profits.

Roger Lawson

National Grid Share Consolidation – Who Are They Fooling?

Shareholders in National Grid (NG.) will have received a notice of a General Meeting to approve a share consolidation (at least that’s those of you on the register of the company, others in nominee accounts may be surprised later by the change in their holding).

This proposal is linked to the return of cash to shareholders following the sale of the company’s interest in a gas distribution business. There will be a large “special” dividend as a result – more on the tax implications of that in a later article.

But the company is also doing a share consolidation which they explain as taking place “in order to ensure that so far as possible, the market price per new ordinary share following the special dividend will be comparable to the price per existing ordinary share prior to the special dividend”. In other words, instead of the share price falling (to reflect the return of capital) and your shares remaining the same in number, the number of shares you hold will be reduced while the share price is maintained.

Who are they trying to fool by this sleight of hand? Do they really think investors are so stupid that they will not realise that the value of their shareholding has been reduced (offset by the dividend received to some extent, if not fully by dividend taxes on private shareholders)?

This consolidation will no doubt incur significant legal and advisory costs on the company, generate unnecessary work for share registrars and stockbrokers, and also create work for investors in adjusting their portfolio records.

I for one will be voting against this consolidation, and I suggest other shareholders may wish to do the same. That would not impede the dividend payment in any way of course.

Roger Lawson

The Unacceptable Face of Capitalism – BHS and National Grid

The extraction by Sir Philip Green of £300m from BHS, which led to the business going into decline and leaving the company pension scheme under-funded before he sold it for a £1 to an unqualified chancer was strongly criticised by a select committee of the House of Commons yesterday. To quote from their report: “The tragedy is that those who have lost out are the ordinary employees and pensioners. This is the unacceptable face of capitalism”.

This echoes the comments of Ted Heath on Tiny Rowland of Lonrho where the mud certainly stuck for a very long time.

But I was reminded of that phrase also when I asked a question at the National Grid AGM yesterday. I raised the issue of the number of jobs the Chairman Sir Peter Gershon had, particularly as at the previous AGM he did not seem to be aware that the CEO was planning to leave (the news was given in a press item which he denied at the AGM but a few months later it turned out to be true). Did he have his finger on the pulse of the business at the time was a point I made. Sir Peter also chairs Tate & Lyle and has several other positions. This is contrary to ShareSoc’s policies. It is particularly problematic when a Chairman holds more than one such role in a larger company (Tate & Lyle is now a FTSE-250 company but it is still relatively large and National Grid is one of the largest FTSE-100 companies).

Moreover, the Senior Independent Director pointed out that he did not consider it a problem as Sir Peter is only contracted to do 2 days per week. So how much does he get paid for this? About half a million pounds per year!

This seems rather excessive to me, and unjustifiable. He should do more hours and/or get paid less I suggest. So how many investors voted against the Remuneration Report or against the Chairman? Actually only 2.9% and 1.4% respectively.

Surely this is the kind of “unacceptable face of capitalism” that our new Prime Minister, Theresa May, has said she will tackle. But it will take a lot more than improved reporting and more votes on pay to tackle this problem.

Sir Peter was only slightly less dogmatic in his approach to responding to shareholders questions than he was the previous year. I will write a full report for ShareSoc members as soon as possible.

Roger Lawson

National Grid AGM, Rensburg AIM VCT and Stocktrade

I attended the National Grid Annual General Meeting in Birmingham yesterday. Unfortunately I was not allowed to ask a question as the organisation that I was representing as a proxy put my son’s name on it rather than mine so I was only allowed in as a “guest”. I will do a fuller report on the event for the ShareSoc Members’ Network later today, but it was not a particularly exciting event this year. Not a single shareholder complained about the outrageously high pay of the executive directors. The Chairman was both dogmatic and condescending to the mainly private shareholders who attended – he could certainly do with some advice on how to handle such meetings. His boring presentation was read out from a script, and contained not a single joke to lighten the event so far as I recall. But I did learn some useful information.

Rensburg AIM VCT

I was on my way to Birmingham when I learned that the Rensburg AIM VCT AGM scheduled for today (the 22nd July) had been cancelled. In the RNS announcement’s wording it had been “adjourned” until the 25th August. So I had to change my travel plans at some inconvenience. Other shareholders might likewise have been affected, if they even knew about the change. It’s all very unusual and unreasonable to cancel an AGM at the last possible moment and is usually done only when circumstances absolutely dictate it. So for example, the Maven Income & Growth VCT AGM was not cancelled earlier this month even though travel difficulties due to a tube strike in London on the day were immense – and the directors all turned up. This reinforces my view that shareholders should vote against the directors of Rensburg AIM VCT as previously recommended. See this note for more comments:

Stocktrade and Personal Crest Membership

One thing I did learn from the National Grid AGM was that Stocktrade are to definitely cease supporting Personal Crest Membership following the takeover by Alliance Trust Savings. Representatives of Stocktrade were at the meeting and I was told that such investors will be advised very soon that they will have to move into a nominee account or depart. I will definitely be departing in that case. The grounds given were the extra administrative cost of Personal Crest accounts which I believe is false. In any case, if that was so why not simply charge more for them? I have already made representations on this matter and will do so again. It is exceedingly annoying that many stockbrokers are now positively moving to withdraw support of Personal Crest membership. Such accounts are a very good way to ensure you get all your rights as a shareholder. There was an article on the benefits of such accounts in the June ShareSoc Newsletter and I will certainly be looking for another stockbroker who does support them as a priority. If anyone wishes to make representations on this matter to Alliance Trust, Patrick Mill is the Managing Director of Alliance Trust Savings (ATS) – his address is Alliance Trust Savings Limited, PO Box 164, 8 West Marketgait, Dundee, DD1 9YP. Or send an email to . You may also care to copy Katherine Garrett-Cox who is the CEO of Alliance Trust and who also Chairs the ATS subsidiary, and also Mrs Karin Forseke who chairs Alliance Trust itself (the parent company).

Roger Lawson

Who are the Election Winners and Losers?

Who are the General Election winners and losers? Well most investors have benefited because the market as a whole has risen today after the election results gave the Conservatives an unexpected victory. Specific sectors that benefited were house builders and utility companies. House builders were generally up at the time of writing this note, with Berkeley Group in particular up 10% – no doubt investors being relieved there would be no mansion tax affecting expensive properties in London.  Utility companies were in favour after the threat of price caps and socialist style intervention in gas and electricity markets was abated – Centrica was up 7% and even National Grid was up 3%.  Other risers were Paypoint although that might have been crystallised by the resignation of the Chairman “with immediate effect” this morning, and Rolls-Royce.

Why Rolls-Royce should rise when they issued a very negative “Interim Management Statement” this morning where they indicated a £350 million reduction in revenue in 2015 from foreign currency rates is not clear – surely the new Government might strengthen the pound and make matters worse? They also reported that free cash flow will be more weighted to the second half which is the normal “jam tomorrow” story with Rolls-Royce of late. It was evident from the Annual General Meeting of Rolls Royce today that the company is very sensitive to exchange rates. The most amusing comment at the AGM was from one investor who commented on the transfer of work from the UK to other countries including the USA and then asked “are you introducing a Marshall Plan in reverse?”. There will be a full report on the Rolls-Royce AGM on the ShareSoc Members Network as soon as possible, and one on the AGM of GlaxoSmithKline held yesterday in addition.

One unfortunate loss for private investors in the election was Vince Cable – a LiberalDemocrat who headed the BIS Department and who lost his parliamentary seat after a long political career. He has been a positive influence on tackling such issues as excessive remuneration in public companies and other recommendations that came out of the Kay Review which he commissioned. It might also affect the ShareSoc shareholder rights campaign as new ministers might need to be educated on the basic issues we are complaining about.

A peculiar casualty of the General Election was SCS, a sofa retailer who only recently listed on the market. The day of the election they issued a profit warning blaming warmer weather and the uncertainty of the election outcome affecting consumers confidence in buying big ticket items. The share price dropped by 32% on the day. Did it bounce back now the result of the election is known and a likely Government settled? The answer is NO. So one can take those comments with a pinch of salt.

Roger Lawson

National Grid and the Problem of High Pay

I attended the Annual General Meeting of National Grid this week (on the 28th July). It was a typical FTSE-100 company AGM with questions on all kinds of matters, mainly from private shareholders of course. There is a full report on the meeting on the ShareSoc Members Network, where many other AGM reports are supplied for members.

I tackled the issue of high remuneration at this company and the change in the LTIP with a couple of questions, and I expected there to be many more from other shareholders but there was surprisingly only one other.

Let me just summarise the key pay issues at the company first, to save you reading the whole 16 pages of the Remuneration Report. It’s a typical FTSE pay scheme for executive directors – namely high base salaries, a short term bonus plan (called APP here) and a long term incentive plan, i.e. LTIP (also called PSP or LTPP here just to confuse you). Last year this produced the following for the CEO, Steve Holliday: base: £1m, APP £1.2m, LTIP £2.2m and pension of £0.4m. Total “single figure” remuneration for the CEO was therefore £4.8m last year including other benefits. That’s up from £3.1m in the prior year. Other executive directors got similar large total remuneration – Andrew Bonfield (FD): £3.2m, Tom King (US head): £4.2m and Nick Winser (UK head): £2.6m.

Do you think that is fair and reasonable for a boring utility company that is in reality a cosy monoply? If so you may not care to read further.

The company actually reviewed their pay scheme recently and have decided to move to rebalance the variable pay elements (APP and LTIP) by reducing the maximum amount under the APP to 125% of salary, and increase the LTIP to 350% of salary (previously 225%). There were some other changes with a stronger focus on awards in shares, and retention of those shares and a change to the performance measurement, but those were the key changes. It is expected that these changes might lead to a small reduction in overall pay if the financial results of the company remain similar.

What I said at the AGM was that I did not like LTIPs because their introduction has led to a racheting up of total pay in companies, and to move to a rate of over 300% for the CEO is ridiculous­─ it will not incentivise him further. Indeed I asked Mr Holliday, the CEO, if he was going to work any harder as a result of this new incentive scheme. The Chairman attempted to divert the question to the Head of the Rem Comm, so I moved into Paxman mode and ended up repeating the same question four times. Eventually Mr Holliday agreed to answer the question but then evaded doing so. Of course I did not necessarily expect an answer as it was more of a rhetorical device than in expectation of a real answer. But the point was made.

I also pointed out that such high leverage rates for bonuses in the banking sector were one of the factors that caused the financial crisis as it encouraged risky behaviour.

Now you would have expected with such large pay figures, and the surely contentious and badly designed change to the LTIP that shareholders might have voted against the relevant resolutions. But the company only got 1% against the Remuneration Report and 3.7% against the Remuneration Policy and the same against the LTIP. So the new “binding vote on pay” legislation proved to be totally ineffective in reining in abusive and poorly formulated pay schemes such as the one at National Grid.  Opposition would have needed to increase by ten times to get anywhere near defeating the pay proposals.

The High Pay Centre Reform Agenda

Now coincidentally the High Pay Centre have recently published a “Reform Agenda” to tackle the general issue of excessive and growing remuneration for the executives of companies. This has contributed to rising levels of income inequality which many see as of social concern. Others simply see it as unfair and unnecessary that FTSE-100 CEOs now get 160 times the pay of the average worker when it was only around 20 times in the 1980s, i.e. disparities have been consistently widening.

The High Pay Centre proposes 7 policies to tackle this problem, because they recognise that the recently introduced pay regulations have not so far had a significant impact on the problem. These policies are:

1. That Remuneration Committees should include a worker representative to bring a “real world” perspective to bear.

2. A legally binding corporate governance code to encourage good practice on pay (although they don’t really make it clear how this would operate).

3. A revised duty for company directors and investment professionals to act in the interests of all stakeholders. Comment: the former was surely adequately incorporated in the 2006 Companies Act and asking institutional investors to take account of stakeholders interests when voting on pay seems problematic to say the least.

4. A qualifying period for shareholders voting at AGMs so only those with longer term interests could vote (on pay for example).

5. A higher top rate of income tax to discourage disproportionate pay increases. Comment: when bankers had a higher marginal rate of tax imposed, many simply used it to justify asking for a pay rise to compensate!

6. Company wide profit sharing so that all employees benefit from a company’s success.

7. A maximum pay ratio between executives and their lowest paid employees.

8. A legally binding commitment to reduce inequality.

ShareSoc has of course looked at this problem in the past. Some of the above proposals might help to some extent (for example the proposal about workers representatives).  But in essence the real problem is to disrupt the whole consensus of high pay that is established by remuneration consultants (whose interest is in raising pay levels), comparability measures (where nobody wants to be below the median), and remuneration committees packed by directors setting and voting on their own colleagues pay. We have suggested that pay should be determined (i.e. devised) by shareholders on an independent remuneration committee, not by the directors, as a simple first step.

Regrettably I do not think all of the High Pay Centre proposals would be workable, nor would those that could be implemented be totally effective in tackling the issue of high pay.  But it is good that they are keeping this issue in front of people because more steps certainly have to be taken if the problem is to be solved. Perhaps a few simple threats of even tougher legislation may focus the minds of those on Remuneration Committees before it is too late. The evidence from National Grid and most other FTSE-100 companies is that they have no plans to really tackle the issue in a major way, with cosmetic massaging being more to their taste.

Roger Lawson