The rise of the shareholder
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Should companies be concerned with shareholders' increasing rights?
Shareholders buy shares in order to make money. They seek out companies that they believe are destined for great futures and invest in them in the hope of reaping financial rewards. However, with these rewards, shareholders also acquire certain rights to have a say in how the company operates, ranging from being able to vote at the AGM to demanding that the company put resolutions to a shareholder vote.
The Companies Act 2006, as amended to implement the Shareholders' Rights Directive adopted by the European Union, extends shareholder rights beyond the provisions of the Companies Act 1985. Some of the key changes, which increase shareholders' ability to be involved in company decisions, include being able to:
- requisition a general meeting with just 5% paid-up voting share capital (down from 10% in the 1985 Act);
- requisition matters to be raised at general meeting;
- ask questions to directors; and
- take derivative action as a minority shareholder.
So do shareholders now wield more power than they used to? According to corporate governance watcher PIRC, the number of investors voting at company meetings doubled over the last decade. Recently there also appears to be a rise in shareholder activism from small shareholders who want to make their voices heard. For example, in 2009 TV chef Hugh Fearnley-Whittingstall requisitioned a resolution at Tesco's AGM to introduce RSPCA standards for the company's chickens. He was able to do this by buying one share in Tesco, and encouraging enough of the other shareholders to support his quest to improve the standards of chicken production and to meet the 5% threshold required to requisition a resolution. Ultimately, the resolution failed, only gaining approximately 10% of the shareholder vote, but Tesco did suffer a barrage of negative publicity concerning their ethical standards.
Similarly, in April 2010 BP shareholders rejected a resolution requisitioned by a group of activists to require the company to report on the environmental, financial and reputational risks of developing Canadian oil sands projects. BP was one of four major oil companies targeted - Shell, ConocoPhillips and ExxonMobile - and the story made headline news. Undoubtedly as a result of these and other similar events, listed corporates are becoming more aware of the power minority shareholders have to raise issues and cause unwanted publicity.
One board of directors which suffered at the hands of minority shareholders was Mitchells and Butler. In early 2010 shareholders chose not to re-elect the current board but instead appointed five new directors; a 23% shareholder who was unsatisfied with the existing composition of the board proposed the resolutions and subsequently engaged enough support from other shareholders to pass them. Other developments which permit shareholders to express their dissatisfaction with a company's board are new provisions in the UK Corporate Governance Code which enable all directors of FTSE 350 companies to retire and stand for re-election annually - shareholders can then vote against directors' re-election. This provision may result in directors becoming more aware of shareholder attitude towards the company's policies and actions.
Recent events have shown that shareholders are not afraid to use their increased rights to challenge the board through requisitioning resolutions at meetings and removing directors from the board. Whether this trend will continue to increase in the future remains to be seen, but in the meantime directors should pay serious attention to all categories of shareholders - if they don't, they could find themselves out of a job.
Ruth Patterson is a second-seat trainee in the corporate department of Herbert Smith LLP.