Mark Northway is chairman of ShareSoc, a group that champions and lobbies on behalf of individual investors.
Here, he outlines what rights shareholders have over companies they own and how crucial it is to use them.
Corporate culture: Using your shareholder rights will mould the character, behaviour and thinking of a company board for the better
Shareholder stewardship has dwindled in recent years, allowing board director self-interest to develop to the point where many have come to regard shareholders not as owners, but as just one of many tiresome stakeholders.
A clear symptom of this governance drift can be seen in the egregious increases in executive remuneration which have been a feature of listed companies for some time.
The diligent exercise of shareholder rights by both individual and institutional shareholders is essential, and below I explain what those rights are and how using them will mould the character, behaviour and thinking of a company board for the better.
What are the roles of shareholders and company executives?
Stock market investing relies on the separation of roles between the owners, or shareholders, of a listed or quoted company and its operators, the executives.
This separation allows the company to pursue its business independently of ongoing ownership changes through share transactions on the stock exchange.
Oversight of the day-to-day business is delegated by shareholders to an elected board of directors.
Mark Northway: Very few individual investors attend AGMs or vote their shares
The board is tasked with acting in way likely to promote the success of a company for the benefit of its members shareholders as a whole.
The board is responsible for the strategic direction of a company, for its culture, and for monitoring and controlling the company’s executive, in all cases acting as agent for the shareholders with a fiduciary responsibility to them.
Like any complex system, the successful operation of a listed or quoted company relies on a set of checks and balances.
Under this system the company’s executives are beholden to the board, and the board is beholden to the shareholders.
The board is required to report to its shareholders on a regular basis, generally through the AGM, and the shareholders are provided with several levers of influence and control – shareholders’ rights.
What are shareholders’ rights?
Key amongst them are the right to attend general meetings of the company, the right to vote at those meetings, the right to propose change, and the right to call a general meeting.
These are enshrined in the Companies Act 2006. However, the importance of the AGM and of stewardship in general has declined for various reasons.
Shareholder rights come with corresponding stewardship obligations, and these really do matter.
Yet regrettably, very few individual investors attend AGMs or vote their shares.
What are nominee accounts, and how do you exercise your rights if you have one?
If you own shares via an online platform, you don’t automatically get a say on important company business because your stock is held on a ‘pooled’ basis, writes This is Money.
But most platforms do have systems in place allowing you to vote if you take steps to let them know your wishes beforehand.
Ian Sayers, chief executive of trade body the Association of Investment Companies, rounds up how to do so depending on which platform you use here.
The propensity of brokers and platforms to hold customers’ assets in pooled nominee accounts, combined with flaws in the Companies Act, is largely to blame for this, although shareholder indifference undoubtedly plays a part.
Why does holding shares in nominee accounts affect your rights?
Under UK law, investors who hold shares via nominee accounts are not the legal owner of them, and therefore do not enjoy the rights which accompany ownership.
The law provides for ‘information rights’ for beneficial owners, but it is the choice of the nominee as to whether these are supported. In most cases they are not.
The Companies Act deals with information and voting rights under nominee arrangements. Crucially, it provides only that such rights MAY be passed to the beneficial owner.
‘May’ is not the same as ‘must’, and rights are not rights where they are subject to the discretion of an intermediary.
This means that companies are not able to communicate effectively with their owners. With few exceptions, communications mandated by law for the benefit of shareholders simply never reach the beneficial owner.
These owners, unless they specifically request it (often on a case-by-case basis and at a cost), don’t receive annual reports, don’t get invited to AGMs and don’t get asked to vote.
It’s a nonsense, but a nonsense which has been allowed to persist for many years.
Will shareholders start exercising their rights again?
The good news is that the recent increased focus on ‘environmental, social and governance’ (ESG) issues and sustainability has sparked a renewed focus on responsible stewardship within society and within governments.
Hopefully, this will translate into improvements in the legal and market framework, matched by an increased long-termism and responsibility on the part of individual investors.
So, when you buy shares, please bear in mind that share ownership brings important rights, and that those rights come with equally important obligations.
It’s your company, and you should think and behave as an owner and as a steward. You should care how it behaves and use the levers of influence and control available to you. It’s only right.
What is ShareSoc?
ShareSoc represents the interests of individual investors to regulators and government, and offers a range of investor education, information and networking services, writes Mark Northway.
Our Shareholder Rights Campaign looks to ensure that shareholders have their proper say as owners of the businesses in which they invest.
We campaign on both specific company issues and on individual investors’ wider concerns. We have had notable success in delivering change at a number of companies and have influenced government policy and legislation.
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