Shareholder activism

United Kingdom
Institutional shareholders have recently announced that they will become more active in scrutinising the behaviour of companies in which they invest. Although it remains to be seen how this will impact on UK corporate behaviour, institutional shareholders have in the short-term successfully seen off the threat of Government legislation designed to make them more active. The Treasury has stated that it will be monitoring progress and in two years' time will review whether this non-legislative approach has made a difference.

The Institutional Shareholders' Committee (ISC), which comprises representatives of the UK's largest institutional shareholders, has published a Statement of Principles which expands on the Combined Code on Corporate Governance. The Statement of Principles sets out best practice for institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles (as well as agents appointed on behalf of institutional shareholders such as investment managers) in relation to their responsibilities in respect of investee companies in that they will:

  • monitor the performance of, and where necessary, establish a regular dialogue with, investee companies;

  • intervene where necessary;

  • evaluate the impact of their activism; and

  • report back to clients/beneficial owners.

The Principles apply only in the case of UK listed companies and can be applied irrespective of market capitalisation, although institutions' and agents' policies may indicate de minimis limits for reasons of cost-effectiveness or practicability.

The ISC recommends that institutions and agents have a clear policy statement on their approach to activism and on how they will implement it. This policy statement is meant to be a public document and is intended to address such matters as the monitoring of investee companies and policies for requiring their compliance with the core standards in the Combined Code, for meeting with an investee company's board and on voting. The ISC believes that institutions and agents should vote all shares held directly or on behalf of clients wherever they can.

The policy statement should also set out the strategy on intervention and give an indication of the type of circumstances when further action will be taken, and what types of action may be taken. The ISC believes that monitoring may require sharing of information with other shareholders or agents or agreeing a common course of action. But institutions and agents may not wish to be made insiders, and will expect investee companies and their advisers to ensure that information that could affect their ability to deal in the company's shares is not passed to them without their agreement.

Institutions should not automatically support the board; if they have been unable to reach a satisfactory outcome through active dialogue they must register an abstention or vote against the resolution. In either case, the investee company should be informed in advance and told the reasons why.

The ISC will monitor the impact of the Statement of Principles with a view to reviewing and refreshing it, if needs be, within two years in the light of experience and market developments.

Hermes, the independent fund manager owned by the largest pension scheme in the UK, the British Telecom Pension Scheme, has separately published "The Hermes Principles" setting out ten investment principles to address the simple question: "What should owners expect from UK public companies and what should these companies expect from their owners?"

Hermes' overriding requirement is that companies be run in the long-term interest of shareholders. The Hermes Principles deal with communication, financial, strategic and social, ethical and environmental issues. In particular, Hermes believes that companies should clearly communicate the plans they are pursuing and the likely financial and wider consequences of those plans. Hermes' financial principles include requiring companies to have performance evaluation and incentive systems which are designed cost-effectively to incentivise managers to deliver long-term shareholder value. All investment plans should be critically tested in terms of their ability to deliver long-term shareholder value. Companies should have and continue to develop coherent strategies for each business unit, and where a company is not the "best parent" of a business it should be developing plans to resolve the issue. Companies should also behave ethically and have regard for the environment and society as a whole, supporting voluntary and statutory measures that minimise the externalisation of costs to the detriment of society at large.

Hermes does not believe that its principles limit management scope or creativity, but that they outline the natural disciplines to be expected of companies which seek to maximise long-term value for their shareholders.

The ISC Statement of Principles can be found at http://www.abi.org.uk/Display/File/38/Statement_of_Principles.pdf

The Hermes Principles can be found at http://www.hermes.co.uk/corporate-governance/PDFs/Hermes_Principles.pdf

For further information, please contact:

Gary Green (Corporate partner) at gary.green@cms-cmck.com or on on +44 (0)20 7367 2111

or

Peter Bateman at peter.bateman@cms-cmck.com or on +44 (0)20 7367 3145.