Shareholder Power – stronger than ever?

Over the past six months, two stories relating to the power of shareholders has caught our eye. Firstly, the proposed move by Unilever of its HQ from London to Rotterdam, and secondly the £75m bonus row at Persimmon.

The Marmite move – Love it or Hate it

Back in March 2018, Unilever announced its intention to simplify its corporate structure, by having just one Headquarters in Rotterdam. A structure that had seen two HQs and legal entities, one in London and one in the Netherlands since the 1930s, was no longer desirable and simplification into one Dutch legal entity was needed to help the company become “more agile”. There were, naturally, immediate calls within the media that the proposed move was as a result of impending “Brexit” but the company denied this and stressed that two of the largest divisions of the company would continue to be based in the UK.

Although the intention was that the company would remain listed in the London Stock exchange, as well as in New York and Amsterdam, the change in HQ status would mean that it would no longer be eligible to form part of the FTSE 100 – and the Shareholders were not happy. As many major investment funds are required to buy and hold shares that mirror the index, many shareholders would have been forced to sell the shares at a time and perhaps a price, not of their choosing. Potentially wiping millions of pounds of the company’s value.

It was claimed that the real reason behind the proposed change was as a result of the brief but hostile takeover bid made by KraftHeinze the previous year. The Chief executive at the time was recorded as saying that UK takeover rules made it too easy for companies to make hostile bids as it placed the interests of shareholders as paramount against the interests of the wider stakeholders (customers, workers, suppliers, communities etc), meaning that if the price was high enough, many shareholders were willing to sell regardless of the wider effects of a hostile takeover on the company and its stakeholders. And whilst Mr Polman (CEO, Unilever) insisted this wasn’t the reason behind the proposed move, the argument is compelling. In addition, the complex structure of the business with two separate legal entities within two separate legal regimes, was making it difficult to provide and deliver alternative plans to improve outcomes for its shareholders.

Whatever the reasons behind the proposal, the company needed 75% of UK shareholders to agree. Once one of the top shareholders announced its decision that it would not vote for the proposed move in October, the plan was doomed. Aviva Investors announced that the move could force UK shareholders to sell their shares and that there was “no upside”. At the time the Financial Times said that more than a fifth of the top 50 shareholders had expressed concerns privately about the move.

Not long after the major Shareholders views were made public, it was announced that “The Unilever Board has… decided to withdraw its proposal to simplify Unilever’s dual-headed legal structure… We have had an extensive period of engagement with shareholders and have received widespread support for the principle behind simplification. However, we recognise that the proposal has not received support from a significant group of shareholders and therefore consider it appropriate to withdraw…The Board will now consider its next steps and will continue to engage with our shareholders.”

The proposal did not even make it to the vote. The voice of a major shareholder was enough for the Board to back down and withdraw its proposal. By the end of the year it was announced that the CEO, Paul Polman would retire. The announcement didn’t mention the failed attempt to move the HQ, but many commentators linked the timing to the fact that UK shareholders could not be persuaded to back the move, perhaps proving that not only the fate of the companies’ headquarters rested in the shareholders’ hands, but the personal fate of the executives too.

Shareholder power – remuneration

One matter frequently making the news headlines is the shareholders’ right to vote against a company’s remuneration report.  Whilst a vote against a remuneration report at the AGM is not binding, it can and often does lead to the Board changing its intentions regarding remuneration for top executives. Back in 2017, Thomas Cook reduced the maximum pay out for its chief executive as a result of a 32.7% vote against the pay deal, proving that although a vote is symbolic rather than binding, it can cause major embarrassment for a company’s Board and a desire to make changes to please the shareholders.

In July last year, Royal Mail saw one of the biggest ever shareholder revolts for a UK listed company, when a whopping 70% of investors voted against the remuneration report. Following the vote the senior independent director expressed the Board’s disappointment at failing to please shareholders in regards to remuneration and said that the Board would consult with investors as it reviewed its pay policy later in the year, but stopped short of making changes to the packages themselves. Instead it issued a statement to shareholders, explaining the contractual and other matters leading to the remuneration decisions and stressing that the focus remained to align “pay to performance”.

Another high profile pay row at the end of last year involved the proposed £100m bonus to the former CEO of Persimmon homes, Jeff Fairburn. A significant number – 48.5% – of investors voted against the remuneration report at the AGM in April 2018 but as the award was as a result of a shareholder approved Long Term Incentive Plan (a vote on which is binding), the company could not legally withhold any of the share payouts. That said, the sheer power of the shareholders’ opinion together with the media pressure applied when the details of the bonus became public, did lead to the CEO agreeing to a voluntary £25m reduction in the award. However, this did little to placate the media storm, with £75m still being largely unpalatable in public opinion, and the CEO eventually resigned at the company’s request as the row had become such a ‘distraction’.

Mr Fairburn’s departure was not a direct result of the shareholders’ vote as this in itself was not binding, but it clearly triggered events which would lead to his downfall. As with Thomas Cook and others the vote on remuneration can lead to real changes and action being taken by companies’ to please their shareholders, but it also leads to the question, of whether at some point, the shareholder vote on remuneration will be made binding. Cliff Weight, Director at the Individual Shareholders Society, ShareSoc, commented in his blog about the Royal Mail vote that it “is surely time that the remuneration vote was given some teeth and made binding”, a view that is likely to have many supporters and will surely grow in prominence as the media and general public continue to challenge high level payments to executives at the top of UK business.

One thing is clear, that whether on matters concerning the location and restructure of a company or regarding how much to pays its executives, the Shareholder voice is as powerful as ever and the Boards who ignore it, do so at their peril.

Resources:

9 February 2017 – https://www.theguardian.com/business/2017/feb/09/thomas-cook-cuts-boss-payout-shareholders-revolt

23 March 2017 – https://www.theguardian.com/business/2017/mar/23/crest-nicholson-shareholders-reject-pay-deal-for-directors

20 July 2018 – https://boardagenda.com/2018/07/20/shareholders-reject-royal-mails-remuneration-report/

21 July 2018 – https://www.sharesoc.org/blog/company-news/royal-mail-remuneration/

5 October 2018 – https://www.bbc.co.uk/news/business-45545225

5 October 2018 – https://www.bbc.co.uk/news/business-45756738

7 November 2018 – https://www.dailymail.co.uk/news/article-6362259/Persimmon-boss-Jeff-Fairburn-quit-75million-bonus-row.html