It is arguably the most public shareholder revolt currently being staged against a listed company. Investors in Rupert Murdoch’s News Corp are loudly vocalising their opposition to the company’s management and future direction.
At an AGM in Los Angeles last month, the re-election of Murdoch’s sons, James and Lachlan, to the board of the media giant drew heavy opposition from about a third of the shareholder base.
Smaller companies, too, are finding that shareholder activism is on the march. Faced with volatile markets, rumbles about increases in directors’ pay and perceived failures of corporate stewardship, the attitudes of shareholders demand attention.
According to a report by market research firm ISS, published in September, shareholder participation at general meetings and other company investor events this year recorded its highest ever year-on-year increase, though the overall level of dissent has remained static over the past four years. The report found that an average 71 per cent of shareholders turned out for meetings held in London in the past year, with a corresponding figure of 62 per cent across Europe.
On AIM, while revolts are rare, they draw headlines. Rebel shareholders removed the non-executive directors of superconductor products developer Zenergy Power in April this year after they disagreed with the strategy of selling the company.
Also in April, security-focused investment company Blue Star Capital appeared to have headed off the need for a showdown with rebel shareholders, who wanted the appointment of two new directors and the removal of the chief executive. The company kept its CEO, but appointed the directors.
It’s good to talk
Veteran small-cap board member John French says the key to staving off a shareholder rebellion is good communication.
‘If a rebellion occurs, I question how senior people at the company are handling communications with their shareholders, because why do people rebel? They rebel because of bad decisions and they rebel against bad performance or if they think the board is mismanaging the business,’ he opines.
‘Too many chairmen and chief executives only like to talk to shareholders when they have good news, and the fact of life is that no company permanently has good news, so you must have a relationship of trust and be approachable. If a shareholder has a worry, talk to them. You may not be able to answer all their questions because of market rules, but the fact that they can talk to the chairman provides reassurance.’
See also: Dealing with unhappy shareholders – Spurious allegations of ‘boardroom bullying’ from minority shareholders seeking a payout are on the increase.
French, who is executive chairman of AIM-listed Resources in Insurance Group and non-executive chairman of PLUS-quoted Sutherland Health, says one tactic that he employs is to include his personal mobile number on every company announcement.
‘People say that I must be mad, because shareholders will ring me up, but I say thank God they do, because then I can talk to them,’ he explains.
Brian Peart, spokesman for the UK Shareholders’ Association, says the most common causes of rebellion are perceptions that a share price is in trouble or that the company is pursuing a poor strategy. Dissent can also arise when directors attempt to take control of parts of a company following a large fall in the share price.
Peart says, ‘In my time, I’ve had 20 or so investments in smaller companies, where the directors, who have run into a bit of a bad time, have sold off the best parts of the company to themselves or companies they’re linked to – so many times that happens.’
Flashpoints can also occur when the founder of a company, who no longer has an executive role, disagrees with strategy.
Roger Barker, head of corporate governance at the Institute of Directors, comments, ‘If a company has been handed over entirely to professional management or to professional directors, you can get disagreement between them and the founder about what the overall objectives of the company are. Should the company be about growth, reinvestment or generating dividends? These are the common causes of disagreement.’
Over the past year, one example of a relationship breaking down between a founder and board involves collaborative software developer Imaginatik.
Founder Mark Turrell, who owned 35 per cent of the company before transferring the shares to his wife last month, was removed from the company’s board in June last year and wants to return. He has since waged a public revolt against the company, even blogging about the dispute.
If a rebellion occurs, Barker says it is the chairman and the non-executive board members who should take charge of the situation. Independent directors are ‘absolutely central’ to restoring stability, he states.
Barker continues, ‘A lot of day-to-day communication between shareholders and the company normally takes place with the CEO and the CFO, but if you have got to the situation where the relationship has broken down, this is where the non-executives and the chairman can play a major role in smoothing over the problem.
‘Ultimately, they are the people on the board who are there to represent shareholders’ interests. They have some distance from the company and the strategy, and they are the people who are best placed to resolve these problems.’
John French warns that, when it comes to dissent, smaller shareholders can be just as capable of making trouble as larger ones.
‘With small and mid-cap companies, it’s not so much the big shareholders, your VCTs and your EIS – they are long-term holders – it’s the small private investors who are the ones who move the share price around.
‘I had a case in the past with one company where there was a bit of aggression from a couple of shareholders, but it was misguided. The company’s share price was suffering, and cash was tight. They were trying to take the opportunity to exert influence, which best suited their interests and not those of the company.
‘I couldn’t tell them at the time, but we were actually in the course of doing a placing, which solved the cash flow process. I spoke to them and, by simply listening to what they had to say, the revolt was thwarted.’