‘Get the boss to work for you’

12th October 2020

When M&G created the first unit trust in 1931 to enable investors to diversify and spread risk through a pooled fund with holdings in numerous companies, equity investment was still the preserve of a wealthy minority. Unit trusts enabled people to have a stake in many different shares at a modest cost and would have made more rapid progress had World War Two not intervened.

By the 1960s, after the rationing and austerity of the post-war years, prosperity returned and more people who were comfortably off but not rich became small investors for whom the unit trust was ideal. The big banks picked up on this trend and Barclays acquired Martins Unicorn unit trusts upon merging with Martin Bank in 1967. Barclays Unicorn soon became a force to be reckoned with.

Targeting the small investor

Barclays was quick to spot the potential for average wage earners to build up a holding by investing as little as £2 a month. It pitched one particular advertisement towards that segment with a bold headline that read ‘Get the boss to work for you!’. The smaller print then explained how buying Unicorn units would in effect make you part-owner of all the companies in your chosen trust.

That was a rather tenuous chain of ownership, as holding Unicorn units would not enable investors to attend or vote at Annual General Meetings of any of the companies concerned – not even the one that you and your boss toiled for. Yet there was an element of reality in the advert’s headline: a minuscule part of each company’s dividend or share price growth would benefit your units.

The power to vote

All this raises a further thought – whether or not a direct holding of shares in a company gives the investor, in reality, any greater say about its strategic direction or operational management than that 1960s Barclays Unicorn unit holder. That seems highly likely, because a direct shareholder can at least vote at AGMs(and EGMs) either in person (Covid rules permitting) or by proxy.

Clearly, a vote by the holder of a 0.0001% stake in a major company is unlikely to swing a decision one way or another, on whether Jo(e) Bloggs should be re-elected to the board, a dividend of 2.35 pence per share should be declared or the company’s auditors should be retained for another year. As with general elections, every vote counts, but only makes a real difference in a close-run race.

It would be unrealistic to expect shareholders with a tiny stake in a company to have a say on strategic or operational decisions that rightly fall to the board of directors or senior management. Anyway, such shareholders typically haven’t the knowledge and experience to make such decisions. What they can do is collectively to elect the directors and trust their ability to oversee operations.

Joining a rebellion

The ability of shareholders to appoint directors that the board itself hasn’t put forward is limited. Occasionally, a group of larger shareholders may try to prevent the election or re-election of a director or to put forward their own candidate; success may sometimes depend on enough small shareholders joining the rebellion. Even a failed rebellion may help modify board behaviour.

Small shareholders may feel they have a legitimate interest in the balance of the rewards between the providers of capital (shareholders) and the providers of (wo)manpower (directors, senior management and other employees). Sometimes the trade-off between directors’ pay and benefits, decided by a remuneration committee of the board, and the share dividend gives rise to tension.

Sharing the pain

In times like today, with many share prices and dividends depressed, shareholders are more inclined to scrutinise director and senior management benefit packages that don’t share the pain. In some cases, voluntary benefit cuts have been agreed. Disparities also occurred pre-Covid, such as when the CEO of a housebuilder was awarded a monster bonus under an agreed but ill-judged scheme.

One area where small shareholders do have a say is in company takeovers. Someone with shares in the instigator or target of a takeover bid usually gets the chance to vote on the deal. If the company receives a takeover offer (usually well above the previous market price) and a sufficient majority vote to accept it, the small minority that vote to reject it are required to give up their shares too.

Hard to ignore ESG

A virulent strain of shareholder power has gripped key aspects of corporate management, namely environmental, social and [corporate] governance (ESG). Many investment firms have adopted ESG, which broadly includes ‘ethical’ and ‘responsible’ investment. This has put pressure on the strategies of some major companies and many small investors prefer companies with strong ESG credentials.

One element of governance under ESG is diversity within company boards. Now shareholders may find themselves invited more often to vote for currently underrepresented categories as targets are turned into reality. So, will directors of all sorts be working for you as per that old Barclays Unicorn advert? The answer is ‘yes, but in a very limited way’, as there are other stakeholders to think about.

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