When we invest in shares, we do this in the confidence that we have acquired a steady dividend income and the potential of hopefully sizable capital gains. Rarely do we give thought to the fact that we have bought something else quite valuable, without even realising it: voting rights. We have become shareholders, and as such we are now the owners of a publicly quoted corporation – admittedly at an almost microscopic fraction.
Such voting rights, however small, have a price which can be expressed by the value differential between normal stock and preferred stock, which are shares which come with higher and often guaranteed dividend payments, albeit without voting rights. Management, in other words, is willing to pay us good money just to make sure that we cannot in any way interfere with their business.
It’s not only free drinks and snacks which we forego when we do not cast our vote. At annual stockholders’ meetings we confirm once a year our satisfaction with the financial results and the way the board of directors have managed the affairs of ‘our’ company.
Because preferred shares – which in large part are more similar to bonds than stock – rarely outperform, we retail investors hardly discern between preferred and normal stock and are therefore unaware that we may hold valuable voting rights. We usually do not care to think about them.
This may be due to the fact that we do not hold shares personally. We own them through brokers, banks acting in our name, or investment trusts or pension funds which may exercise these voting rights on our behalf. More often than not they themselves delegate such rights to ‘proxy’ companies, which can use them as they deem fit.
With the rise of ‘passive’ investments, when we buy index tracker funds to save the often steep costs of ‘actively’ managed funds, such voting rights are left by the wayside too. A fund based on algorithms is not interested in judging the behaviour of individual managers.
This is of course morally regrettable. Not bothering to vote in a democracy will give us the governments we deserve. Not exercising our voting rights as stockholders gives us managers who can act against our societal, ethical and financial preferences with impunity.
We are flustered when CEOs who hardly contribute to the financial well-being of their companies pay themselves salaries 300 times higher than their workers who are the ones truly adding value. We are indignant when outsourcing eats away at the quality of products we have cherished over many years. Angry when companies choose to ignore their gender bias and practise inequality, upset when corporations buy businesses only to make workers redundant. And we worry about the flaunting of good corporate behaviour, with companies violating the most basic ethical standards, for instance by paying bribes, running sweatshops, engaging in tax evasion or degrading the environment.
It is therefore increasingly common for large investors like insurance companies, sovereign wealth funds or pension funds to get involved more actively than in the past. They have to preserve their public reputation too, which may suffer when staying invested in coal, tobacco, gambling or bad governance.
To cast a critical vote can also be financially rewarding, as the practice of ‘activist shareholders’ demonstrates. An activist shareholder gains a foothold in a company by acquiring a relatively small amount of stock to legitimise her demands to the management.
This can include, among other things, operational changes: the sale or demerger of less profitable activities; the abandonment of planned takeovers deemed too expensive; radical cost savings; repayment of idle capital in the form of special dividends or share buy-backs; or, more theatrically, the sacking of existing board members as well as the nomination of new ones.
Such ‘stirrers’ will not necessarily focus on good governance. Their focus is purely on financial gains for themselves or shareholders at large. Tactics include press conferences, liaising with other shareholders, pressuring the existing management with often very public critique bordering on harassment. Such activists are very interested in putting together a decisive amounts of votes, which includes our dormant ballots.
Not exercising our voting rights as stockholders gives us managers who can act against our societal, ethical and financial preferences with impunity
The approach is reminiscent of corporate raiders but involves less capital and does not end in a takeover of the targeted company. The focus is on short-term boosts to the share price. Embattled management often sees itself in no better position than to offer to buy out the troublemakers for a steep premium and settle at that.
A colourful example is the battle over ThyssenKrupp, the rudderless German steel-to-submarine conglomerate, so spectacularly won by activists in September.
After the resignation of its hapless CEO Heinrich Hiesinger in July, who was followed 10 days later under protest by his chairman Ulrich Lehner, the remaining place holder management agreed to split the company in two parts. ThyssenKrupp Industrials includes its successful elevator business, car parts and engineering. ThyssenKrupp Materials will run its steel business, bearings and submarines – the parts responsible for regular losses which never seemed to quite go away, and its joint venture with Tata Steel, now in the crosshairs of EU anti-competition authorities.
Shares jumped more than 17 per cent on the news, a boon long overdue for those of us owning Thyssen shares. Priced at €45 before the financial crisis, shares idled in the teens for years. As a bondholder I hope to be repaid by at least one of the two.
A very emotional, and very active, debate was also taking place among Unilever shareholders, institutional and retail alike. The heated deliberations concerned Unilever’s decision to abandon its dual-shareholder structure with headquarters in London and Rotterdam and to adopt a more streamlined and practical organisation, with the new head office in Rotterdam only.
Large shareholders like insurers Legal & General and Aviva, but also the UK press and quite a few politicians, were outraged. How could it be possible that the maker of Marmite, epitome of Englishness, dares to consider abandoning ship, now at the time of an ever more chaotic Brexit?
Had the Dutch lured them with tax incentives? Did Dutch CEO Paul Polman want to take his company national? It was a blow to all little Englanders and irate islanders who saw their grand folly maliciously ridiculed.
The more sober-minded critics stressed the possible financial loss shareholders might suffer when Unilever, a prominent constituent of the FTSE stock index, would disappear over the Channel. UK-focused pension funds and index trackers would be forced to sell, inflicting seemingly inevitable losses to shareholders big and small.
This of course insinuated that the index provider FTSE Russell, a subsidiary of the London Stock Exchange, would indeed delist Unilever just because headquarters had moved. It would have to disregard Unilever’s intentions to keep half of its operations in the UK and to continue its listing on the LSE. A decision which neither statutes nor the law demanded.
As a shareholder I’d wished to own a simplified company, with better decision-making, a more streamlined structure, more financial firepower and better take-over protection. This is why I wanted to cast my vote on October 26.
Sadly, Unilever had to shelf its grand plans. The voting will not take place. Big UK institutional shareholders were adamant in their protest, not wanting to alienate too many of their UK customers. They constituted a large enough voting block to force Paulman’s hand.
In a democracy one would have called it a sad day. Which, in a sense, it was.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.