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2022 May Proxy Governance Update

19 May 2022

Retail Investor Relations

May's Proxy Governance Update looks at retail investors, and how their collective voice continues to be amplified and is making a resounding impact in the investment universe.

Olayinka Agbede Olayinka Agbede Principal Corporate Governance Officer

The first four months of the year has seen a flurry of activity as companies, investors, and proxy advisory agencies all started the 2022 AGM season - a theme we explored in our recent CGPro Network event. As we continue our work supporting corporate governance, we’d now like to take some time to deep dive into a few other areas of interest before us.

In May’s Proxy Governance Update, we explore the growing importance and focus on the retail investor. In 2021, we witnessed tremendous growth in the number of retail shareholders. EQ, as a leading share registrar in the UK and US, occupies a prominent position, through which it was observable how companies are responding to and embracing the surge in retail investor numbers - promoted through their access to and knowledge of equity markets. 

The exposure of retail investors in proportion to the overall capital remains modest compared to that accessed by institutional investors. However, their voice continues to be amplified and is making a resounding impact in the investment universe. 

In This Edition

We consider the growth in the numbers of retail shareholders and explore how important it is for companies to open themselves to adopting a new mindset in understanding the requirements of individual investors and how best to benefit effectively from the boon in their numbers.

Conversely, following the rise in retail investors, there has been a notable increase in retail shareholder organisations' engagement and lobbying activities. These have been set up to champion the individual investor to ensure that their voice reaches the company boardroom's furthest recesses and within government and regulatory authorities.

Thought For May

"We are regularly asked what are the main themes we are seeing and, so far, we still see diversity, executive remuneration, particularly in the context of the wider stakeholder experience, and climate, as key matters on the company and investor ESG agenda this season." ― Anne-Marie Clarke, Head of Corporate Governance

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Retail Shareholder Groups

The 2021 proxy season will undoubtedly be remembered as a year of change.

While many aspects of life continued to be impacted by the ongoing COVID-19 pandemic, some elements of governance appear to have changed decidedly. Indeed, in 2020, as was severally predicted, there was greater adoption of technology and electronic communications to facilitate AGMs and their communication in 2021.

To this end, we wanted to take this opportunity to highlight how certain companies that have a significant amount of retail shareholders on their register fared during the last season. We look at their interactions and the dissemination of information to encourage this particular group of shareholders to actively engage with the company and voice their support for the leadership by utilising their voting power at general meetings.

Later in the update, we will consider recent case studies and how influential they are at aiding private investors, who might feel aggrieved to seek recourse through engagement and consultations facilitated by such institutions.

Key Questions

  • Who are Retail Investors?
  • Do individual shareholders have a right to be heard?
  • What Retail Shareholders Groups are available in the UK and what has been their impact?

Who Are Retail Investors?

A retail investor, also known as an individual investor, is a non-professional investor who buys and sells securities or funds that contain a basket of securities such as mutual funds and exchange traded funds (ETFs).

Retail investors execute their trades through traditional or online brokerage firms or other types of investment accounts. Retail investors purchase securities for their own personal accounts and often trade in dramatically smaller amounts as compared to institutional investors. An institutional investor is an umbrella term for larger-scale investments by professional portfolio and fund managers who might manage a mutual fund or pension fund.

The rise in individual investors has further bolstered the investment landscape. The UK is experiencing an increased diversification of individuals taking up investing. The surge in youthful shareowners has been facilitated by the ready availability of online trading platforms and companies that have caught onto the advantages of engaging with a broader set of their stakeholders, including employees and customers, by offering shares.

Notable points

  • Retail investors are non-professional market participants who generally invest smaller amounts than larger, institutional investors
  • Due to their smaller trades, retail investors may pay higher fees and commissions, although some online brokers offer no-fee trading
  • The retail investment market is enormous since it includes retirement accounts, brokerage firms, online trading, and robo-advisors

Do Retail Shareholders Have A Right To Be Heard?

Individual shareholders have much to contribute to companies and society; indeed, they have always been an important group for issuers. The growth in retail share ownership within equity markets has meant their support is now more critical than ever. 

Factors contributing to this growth have ranged from a vast increase in the availability of popular online trading platforms to widespread efforts by corporations to generate loyalty in their employees. The advancement of employee shareholder numbers demonstrates this by offering perks and discounts, such as employee share schemes. While the growth is a welcomed bonus, as with anything that is not adequately understood or managed in the best possible manner to derive the greatest level of benefit, it is the case that because non-institutional shareholders are singular, they struggle to be heard. Resultantly, there has been an increase in the representative roles of shareholder organisation groups to harness retail shareholder participation and pitch this at levels where most fruit can be borne.

Every shareholder in a UK company has the right to have their voice heard by the companies they invest in. Particular problems may arise where large shareholders dominate companies. Dominant groups of shareholders may have representation on the board, thus exercising even more direct control of the company. Although directors should only act in the interests of the company, it is also important to recognise a key duty is to promote the company's success considering the need to act fairly to all members of the company, and interpretation and enforcement of that role is not easy. They could be influenced to act more in the interests of a concerted group of ordinary shareholders rather than those of the company's lesser organised shareholders.

For public companies to benefit from the growth in retail investors, an excellent place to start will be for corporate executives to change their perception of this class of investors by deepening their understanding of their behaviour and motivations. As can be deduced from a study of the origins and literature regarding the missions and objectives of these shareholder organisations, it is evident that a number of these groups have identified errors in the UK share investment scenery, arising from an absence of the voice of private shareholders.

These shareholder organisations believe that retail investors often lack the required knowledge to understand the issues, or they can be susceptible to being misled by politicians or company directors. Investors hope to influence national policies or companies by speaking out about what is wrong. But individual investors need to band together and speak with a unified voice if they are to be heard

You can read more about the rise of the retail investor in EQ's Shareholder Voice report.

Shareholder Voice 2021

What Retail Shareholder Groups Are Available In The UK?                                                            

Shareholders usually have the same basic rights regardless of whether the company is private or public. The rights of shareholders depend on the rights attached to their shares under the company's articles. Different shareholders can enjoy different rights and this is usually effected by a company having different classes of shares. Such rights are usually provided in the company's articles. 

Every shareholder in a UK company has the right to have their voice heard by the institutions that they invest in. EQ's Shareholder Voice research shows that 80% of Gen Z shareholders have already voted in AGMs — the highest of any generation. Furthermore, another 9% say they would like to have their say at AGMs. This suggests that most are committed, long-term investors. 

With the growth in the quantum of retail investors, it would be a misconception to believe that they are not worth engaging with because they are incorrectly viewed as out to make quick capital gains. There is an opportunity to engage with retail investors on the whole, regardless of their age or gender, as many will follow stories and themes, when presented in the right way. Building narratives in digital channels can gain shareholder engagement with a corporate's journey. It has been suggested that building a loyal retail investor base with a long-term investment narrative linked to the company brand will be a more effective strategy than focusing on narrative to attract investors at the point of results. 

To this end, companies are encouraged to develop a robust communication and engagement programme with individual investors and the organisations that represent them. This includes communicating through tailored web pages, social media and email aimed at individuals and also shareholder rights groups, which have been formed to represent the individual investor and exert influence as a collective voice in tackling matters such as corporate governance compliance and engagement activities concerning apparent and perceived instances of likely governance or regulatory failings. We consider below three of the current UK retail shareholder groups and will later explore the impact they can make in securing recourse for aggrieved retail investors.

About The UK Shareholders’ Association (UKSA)

The UK Shareholders Association (UKSA) is a not-for-profit organisation limited by guarantee with over 500 members. Founded in 1992 by a small group of founder members, it is the UK's oldest shareholder campaigning organisation, representing and supporting individual investors in the UK stock markets. Its original impetus was outrage at the excessive pay of utility company chairpersons post-privatisation, allied to a determination to use shareholder power to do something about it. Interestingly, the founding members and others met in a home via a letter in the Investors Chronicle. 

UKSA, as a company limited by guarantee, possess a Memorandum, Articles and By-laws and is governed by a Board of Directors, whom the full members elect. It is independent, including financially independent, of any organisation or institution that it might have cause to criticise. The organisation is funded entirely by membership subscriptions and voluntary donations.

UKSA have two stated priorities:

1.  Build a campaign to create public awareness of the way the whole savings industry operates:

      • to generate the political force for change,
      • and restore the rights and influence for good of the private investor.

2.  Help savers to help themselves and each other:

      • by steering them towards reliable and independent sources of financial guidance,
      • by offering social and other events where members can listen, learn and socialise.

UKSA Membership is available to those interested in stock market investment and the pursuit of improvement in the investment environment for private investors. This is encouraged through constructive engagement with the UK Government, the Regulators and the wider financial services industry. UKSA regularly responds to consultations from Government, the Financial Reporting Council (FRC) and the Financial Conduct Authority (FCA). UKSA, additionally participates in working parties, particularly on issues such as UK corporate governance, including the Cadbury Report, the Greenbury Report and the Myners Report

More recently, UKSA has responded to the Department of Business, Energy, Innovation and Strategy’s independent enquiry into the Financial Reporting Council’s call for evidence on the statutory audit market's condition and the Brydon Review.

UKSA participates in European discussion through its membership of the European Federation of Investors and Financial Services Users (Better Finance) and provides a discussion forum through its newsletter, The Private Investor. It also runs educational events and regional networking meetings. 

UKSA Impact

Many of its activities depend on what individual members can arrange. UKSA members actively encourage better accountability between boardrooms and investors through specially arranged meetings between FTSE companies and private investors. Instances of where the UKSA bringing pressure to bear on public institutions have reached the national media, including British GasRailtrack and the successful defence of Marks & Spencer from Philip Green. 

Since the financial crash in 2007, UKSA has been campaigning for fair and equitable treatment of private investors in cases where audit and regulatory oversight appears to have failed. Examples include Lloyds TSBNorthern Rock and Bradford & Bingley, and, more recently, Carillon and Patisserie Valerie. Finally, UKSA would like to see more regulation of these matters, and more rights for minority shareholders in public companies. 

Particularly noteworthy to the subject under investigation is that UKSA, in response to the news that HM Treasury wanted to facilitate wider participation in the ownership of public companies, and to remove the current disincentives, through its consultation on the prospectus regime, welcomed the first of the four key objectives stated in the Ministerial Foreword: ‘We want to facilitate wider participation in the ownership of public companies, and to remove the disincentives that currently exist for the issuance of securities to wide groups of investors – including retail investors. Doing so will allow a broader cross-section of society to benefit from their growth. It will also enable companies themselves to access a broader investor base and improve market functioning overall by increasing the liquidity of markets.’ 

UKSA explicitly remarked that “This may be the first time that such an objective (which UKSA has been promoting for many years) has been recognised. We have a proposal that is a necessary condition for progress and addresses a number of other issues”. The full response statement can be found here.

About ShareAction

ShareAction is a UK registered charity founded in 2005 with Memorandum and Articles, which aims to improve corporate behaviour on environmental, social and governance issues. It originated from a campaign by People & Planet that helped Britain's largest single pension scheme adopt a responsible investment policy. 

ShareAction is a company limited by guarantee, which is only open to not-for-profit civil society organisations. These members have voting rights and elect the board of trustees, who govern the organisation. The board is held to account by their member organisations, including Amnesty International, CAFOD (Catholic Agency for Overseas Development), Christian Aid, Citizens UK, Unite the Union, WWF, Greenpeace, TSSA (the union for people in transport and travel), Oxfam, Prospect and UCD (University College Union). The charity is heavily reliant on generous support from its philanthropic funders. 

Most of its funding is derived from charitable grants gifted by various trusts and foundations. In addition to this, its network membership fees also contribute to much needed financial support. ShareAction will not seek or accept funds from listed companies or any for-profit investment firms. The exception to this is the Workforce Disclosure Initiative (WDI), where investor signatories pay an annual membership fee to support WDI's work to drive higher corporate disclosure standards. It also welcomes not-for-profit asset owners becoming paying members of investor networks that work collaboratively on responsible investment projects and are served by ShareAction. 

ShareAction works with institutional investors to continue pushing for action on key issues, including climate change, workforce equality and health, and to build networks and coalitions of like-minded asset managers and owners to engage with companies. ShareAction's 'movement' demands reform in the ways large investors make decisions and account for them. It has a network of AGM activists who use carefully crafted questions to challenge the world's largest companies on the key issues. For 15 years, it has driven change at the heart of the financial system, shaped policy and built a diverse movement of savers and investors for responsible investment.

ShareAction states that it makes sure savers' voices are heard by the people managing their money. It publishes policy recommendations to influence and rewrite the system's rules, analyses the behaviour of big investors, harnesses competition and drives up standards. ShareAction brings together investors, organisations and individual savers into powerful networks that take action and drive change and provides savers, institutional investors, and policy-makers in the UK and Europe with the information they need to act.

ShareAction Impact

ShareAction was involved in what is considered the first climate change resolution at a European bank. Led by ShareAction, 11 institutional investors managing over £130bn in assets filed a shareholder resolution at Barclays 2020 AGM alongside over 100 individual shareholders demanding that Barclays provide a plan to stop financing to the energy sector and to gas and electric utilities that are not aligned with the Paris Agreement on climate change. Barclays responded by putting forward its climate resolution, in which it pledged to align all of its financing activities with the goals and timelines of the Paris Agreement, starting with the energy and power sectors, and to publish “transparent targets” to track its progress. The shareholder resolution failed; c.24% of shareholders voted for the resolution passing the 20% threshold, meaning the bank was obliged to respond formally to its shareholders. The board’s resolution on its net-zero ambition, filed in response to intensive investor engagement triggered by ShareAction’s resolution, received 99.93% support. 

On the whole, an evaluation of the campaigning and lobbying efforts of ShareAction for the year 2021, shows that its influence and impact is notable in the results that are been delivered. The organisation is to be lauded for all its efforts and corresponding positive results and egress being made on the various fronts at which it is fighting for its member organisations, savers, investors and affiliates to have their voices heard and causes supported.

It is important to note that ShareAction’s impact cannot just be weighed by reviewing its campaigning and engagement activities. Still, consideration needs to be given to its significant and extensive lobbying activities over the last 12 months, which details the key policy initiatives ShareAction sought to influence in pursuit of its goal of creating a responsible investment system.

As part of its mission to promote responsible investment, ShareAction regularly engages policymakers at UK and EU levels. ShareAction’s lobbying activities for 2021 can be reviewed here. ShareAction also submitted responses to a number of formal consultations, which are published here.

Recent Developments

Company messaging is becoming more tailored; one generic message is no longer appropriate. For too long, information about companies, featured in the annual reports and associated general meeting disclosures, has only been written for institutional investors – thus making it impenetrable to ordinary people – but it has additionally been restricted to mediums such as letters, notices and announcements. However, a gradual shift in approach is occurring, which is necessary to satisfy the surge in individual investors. A move towards using multiple channels such as social media, virtual meetings, investor days and webinars can powerfully inform investors.

In addition, many retail investors want more exclusive experiences such as advice, education and in-person events. Companies are advised to utilise social media platforms such as Twitter, Facebook and the like if they want a targeted audience - they are pretty incredible in how they allow organisations to target investors. In closing, it has been noted that opening communication channels with hundreds of individuals takes time and planning, but it could provide a crucial mechanism for gaining support. Soliciting these retail investor organisations and working in tandem with them could yield positive results and is a worthwhile exercise, as demonstrated in considering their impact on the investment ecosystem.

Our Conclusions

As we reflect on our findings, we would like to end with a final thought that aligning management and investor perspectives requires intentional engagement, listening, and understanding from both parties. The evidence of that meeting of minds lies not only in the votes on resolutions but equally in the continued, ongoing dialogue that results from the efforts of both parties. We hope this article has given you food for thought in this developing area. If you would like to understand more about this topic or need support with formulating strategy and implementing steps to enhance your organisation's communications and outreach to the retail investor base on your share register, please contact our expert Corporate Governance advisory team on the details below.

Additionally, EQ, as a leading share registrar in the UK and US, is delighted to continue bringing insight and ideas to strengthen the industry and to explore how companies can harness retail shareholder participation for their mutual benefit. In this vein, EQ carried out extensive research on this, details of which can be found here.

We support our clients throughout the year, not just at AGM times.

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