Chapter 3. Whose Company is It?

Acompany is owned by its shareholders. Your stake in a company is in proportion to the number of shares you hold. So if you own 5% of a company’s shares you are entitled to 5% of the votes at any shareholders’ meeting and also to 5% of any profits distributed as dividends.

The company will employ a firm of registrars to keep the register of shareholders up to date, amending the list as shares are bought and sold and mailing out the annual report and any other information that shareholders are entitled to receive.

In practice, most companies have institutional investors such as pension funds on their shareholder register and their holdings will be considerably larger than yours. They will, when things go wrong, make known their disquiet to the directors and although it may seem a little unfair that their voice is louder than yours, in most cases your interests and those of the institutions will be the same.

The directors may also sound out the views of large shareholders on a major issue such as a change of strategy or a substantial acquisition. It can be useful to know if a planned course of action is going to run into serious opposition.

However, companies are not allowed to give crucial information to favoured shareholders without also releasing that information to everyone through a stock exchange announcement.

The London Stock Exchange has, over the years, made valiant efforts to stamp out the issuing of inside information and the flow of information today is much, much fairer than it used to be.

Shareholder revolts

A company is run on behalf of its shareholders by a board of directors. In practice, the directors tend to have a pretty free rein and, in some cases, can come to regard the company as their personal property. If it comes to a vote, though, they can be ousted by the shareholders – and occasionally, though very rarely, this does happen.

Case study: BSkyB

One of the most high-profile and longest-running cases of a shareholder revolt against a director occurred at British Sky Broadcasting, where James Murdoch was installed as chairman by his father, the media mogul Rupert Murdoch, way back in 2007.

The Murdoch family controlled News Corp, the largest single shareholder in BSkyB with 39% of the shares. Discontent over the family’s prominent position in the British media had rumbled on for years, as had concern over their political influence.

Matters came to a head when News Corp made an offer to buy all the BSkyB shares that it did not already own. The bid was pitched at 700p, which was above the prevailing stock market price but well below the 850p that shareholders felt News Corp should and would be prepared to pay, as long as the independent members of the BSkyB board put up a fight – which they did.

The fight lasted long enough for The News of the World and The Sun to become increasingly embroiled in a phone-hacking scandal and, though he had not been in charge of the newspaper division when the hacking happened, James Murdoch also became tainted by the allegations. After a year of getting nowhere, the Murdochs abandoned the bid.

BSkyB shareholders staged a revolt when James Murdoch subsequently came up for re-election as their chairman.

However, he returned as chairman of Sky four years later and the family renewed its bid, this time through 21st Century Fox, where James Murdoch was chief executive.

This was a clear conflict of interest. Matters again came to a head at the annual general meeting in October 2017 when 22% of shares were voted against the chief executive’s re-election and 29% against the director’s remuneration report.

Shareholder revolts naturally tend to coalesce around annual general meetings, when shareholders vote on a whole range of issues, including the election and re-election of directors.

Most revolts are over executive pay schemes, especially in the aftermath of the banking crisis when there was public outrage over bonuses. These usually fizzle out ahead of the meeting because if there is sufficient disquiet among large shareholders the board will usually back down to avoid the humiliation of losing a vote.

Case study: AstraZeneca

Pharmaceutical giant AstraZeneca knows a thing or two about revolts over executive pay, though it took several years for it to get the message.

The then chief executive David Brennan was ousted in a row over his £9 million pay package in 2012, yet only two years later 40% of shareholders kicked up again by refusing to support the remuneration report, which contains details of executive pay and which must be presented to the AGM every year.

History repeated itself in 2017, when there was a 39% vote against the £13 million pay package for new chief executive Pascal Soriot. His actual annual salary was only £1.2 million. However, Astra added in a £1.2 million annual bonus, £3.6 million compensation for a bonus lost when Soriot left his previous employment, and £6.9 million from a long-term incentive plan.

Some lessons had been learnt, though. Astra consulted its major shareholders when the rumblings of revolt began and made changes to the long-term bonus plans “to make them simpler and fairer”.

Directors

There are two types of directors: executives and non-executives. They tend to sit on the board in roughly equal numbers but there is no set formula for how many of each a company should have.

Executive directors

Executive directors work for a company full-time and are responsible for day-to-day operations. The most important executive is usually called the chief executive, or group chief executive or chief executive officer (CEO for short). In a smaller, privately owned, company they would probably have the title managing director.

Whatever the actual title, this person is the top executive, the one to whom the other executives report.

After the chief executive, the most prominent executive is usually the finance director. Other executives who may be on the board include the sales director, the marketing director and the heads of each division in the group. There will also be a company secretary, who carries out certain defined legal roles. This is not always a separate post. The role could be fulfilled by, say, the finance director if the company is not large enough to justify a separate appointment.

Non-executive directors

Non-executive directors are part-time and may do no more than attend monthly board meetings. They are there to represent the interests of the shareholders – people like yourself. They are usually chosen for their wide business experience and their role is to offer advice and to see that the executives are doing their job.

They will probably be non-executives of several quoted companies, though they should not sit on the boards of two rival companies as there would be a clear clash of interests. They can, though, facilitate contact between two companies in which they are directors if there is a mutual advantage.

The chairman of a company is normally, though not always, a non-executive. He or she may well have an office at the company and perhaps work two or three days a week there, offering help and guidance to the executives as required. This is regarded as a highly prestigious post.

The chairman chairs the board meetings, just as the chairman or chairwoman of any formal organisation such as the Women’s Institute or the British Legion does. He or she sees that the agenda is followed, that the meeting is orderly, that all directors have their fair say and that important issues are addressed.

There is also a vice-chairman, who is also usually non-executive and who deputises in the absence of the chairman.

The top two roles on the board are chairman and chief executive. It is regarded in the City as best practice for two separate people to hold these two roles, with the chairman as a non-executive.

In the past it has been common, when a chairman retires or resigns, for the chief executive to step up to the chairman’s role and a new chief executive to be appointed. Such a move has the advantage of ensuring that the new chairman is very familiar with the business and how it operates.

This practice has, however, become increasingly frowned on, the argument being that an outsider is completely independent while the newly promoted former chief executive is too cosy with the other executives and may persist in interfering with the day-to-day running of the company.

Occasionally one person holds both posts, which puts a great deal of power into one pair of hands. We also sometimes see an executive chairman as well as a chief executive. This can cause problems over who does what and is likely to create a conflict between rival egos.

There is some kind of pecking order on the board, partly in terms of each individual’s role in the company and, in the case of non-executives, based on length of service on the board.

However, it is inevitable that other factors come into play in determining whose voice carries most weight. As in all walks of life, some individuals are more ambitious than others, some are more forceful.

The importance of a balanced board was amply demonstrated at Royal Bank of Scotland, where the independent directors failed to rein in chief executive Fred Goodwin, whose expansionist policies finally overstretched the bank to the point where it collapsed into a government bailout in the financial crisis.

A chief executive who is demonstrating success in the business will command more respect than one running a struggling enterprise. Some non-executives are more adept or daring in controlling a maverick executive. Directors, in the end, are only human. Some boards pull together and others split into factions.

Directors’ pay

Deciding how much the directors are paid for their services is a particularly contentious area. The board will set up a remuneration committee, probably comprising three non-executives and chaired by the longest-serving one.

Executive directors will be paid for doing a full-time job, possibly quite handsomely, and there are likely to be incentives such as bonuses if certain performance targets are met. Performance targets may involve meeting minimum profit levels or raising the value of the shares on the stock market by a certain percentage.

Executives are often awarded share options, where they are allowed to buy new shares from the company cheaply or even at no cost. They will also have generous payments made into their pension fund.

Non-executives are normally paid a fixed, much lower fee, reflecting the fact that they may do no more than attend a monthly board meeting. The chairman’s salary will depend on how much time he is required to spend on company business.

As a general rule, the bigger the company, the higher the remuneration for directors.

As noted earlier, shareholders can object to the salary structure at the annual meeting but it is extremely difficult to persuade large shareholders – such as insurance companies, pension funds and unit trusts – to make a fuss.

Directors’ shareholdings

Directors may hold shares in the company. Indeed, it is considered rather bad form if they do not as it looks like a vote of no confidence in themselves if they are not prepared to risk some of their own money in buying at least a nominal stake.

There is no set figure for how many shares a director should hold. Sometimes the entire board will hold less than 1% between them. Sometimes just one director holds more than half the shares. Factors that can affect the size of directors’ shareholdings include the size of the company and whether a director has a residual holding from the days before the company was floated on the stock exchange.

Any shares held by directors count equally with those held by other shareholders. A director with 5% of the shares has 5% of the votes, just as you would do with the same amount of shares.

Example: directors’ shareholdings

The two tables below show a retailer where one director owns more than half the shares and another where the board’s holdings add up to less than 1% of the total shareholdings.

Although other shareholders have only nominal shareholdings, chief executive Mike Ashley controls retailer Sports Direct – with well over half the 530 million shares in circulation at the time of the 2017 annual report.

Table 1: Shareholdings of Sports Direct directors

Source: Sports Direct annual report 2017

Marks & Spencer has more than three times as many shares issued as Sports Direct, with over 1,600 million. Its three top executives hold just 0.03% of the total.

Table 2: Shareholdings of Marks & Spencer executives

Source: Marks & Spencer annual report 2017