Investors in listed companies have voting rights, in proportion to their stake, which gives them a say in the way the business is managed and how it behaves in the wider environment. Last week, British shareholders made their voice heard with their rejection of Unilever’s proposal to move its headquarters to the Netherlands.
Many of us invest via collective investment vehicles, whether they be unit trusts, investment trusts, pension schemes or life assurance funds, so who is looking after our interests? In the same way as you trust a fund manager to invest your money prudently and profitably, you are also delegating responsibility to that manager’s corporate governance team to vote on your behalf. This applies to both routine matters, including approving reports & accounts and re-electing directors and auditors, as well as more critical issues such as whether to accept or reject a takeover offer.
As your representative, they adhere to the UK Stewardship Code (operated by the Financial Reporting Council); a set of principles and guidelines for institutional investors who have holdings in UK companies. The code’s objective is to make them actively participate in corporate governance in the interest of their beneficiaries. The ability to influence the long-term strategy and success of companies in a constructive way, should serve to benefit both investors and the economy as a whole.
Consequently, the governance role has extended to regular engagement with companies on social and environmental issues which may affect a company’s performance. In order to reach informed and well-thought-out decisions the corporate governance managers draw on both internal and external research resources. They collaborate closely with their ESG (Environmental, Social and Governance) colleagues and lobby companies to improve in areas where they identify weaknesses.
One of the most proactive teams I have come across is the Corporate Governance and Responsible Investing team at Legal & General (LGIM). This 12 strong team has a clear mandate to protect their investor’s capital and long-term interests. If considered appropriate, they get involved in key events such as merger and acquisition discussions or replacing underperforming management. In recent years they have helped instigate a big increase in women on boards, have voted against over 160 executive pay deals and never abstain from voting when they believe they can make a difference.
To put pressure on companies to change their practices, large investors may work together. Along with Kames Capital and others, LGIM have been vociferous in criticising Sports Direct regarding employment contracts, executive pay and the dominance of the high-profile chief executive, Mike Ashley.
Turning back to Unilever, a large number of leading fund groups, including Aviva, LGIM, Schroders and M&G, opposed the relocation plans. The Anglo-Dutch consumer goods conglomerate, which makes a vast array of products from Dove soap to magnum ice creams and marmite to pot noodles, had argued that since a majority of its shares were traded in Rotterdam , simplifying the dual corporate structure would ‘accelerate value creation’.
The company also claimed it would help it remain competitive in a consolidating food industry, making acquisitions and disposals easier, yet Unilever is regarded as a highly profitable and sustainable business with stable dividends. The dual structure has been in place since 1930 when a Dutch margarine firm and Wirral-based British soap manufacturer, Lever Bros, came together in a merger.
Unilever is a sizeable constituent of the FTSE 100 index, with a market cap of around £124bn giving a weighting of nearly 2.2%. The proposed move would have meant almost certain ejection from the index, of which it has been a member for thirty years, outraging many UK fund managers for whom it is a core constituent of their portfolios. Furthermore, passive funds tracking UK indices would become forced sellers, potentially having a negative impact on the share price. Some funds could face a capital gains tax charge and the costs of reinvestment.
A leading advisor to pension funds recommended its clients to reject the move, arguing that for UK investors it was effectively a ‘takeover without a premium’. Furthermore, a stricter anti-takeover regime in the Netherlands could shield the company from future bids. Many believed the firm was seeking this protection, after an attempted takeover bid from Kraft Heinz in 2017. However, UK shareholders were instrumental in defending the company from this approach.
Unilever also refuted suggestions the move was Brexit related. Whatever the real rationale, the protestations in the UK have had the desired effect and Chairman Marijn Dekkers announced last week, well before the scheduled vote, that the plan would be withdrawn. The backing-down was welcomed by Greg Clark, the business secretary, as a vote of confidence in the UK as an ‘open and competitive economy and a great place to locate headquarters’.
In my view, it is a positive outcome for UK investors and illustrates how shareholders, who are the ultimate owners with the company’s executives working as their agents, can influence the direction a company takes. Although, it does make me wonder, had such extensive corporate governance procedures been in place earlier, would many more of our iconic brands still be in the hands of British companies?
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