Business, Innovation and Skills CommitteeWritten evidence submitted by UK Shareholders Association

Evidence to the Business, Innovation and Skills Committee on the Government Response to the Kay Review

UK Shareholders’ Association is a long established non-profit body representing the interests of individual shareholders. In addition to the services we provide to our own members, we have a 20 year record of making representations to various public authorities on behalf of private investors in general, including three submissions to the Kay Review. We have a collective experience derived over many years from numerous, mainly long-term, investors. We also strive to play a role in the education of our members and investors generally. We are entirely funded by subscriptions from our members.

Executive Summary

In this paper we express our disappointment with the Government Response, which lacks any sense of urgency and drive despite the Review being relevant to the overall economic performance of this country, as well as to relationships between companies and their shareholders. We give just a few examples from the Response to illustrate our concerns. One is the reliance on a broad group of departments and regulators to achieve progress on examination of law and regulation with a leisurely timetable but no one person or body indicated as driving it forward. Another is the reliance on the Stewardship Code despite evidence that it is not effective. A third is the excuse of waiting for European directives before taking action on rights for private shareholders.

Our Evidence:

1. We are extremely disappointed with the whole tone and attitude of the Government response, which has lost all the sense of urgency and initiative that accompanied the setting up of the Review when it was announced in June 2011. The Review does not merely deal with relationships between companies and shareholders but it leads into wider issues which have contributed to the economic decline of this country. For example, Professor Kay highlighted early in the Review the fact that both Business Investment and R&D investment in the UK have fallen in recent years and both are now significantly below those of our principal trading competitors. This aspect of the Review is passed over in the Government response and yet we would have thought this would be a key feature especially in the light of the difficulties there have been in engendering economic growth.

2. We are well aware that, while Kay gave an excellent analysis of what is wrong at present, and described the ideal situation he would like to reach, his route map for achieving the desirable result was lacking in detail. The Secretary of State seems to have accepted this as a reason for relying largely on market participants to achieve progress and, where Government is directly involved, not to propose any further progress report until summer 2014. We believe, on the contrary, that very little is likely to be achieved without a strong push from Government. Moreover any review dependent on “market participants” will surely be biased towards the interests of the financial services industry, which largely conducts its affairs with other people’s money; those whose money it usually is, namely private investors and savers, are usually absent from such reviews and so need the Government to act on their behalf.

3. We continue by giving specific examples of some points in the Response where we can make positive suggestions.

4. Chapter 2

In paragraph 2.22 The Government “calls upon market practitioners to have regard to these principles”. This in our view is completely inadequate to achieve any progress. A positive way forward would have been for the Secretary of State to call industry leaders together to bring their influence to bear in establishing these principles and threatening them with legislation if they failed to do so. In paragraph 2.29 the Response proposes to take forward the identification of changes in law and regulation by expecting three government departments plus the Cabinet Office to work jointly with five regulators. There is no indication in the Response of any one individual or Department having been given any power or responsibility to drive this forward. Moreover only in summer 2014 are we to hear how the Review is to be used to inform future policy development. That will be already two years from the publication of the Review, three from its commissioning and less than one year from a general election. This leisurely approach is totally inappropriate.

5. Recommendation 1

The response here places great reliance on the development and application of the Stewardship Code. While we are supportive of the FRC’s introduction of this Code and note the list of companies that have publicly signed up to it, which is no small achievement in itself, we have consistently pointed out the lack of incentive for major shareholders handling other people’s money to allocate the necessary resources to make a good job of it; in fact, competitive factors provide a disincentive.

We are currently dealing with a case of an executive compensation scheme in a FTSE 250 company which appears to have been devised simply as a means of transferring wealth from the shareholders to the executives with very little in the way of performance requirement to achieve this. It is evident from the voting figures that major institutions voted in favour of this package despite all its weaknesses and these appear to include some who have signed up to the Stewardship Code. This demonstrates that the Code is not working and that Government should be looking for alternatives such as shareholder committees involving shareholders with a real, long-term economic interest. We believe that this would provide a more fruitful opportunity for progress than the forum proposed in Recommendation 3.

6. Recommendation 10

At first sight the Government appears to have accepted this recommendation. However, closer reading indicates that they have skated over the possibility that stock-lending is carried out in whole or part for the benefit of the asset manager even though it is at the risk of, and possibly against the interest of, the ultimate investor. Here again there is a complete reliance on the investment industry to make progress coupled with a lack of urgency by deferring any further consideration to summer 2014.

7. Recommendation 17

7.1 The issues addressed by Professor Kay’s final recommendation are long-standing and becoming more serious as time goes by. More and more shares have to be held through nominee accounts, either because the Government requires this for ISAs and SIPPs or under pressure from brokers because this gives them a degree of control from which they derive commercial benefit. This leads to the failure of shareholder democracy, loss of control over one’s investments and the weakening of the pressure that private individuals are able to apply to boards of directors by challenging them at AGMs. Moreover, it appears to be a direct obstacle to the holding of shares by individuals, whereas we would have expected the Government to want to encourage this as a means of saving, with the additional benefit of wider understanding both of the way wealth is created and of the capitalist system in general.

7.2 As illustrated by Professor Kay, other countries have solved this dilemma although the countries he lists are not the only ones, and it seems to be unique to the UK. At the moment, the only way round the problem here is through holding a Personal Crest account. The idea of these becoming general is anathema to service providers for one reason and another and forbidden by HMRC for ISAs and SIPPs.

7.3 On page 31 of its response the Government gives potential EU legislation as a reason for holding back on further action. On the contrary, current EU proposals add considerable urgency to the need for progress since those concerning central securities depositories involve compulsory dematerialisation. If this were to occur without progress on Recommendation 17, the only private shareholders outside nominee accounts who retained their proper rights would be those who had adopted the Personal Crest system. Everyone else would be disenfranchised and AGMs would be non-functioning (a serious loss of director face-to-face accountability), since the vast majority of private shareholders would no longer have an automatic right to attend and vote.

7.4 Parliament should also be aware that, by means of Part 26 of the Companies Act 2006, it has allowed the acquisition of all of a company’s equity without all its equity holders having a say in the matter. In corporate actions, of which this is the most dramatic, nominee account users, not being the legal owners of their shares, are usually excluded from the vote. Whether nominees vote the shares unbeknown to their clients is itself an unknown, but such acquisitions, now the majority, hand the acquirer 100% of the shares in what amounts to those disenfranchised as compulsory purchase, with no minimum voting participation (ie it can and has been less than 50%). The Government also loses revenue, because this method of acquisition avoids stamp duty.

7.5 Professor Kay expresses concern about the security of shares held in nominee accounts. The level of compensation available for loss of investments held in nominee accounts is just £50,000, whereas the equivalent figure in the USA is understood to be $1m. Even if investors succeed in recovering all their investments when the nominee goes bust they will certainly have faced a lengthy period before any investment is returned or made available for sale. For ISAs and SIPPs, the Government denies savers the right to own their investments but has refused to recognise the extra financial risk this imposes.

7.6 It is essential that the Government legislates to remove the obstacles to what should be investors’ right to be treated as full shareholders regardless of the means by which they hold their shares in individual companies. UKSA stands ready to contribute to the exploration of means that we acknowledge is first needed, but a clear lead from the Government on this crucial issue is needed now.

Roy Colbran, Head of Government Policy Group
John Hunter, Policy Team member
Eric Chalker, Policy Co-ordinator
20 January 2013

Prepared 24th July 2013