ShareSoc Chairman's Blog

Posted by ShareSoc at 12:15, September 9 2013.

FT article on dematerialisation

The Financial Times published a long article by Jonathan Eley entitled “What price shareholder democracy?” on Saturday. It was in the FTMoney supplement and covered the issue of nominee accounts, dematerialisation and prospective EU legislation. Mr Eley covered most of the issues well but here’s a note I have sent him to explain a few points.

Dear Jonathan,

Regarding your article at the weekend on shareholder democracy and nominee accounts, which was generally very sound, a few points:

1. Not all listed companies like the nominee system because it effectively means they do not know who their real shareholders are, and also have no way of communicating with them. It is often particularly important to mobilise private shareholders and smaller institutional holders when a company is under attack by speculators or short term holders but it is very difficult for the directors to do that when the retail shareholders are in nominee accounts. Indeed I would argue that those companies who like the nominee system are often those where the management are major shareholders and are quite happy to have private investors disenfranchised - this happens quite a lot with AIM companies, where the directors often want to do what they want regardless of shareholder views. 

2. You close the article by asking "who will pay for it [dematerialisation]?  The answer from previous studies of the cost and benefits of dematerialisation is that it will more than pay for itself! Obviously there are some initial costs to be borne by brokers and Crest to convert their systems, but they will also make substantial cost savings from the reduced paper handling and otherwise simplified systems (assume all paper share certificates are dematerialised as recommended). So the industry saves money, but also private shareholders save a lot also because they incur substantial costs from such problems as lost share certificates. The current costs are high because there are still millions of holders of paper share certificates. In addition, at present you sometimes have to "rematerialise" a "dematerialised" holding to take advantage of corporate actions. For example I recently had to rematerialise into paper a holding in a VCT which was in my personal crest account so I could take up an "enhanced buy-back" offer. Basically the current system is a mess and paper share certificates are not just archaic but they are also a major security risk.

3. So far as ShareSoc is concerned, nominee accounts are an anathema for the reasons you partly explain in your article. The reason why stockbrokers like pooled nominee accounts is not simply the cost but because it locks their clients into their services. There is no cost difference between a nominee account or a personal crest account - indeed some brokers who offer both charge the same. In other words, the claims for cost benefits of pooled nominees are a myth. In essence nominee accounts undermine your legal rights, create major risks for investors, and destroy shareholder democracy. We think they should be severely restricted or at least clients made aware of the issues before they sign up for them. In addition we would like to have the regulations changed so that ISAs and SIPPs don't need to be in nominee accounts.

Regrettably the Government seems to be listening more to those who would like to keep the status quo rather than introduce a modern electronic system based on dematerialisation (as recommended incidentally in the Kay Review). They are trying to delay implementation of the CSDR EU legislation when they should not be.

Shareholders should write to their M.P. if they wish to get a more sensible approach in place before it is too late.

Posted by ShareSoc at 20:16, September 2 2013.

Vodafone deal details now available, and most are pleased

Vodafone (LON:VOD) have now published the details of the deal to sell their stake in Verizon. I won’t repeat the details here but most investors seem pleased with it. That includes ShareSoc director Stan Grierson who got a few seconds on BBC News explaining how we will now be able to afford more space on airlines for his long legs – you can see a more useful and longer video interview here: www.bbc.co.uk/news/business-23936013

Although the deal is being applauded as a major cash injection to the UK economy, in reality it might simply mean shareholders like Stan, and even institutions, moving to reinvest the cash in other stock market stocks rather than spend the money, i.e. it might simply lead to asset inflation. Perhaps today’s general rise in the UK market was simply anticipating this phenomenon.

One aspect glossed over in the announcement was the prospective share consolidation. These tend to be complex and one thing we will need to keep an eye out for is the question of whether managements LTIPs and share options are adjusted accordingly.

For private shareholders they might be concerned about being issued with Verizon shares but there will be a dealing facility put in place to assist with that problem. At least there was no mention of share buybacks in the announcement.

Oddly enough I have never personally been a big holder of Vodafone. One of my big early mistakes in investing was trusting a well known private bank to handle part of my financial affairs. They purchased Vodafone at 275p in 1999 and sold at 141p in 2001. They were soon after fired, and that was not their biggest mistake. As ShareSoc keeps telling people, you are usually better off looking after your own share portfolio, because your mistakes won’t be any worse than the professionals and with a modicum of wisdom and experience you can do a lot better. I bought Vodafone back subsequently in 2008, but with the latest announcement I have at least recovered the past losses.

Roger Lawson

Posted by ShareSoc at 09:23, August 31 2013.

Vodafone and Verizon – how will they use the cash?

ShareSoc has issued a press release on the likely deal for Vodafone (LON:VOD) to sell its stake in Verizon Wireless (see www.sharesoc.org/pr50vodafone.html). This might realise over US$100bn in cash so the key question is what the company will do with it. Will it waste it on other acquisitions or return it to shareholders? And in the latter case in what form?

Vodafone is a company that appears to love share buy-backs, like many other FTSE-100 companies. But ShareSoc suggests that it would be better returned via special dividends or tender offers. Ideally shareholders should have the option to receive it as either income or capital so they can choose which is more tax efficient.

Posted by ShareSoc at 07:32, August 29 2013.

Dunedin Enterprise – Chairman stepping down

Dunedin Enterprise Investment Trust Closed Fund (LON:DNE) announced its half-year results this morning. They were unremarkable. But the good news in the announcement was the mention that David Gamble is retiring from the board, and hence as Chairman, at the next AGM.

ShareSoc attacked this company for the introduction of a performance fee in October 2012, under Mr Gamble’s chairmanship. It seemed totally unnecessary to compensate the fund manager in the way chosen because of a change in investment policy, with the risk of substantially higher management fees. Read our press release here: www.sharesoc.org/ShareSoc_Press039_Dunedin_Enterprise.pdf

At the subsequent General Meeting, it was disclosed, in response to questions, that Mr Gamble had 8 directorships and 2 other consultancy roles. This is surely excessive and contrary to ShareSoc’s guidelines for non-executive directors which suggests a limit of 4 or 5 roles (see www.sharesoc.org/Non_Execs_Code.pdf ).

So ShareSoc cannot but welcome this change of Chairman.

Posted by ShareSoc at 10:22, August 28 2013.

EuroFinuse attacks lack of retail investor representation

Guillaume Prache of EuroFinuse (of which ShareSoc is a member) has been attacking the lack of adequate retail investor representation on European bodies that devise financial market regulations. Specifically he has attacked the European Securities and Markets Authority (ESMA) and its Securities and Markets Stakeholder Group where only a few of the 30 members on the committees are consumer advocates (i.e. retail investors). He complains the big banks are dominating policy development on European financial market regulations which of course now dictate local national regulations. EuroFinuse have also raised a complaint to the European Ombudsman on this matter.

The issues were covered in a lengthy article in the FTfm supplement on 26/8/2013, which can be read here:

www.ft.com/cms/s/0/c93b2a36-0bfa-11e3-8f77-00144feabdc0.html?siteedition=uk#axzz2dFzFVouu

Posted by ShareSoc at 09:41, August 24 2013.

Media Corporation – Cessation of Business

One of the first “problem” companies that ShareSoc reported on (and got involved with to a limited extent, although it always appeared to be somewhat of a basket case) was Media Corp (LON:MDC) . We first covered it in our June 2011 newsletter when the share price was about 1.5 pence. After various changes of strategy and management upheavals, the shares were suspended from AIM (not for the first time) in April at 0.095 pence, after much dilution from new share issuance in the meantime.

Yesterday (on Friday 23^rd August, at 5.45 pm) the company announced with the headline “Cessation of Business” that it was disposing of its remaining operating businesses and transmogrifying into an investment company – to be called Leopard Oil Plc. Yes it will be focussing on “oil and gas opportunities”, which sounds like even more speculation.

It’s always a good time to make a major announcement after the market has closed and just before a bank holiday is it not? Although with the shares suspended it may not matter a great deal. But this is what one might expect from past goings-on at this company.

The company’s previous activities have been primarily in the gaming sector, and they had been working on a new platform called “Intabet” but they report that this has proved beyond their financial resources to launch. They also have “legacy issues” apparently, without spelling out what they are.

A General Meeting to approve the proposed change of direction has been called for the 16^th September. It should be an interesting meeting for anyone still holding shares in this company.

Posted by ShareSoc at 09:32, August 23 2013.

RSM Tenon Pre-Pack: an odd connection

ShareSoc has made many representations in the past about the abusive use of pre-pack administrations. In the case of publicly listed companies, they usually mean the ordinary shares become instantly worthless. The latest case of a pre-pack in a listed company is that of RSM Tenon (LON:TNO) . This company (an accountancy practice oddly enough) got into difficulty by taking on excessive debt for a growth strategy. Baker Tilly were negotiating to buy the business for a rock bottom price. But yesterday it was announced that instead the company had been put through a pre-pack and sold to Baker Tilly by the administrator. You can tell it’s a pre-pack (i.e. one arranged before the administrator had been formally appointed) by the wording of the announcement issued by RSM Tenon which says “Immediately following their appointment, the Joint Administrators [Deloittes] agreed a sale of the Company’s trading entities to Baker Tilly”.

Whether any better deal could have been done, or the interests of ordinary shareholders protected in this case, may be debatable. But there is one odd connection.

Vince Cable’s BIS Department have launched yet another inquiry into pre-pack administrations (in this case an “independent one”) because there have been continuing concerns about their operation.  For example, he recently said “You do have these so-called phoenix companies where owners typically shut down their companies in order to wipe out their debts and start again the following day under a slightly different name”. This inquiry will be led by Teresa Graham and will report next year – the terms of reference have yet to be announced. Teresa Graham is an accountant who has been involved in other Government quangos – she chairs the Administrative Burdens Advisory Board of HMRC at present, but also has some non-executive directorships in smaller companies. More interesting perhaps is that she previously worked for Baker Tilly! Will she be examining this particular example of a pre-pack one wonders?

Note that there is a lot more information about pre-packs and ShareSoc’s representations on the ShareSoc Members Network where there is a “Forum” dedicated to the subject here: http://sharesoc.ning.com/forum/topics/prepack-administrations

Posted by ShareSoc at 11:29, August 20 2013.

Improving Corporate Governance and Shareholder Engagement

The above was the title of a document recently published by the Association of British Insurers (ABI), a body that represents some of the largest institutional investors in UK companies. It’s primarily a review of where they stand on corporate governance but is well worth a read if you have an interest in such matters. It also contains some recommendations for improvements.

One recommendation is that the time commitment of non-executive directors should be reviewed. Perhaps this is because it reports that the average size of board information pack in a FTSE-100 company is 288 pages long! They seem to be full of operational detail and must in essence be indigestible. But another recommendation is that boards should be “more demanding of the formal flow of information they receive”. Perhaps more demanding for less bumf and more summarisation?

The ABI is proposing to establish an “Investor Exchange” where members can raise concerns about companies and organise meetings. But it will be a private and confidential forum.

On shareholder rights, they are keen to retain “one share, one vote” rather than introduce differential voting rights.

On Annual General Meetings they say “members still believe that the AGM is an important last line of accountability for companies and directors and reinforces the relationship with shareholders”. They suggest companies could do more to “reinvigorate the format” but they point out that attendance of institutional investors might be improved if AGMs were more spread over the year (they tend to be bunching up now due to many companies moving to a December year end). But it is good to hear that they feel institutions should attend such meetings which many do not.

There is much of merit in this document, although it does tend to be focussed on large FTSE-100 companies. 

The "fibbing" word was embedded in a question. It is a question, not an allegation. Perhaps you are suggesting that when a company says "we have consulted our major shareholders" they have only discussed it with the corporate governance specialists who are sitting behind a "chinese wall" in their institutional shareholders, i.e. they have not consulted with the investment managers who actually make decisions about holdings in the company? Or perhaps they have discussed it with the latter, but they have agreed to be made insiders and hence won't be trading the shares in the near future? I suggest this all somewhat unrealistic and not how it operates in practice. I reiterate the original point: there is a logical problem in wanting more "engagement" between investors and company directors when the "insider" difficulty has not been properly resolved.
As regards "outrageous pay", there is a widely held perception that the pay of directors in FTSE-100 companies has become grossly excessive. If you think otherwise, please let us know.

Well institutional shareholders are now expected to "engage" with company boards on the subject of director appointments, remuneration and lots of other things too. So yes the problem of them becoming insiders is already plain and has to be tackled somehow. This is not an objection to Shareholder Committees, where certainly the same problem would arise, but is a logical difficulty that nobody seems to want to face up to. Suggestions on how to get around it would be helpful. But of course we are talking theory here rather than practice. In reality boards already often consult their major shareholders on remuneration and major appointments - indeed they often justify their outrageous levels of pay by saying they have done so! Or are they fibbing?

Posted by ShareSoc at 08:29, August 19 2013.

Kentz – Keeping shareholders in the dark about a bid until now

This morning Kentz (LON:KENZ) announced that it had received two approaches from different companies about a possible offer for the company – from Amec and M&W Group. In fact the company indicates that there was a conditional offer from Amec of 565p to 580p per share in cash (on the 5^th August according to Amec) when the share price has been hovering around the 400p level for the past year, i.e. that would have been a premium of about 40% which is usually enough to convince shareholders that the offer is a good one.

But the board of directors concluded “that it undervalued the Company and therefore unanimously rejected the approach”. It did not tell shareholders at the time and perhaps only now has done so because of announcements by Amec and M&W Group concerning press speculation on the matter.

The share price has now risen to over 590p at the time of writing which rather suggests the market believes there will be a successful bid in due course. At that price the prospective p/e is about 13 (note be careful when looking at forecasts for this company because the company reports in dollars so earnings forecasts are usually in cents).

These offers are surely potentially good enough to merit serious consideration, and possibly put to shareholders in due course and the directors will no doubt now come under some pressure on this matter. Did they consult their major shareholders about the offer? Why did they not indicate by an announcement that there was a possible offer? Note: a company does not have to disclose all possible approaches, as often they are quite informal, but in this case both of them appear to have been serious approaches. Is the company avoiding its responsibilities by claiming to be outside the Takeover Panel remit (it is registered outside the UK)?

Posted by ShareSoc at 09:33, August 18 2013.

Elektron Technology – problems at the top

I had been aware of the unhappiness of some shareholders in Elektron Technology (LON:EKT) for some time, and the difficulty they had of doing anything about their concerns. I just happened to be reading the Annual Report of Downing Income VCT 3 over the weekend, who had a holding in the company, and this is what the fund manager has to say: “Elektron Technology plc experienced continued poor trading, due to challenging macro conditions and what, we believe is, a weak management team with poor financial discipline and corporate governance. Our lack of confidence in management to deliver the much needed turnaround in this company, combined with the fact that we believe the board is highly overpaid, has led us to exit from this holding after the year end.”

I then looked at the discussions on this company on the ADVFN bulletin board, and what do I find? An apparent legal spat over allegedly misleading announcements by the company and lots of other negative comments (such as about the decision to move production to Tunisia for some of their products).

Revenues, profits and the share price all seem to be falling. This is surely a company to avoid unless there are some changes at the top. It’s not often a fund manager is so direct in their comments on a company.

Thanks for the opinions. Much of what's proposed we already support and campaign on - especially concerning voting rights for nominee shareholders. We are working hard "behind the scenes" on that, especially in light of the proposed dematerialisation directive and weak UK government response to it. Perhaps we should take a higher profile on it. Of course, we are very keen that it is made easier to contact individual shareholders when matters of mutual concern arise. Clearly, action groups must act responsibly, but there are a number of cases, especially on AIM, where directors' actions appear at odds with the interests of minority shareholders.

We are looking at a more constructive concept of "shareholder liaison groups" (SLGs), where effectively, a single point of contact is established between individual shareholders and a company's Board. This should make for more efficient communications for both parties and good companies should be able to head off the need for action groups, by maintaining a constructive dialogue and explaining the intent of their actions and the constraints they live under. I see this operating in much the same way that companies communicate with major institutional shareholders, thus helping to level the playing field.

The shareholder committees we advocate have very limited and specific functions: nomination of directors, remuneration, and (possibly) audit. I don't see that leading to a "shadow directorate". My observation is that in too many firms, current nomination & remuneration committees are too cozy and serve the interests of executives more than that of shareholders and wider society. Having said that, I do acknowledge that there are plenty of good companies where the Board-appointed committees do operate well.

Unfortunately a major practical challenge we face is the need to increase our resources to be able to increase the effectiveness of our campaigns. We do need as many people to sign-up as full members as possible (and/or make donations), which will enable us to do rather more on any individual issue.

Thanks,

Mark

Hi Roger

Has Sharesoc now spread its wings to encompass looking after the interests of shareholders in non UK listed companies?

Posted by ShareSoc at 09:07, August 15 2013.

Why would anyone buy shares in an AIM IPO?

Cambridge Cognition Holdings (LON:COG) launched on AIM on the 18^th April at a price of 70p. Their focus is on the provision of neuropsychological tests via easy to use software tests (such as on tablet computers more recently). With such conditions as dementia become more common as the population ages, and the fact they have a credible reputation in the field going back some years, it looked a typical “concept” stock, i.e. great prospects from a single idea if rather short on current profits. But at least they had revenue of about £5m per annum. The IPO placing raised £5m which was to fund the expansion of sales and marketing efforts. One presumes that the promoters of this fund raising put forward the merits of the management team then in place.

But four months later it’s all change. Yesterday the company announced that CEO Ruth Keir and CFO David Blair have resigned and one of the non-executive directors, Nick Kerton, is becoming the new CEO. He is bringing in a former colleague, Nick Walters, as CFO.

There are compliments to the departing team for “establishing the firm footing on which we today stand” but there is no trading update. Interim results will be out on the 18^th September. It may be a fair assumption that business development is not exactly on track.

I read the AIM prospectus at the time of the IPO, partly because my sister was a Professor of psychogeriatrics and hence I could get some opinion on the market sector. Perhaps good potential, but it looked a somewhat undeveloped business that was losing money. So I deferred any decision on investing. Such management changes soon after the IPO do not inspire confidence that the company has established a business model that will be profitable in the long term - a simple question for any early stage business.

There is a good rule of thumb I suggest for AIM companies who have launched IPOs – wait to see whether the story promoted in the AIM prospectus turns out to be true before investing.

Here's the interview, Roger...

http://www.bloomberg.com/video/what-is-the-best-use-of-apple-s-cash-5vuOcj_gSt2vs~7OAEnjVg.html  

Posted by ShareSoc at 11:08, August 14 2013.

Apple and Carl Icahn – Interview on Bloomberg TV

I did an interview this morning on Bloomberg TV concerning Carl Icahn’s stakebuilding in Apple and his comments that it is seriously undervalued. He also seems to feel they could return more cash to shareholders. They do have over US$100billion in cash on their balance sheet, and although some of it is held overseas (and hence might be expensive to repatriate for tax reasons), they have only been using moderate amounts to buy back shares in the market. Indeed, as Apple generates so much cash, it’s not obvious that the cash pile will significantly come down.

Companies often hang on to cash when shareholders might prefer to see it returned to them, particularly in recent years when the interest rate on cash has been so low. Investors tend to feel that if the company cannot employ it, they can make better use of the cash by reinvesting it elsewhere.

In Apple’s case, one question is whether they could invest more in R&D to expedite new products as the new product pipeline is an issue of late at the company. Will they be able to continue their sales and profit momentum without major new product launches, and soon? They could also of course use cash to make complementary acquisitions to boost profits growth. But the size of Apple’s cash pile is now so large that both of these possibilities would not necessarily make a major dent in it. And in the technology world, you cannot necessarily expedite new product development by spending more money or putting more people on to the task.

Mr Icahn is of course somewhat exaggerating the size of his stake which is only about 1%. Perhaps he just sees an opportunity to promote the merits of the stock via Twitter and by pushing the idea of more cash return that it might bring about a significant uplift in the share price. It has of course already had a positive effect on the share price.

What was not covered in the TV interview is whether market share buy-backs are a good idea in general, or whether the company should consider other ways of returning cash – for example by a tender offer or increased dividends. Usually I am not keen on market share buy-backs because only the sellers in the market benefit, and it can have a distorting effect on share prices.

But as I said in the interview, Mr Icahn not only has to convince the management of Apple that his ideas make sense, but other shareholders also.

Hi All, as a number of people have noted, this is an investment focused site so let's please move on, thanks Admin:

http://help.stockopedia.co.uk/knowledgebase/articles/219816-what-are-the-posting-guidelines-

For the record I cycle regularly in London and rarely watch Newsnight. I say that just to reduce the volume of the likely ensuing rant.

....must be 'borish'  as in 'penetrating' ...?

You say you will resist the temptation to discuss the matter, but then persist in making more borish comments on the subject. I am glad you now consider the matter closed however because I don't like debating with those who insist on having the last word.

Roger

This is not the place for a discussion of the rights and wrongs of national and local transport policy in general or cycling policy in particular. So I will resist the temptation to which you have, yourself, succumbed.

I find your comments on cycling and related matters to be irrational and your manner of expressing them to be needlessly abrasive and confromtational. But having said that, I have no wish to deal with this issue on Stockopedia which is too civilised a setting for the acrimony which would undoubtedly ensue. I will therefore regard this exchange as closed.

T

Obviously a rhetorical question. You can interpret it as your mood takes you.

Roger

Are you being serious? Or is this a wind up?

T

Yes it was me. The interview concerned was 30 minutes of film, which got edited down to only leave the "inflamatory" comments - taken out of context. All the reasoned arguments for what to do about cycle safety in London were left out. As usual the BBC, like most media, were more interested in a good story that an intelligent debate. But the fact remains that cyclists in London are having too much spent on them by the Mayor who has a peculiar love of this mode of transport. After the car-hating Ken Livingstone, we now have the cycle loving Boris Johnson, both playing to their respective audiences of fanatic supporters. Just to spell it out, I have no objections to cyclists or cycling, but they need to be aware of the risks they run on the roads. The accidents to cyclists are going up sharply because cycling is rising (despite the large amounts spent in the last few years on cycle safety measures). The more Boris promotes cycling, the more people will get killed or injured on London's roads which is a point he seems to be ignoring. Some of the measures proposed actually discriminate against other road users, when cycling is still very much a minority mode of transport. Roads should be shared by all road users unless off-road provision for cyclists can be provided - which I would prefer to see. Note: I would not usually want to enter into this debate on a web site devoted to financial matters, but the previous poster clearly deserved a response.

Hi Mark

thanks for the clarification - I just wanted to check in case there is more than one Roger Lawson.

I did not for a moment think that there was any link between Sharesoc and the ABD other than Roger's involvement with both.

I have to say that I thought his public comments targetting cyclists reflected badly on him. At the time I dismissed them as bizarre rantings worthy of nothing more than ridicule. But having now made the connection with Sharesoc I find it rather worrying that someone with such poor judgement is chairing Sharesoc.

regards

T

Might I ask if the Roger Lawson who chairs ShareSoc is the same person as the Roger Lawson who appeared on TV news this week as spokesman for the Alliance of British Drivers? They certainly bear a striking facial resemblance.

The latter Roger has been in the news this week for making apparently inflammatory statements attacking cyclists. Those of us who use bikes would, I'm sure, be interested in knowing more about their critic.

Posted by ShareSoc at 14:39, August 8 2013.

Esure and why you should be wary of IPOs

esure (LON:ESUR) floated in March this year at 290p per share. A couple of days ago the price slumped by 20% after a warning in the interim results that the second half would be much tougher. Other car insurers have also warned about a softening market in this sector.  The share price is now well below the IPO price (247p at the time of writing).

I thought it interesting to look back at what ShareSoc said about the flotation back in February. We ran an article under the headline “Should you invest in Esure?”. ShareSoc never gives outright buy/sell recommendations of course, but here’s one phrase from the article: “they have chosen an opportune moment to do an IPO”. It also pointed out that they no longer appeared to be as price competitive as before and might have been raising their rates prior to the IPO. Indeed the directors did warn in the prospectus, as our article reproduced, that “Although the UK motor industry is at a stage in the cycle where there is and will likely continue to be significant competition in pricing and underwriting terms and conditions over the short to medium term, the Directors believe the Group is well placed to mitigate the impact of this and achieve growth”. It would appear their confidence was misplaced.

Our comments were quite appropriate, were in essence surely “fair comment” and if they communicated a rather jaundiced view of the Esure IPO, perhaps so much the better. But here’s some straightforward investment advice we can give: Be very wary of IPOs. The timing of IPOs is typically chosen by the sellers to be to their advantage - and in this case some shareholders were selling as part of the IPO process.  The prospects of a company are puffed up by the promoters of the IPO as the shares are “sold” to institutional investors and the wider public, and the business can be “adjusted” to show good short term profits in a favourable market climate.

So when you get offered some Royal Mail shares (early next year), just bear those comments in mind – and of course read the prospectus carefully! Royal Mail has been raising prices rapidly to improve profitability, no doubt in anticipation of a public offering which has been talked about for years. What longer term damage this will have on their business has yet to be seen. The prices of stamps can be put up very quickly, but the customers’ usage habits may only change slowly. So this may be another case of an “opportunistic” sale.

Posted by ShareSoc at 09:07, August 7 2013.

Votes against holding meetings at short notice are rising

An interesting article in the latest PIRC newsletter reports that the percentage of votes against resolutions to change the notice period of General Meetings to 14 days has been rising. These are the figures: 2010: 2.78%, 2011: 4.24%, 2012: 5.31%, 2013: 7.4%. It even reports the odd defeat such as at Hammerson in 2011.

It ascribes this change, which it describes as a “pretty innocuous agenda item” as being down to the views of overseas investors. PIRC has reported previously on the rapidly rising holdings of foreign investors in UK listed companies, where they may now well be in a majority based on share register analysis. They suggest that votes are being dominated more by “non-UK concerns”. But surely their interpretation is open to question.

Private shareholders generally oppose a change to 14 days notice from 21 days because they may be absent on holiday or for other reasons. In addition, the use of nominee and trust accounts often makes it difficult for shareholders (even institutions) to vote in time, even if they are UK based - as we saw in the VSA delisting case. A shorter notice period also undermines shareholder democracy on any contentious items because it reduces the time to mount opposition.

ShareSoc has recommended voting against such resolutions as a matter of course as we see little justification for them – see www.sharesoc.org/voting%20at%20general%20meetings.html . Perhaps shareholders are actually learning that these resolutions are not in there interests. The change in the Companies Act from 14 to 21 days notice by default was surely designed to protect shareholders on a pan-European basis and was one of few bits of wise EU regulation. Companies should not attempt to overturn that wisdom.

Shareholders who attend AGMs should always question why they have such a resolution on the agenda. Normally the directors do not have a good answer because they have rarely considered the matter in full.

Posted by ShareSoc at 14:53, August 6 2013.

ISA Statistics – Are individual investors choosing rationally?

Some interesting statistics published by HMRC are those for the number of ISA holders. These figures are published annually and there were 24.4 million adult ISA holders at the end of 2011, with average savings of £14,950. However 16.5m of those were holding “Cash ISAs” only. Does it really make sense to hold such accounts when the interest rates paid on cash ISAs is so little and the tax benefit from lack of tax on the meagre income is so small? It might have made sense when interest rates were higher a few years back, but surely not now.

Some 3.0m held only “Stocks & Shares” ISAs with 4.7m holding both Cash and Stocks & Shares ISAs. In the Stocks & Shares ISAs there were total holdings of £190bn in 2012, but only 16% of those holdings were in shares directly, with the 74% being in Unit Trusts, OEICs and Investment Trusts (the latter being the smallest element of those three). This again shows how unsophisticated most such investors are because investment trusts typically outperform unit trusts and OEICs. Similarly by investing more directly in shares they would save the high expenses charged by many unit trusts and OEICs. A rational investor may want some holdings in collective investment funds, but the balance shows that investors in ISAs apparently tend to buy what they are sold by ISA operators and “platforms” – namely funds rather than direct investment in shares.

Instead of a shareholding culture being promoted by “Stocks & Shares ISAs” what we appear to have is the “rely on the experts” culture promoted by financial intermediaries, to the disadvantage of investment performance.

Posted by ShareSoc at 12:51, August 5 2013.

Invensys and long term holders

The takeover bid for Invensys (LON:ISYS) by Schneider, announced last week, coincided with a report published by a Commons Select Committee that covered the issue of takeover bids of what might be perceived as “national champions” (i.e. large FTSE-100 stocks that have been long-established UK companies and provide significant employment in the UK). The report by the Business, Innovation and Skills (BIS) Committee of MPs was an extended note on the Kay Review and how its recommendations have been progressed by the Government. The Kay Review examined the structure of the UK stock market in some depth and emphasised the short term nature of many investment decisions with high-frequency trading becoming ever more common. ShareSoc made more than one submission to it which are on our web site.

One interesting aspect of the report is its coverage of the Cadbury takeover by Kraft which generated much debate at the time. The report notes that at the start of the bid process, only 5% of shareholders were considered “short-term”, whereas at the end the figure was 31%. After Kraft increased its offer, the board recommended the bid to shareholders as they determined the majority at that time would accept the new offer. Professor Kay suggested that differential voting rights be looked at as a way to protect longer-term holders being forced out by short-term speculators.

The report by the Committee not only suggests that a Financial Transaction Tax be researched which would discourage high-frequency trading, but also looked at the possibility of introducing a rule whereby only long-term holders would have voting rights. Although Prof. Kay concluded that there would be practical difficulties, the Committee wants the Government to examine this again.

There are a number of problems with introducing such a rule. For example, if you recently bought a company’s shares with the intention of holding it for the long term, and then were faced, out of the blue, with a bid for the company you would surely find it rather annoying that you were unable to vote on the issue. In addition it ignores the problem of “pooled” nominee accounts. The suggestion is that you could refer to the date of acquisition on the share register, but many retail investors hold their shares in pooled nominee accounts - what date might apply then? Indeed the problem of nominee accounts which are also widely used by institutions would create many difficulties. In addition, a current holding can be made up of a number of purchases and sales over time – what date would apply?

To break away from the principle of “one share, one vote” surely introduces all kinds of peculiar anomalies. Regrettably the views of this Committee rather confirm the view that politicians have little practical knowledge of how stock markets and share trading currently work. In the case of Cadbury, even the “long term holders” seem to have made a rational decision that the Kraft offer was an attractive one. It’s difficult to defend against rationality.

However it is a report worth reading as it does cover the progress of the Kay Review and a number of other issues. They do have some concerns about the progress. For example, they say “The similarities between the remit of the Kay Review and that of the Myners Review demonstrate that little progress has been made to reform the sector. It is therefore critical that they do not share a similar fate”. The latter means kicked into the long grass by lack of action, and little support from institutional investors. Neil Woodford of Invesco is quoted when the concept of an Investors Forum is discussed, which was one of the Kay Reviews proposals which is being progressed (“Investors are not good at coming together and talking about investment issues. Corralling investors is a bit like herding cats. It is very difficult to get investors even to agree to meet on a particular subject, even if it is particularly egregious”). That is certainly the experience that those involved in shareholder activism have, where getting institutions involved is always difficult – they never want to lead on the matter, and generally do not wish to spend time or money on contentious issues. They would often simply prefer to sell a stock and forget about it so that it is no longer present in their published list of holdings.

The Committee report also covers the issue of the board consulting investors on major decisions such as the appointment of new board members, and ask the Government to clarify the issue of “insider trading” that this creates. As ShareSoc pointed out in our submission to the Kay Review, investors wish to be consulted but don’t want to be given inside information that would prevent them trading, a logical difficulty!

Posted by ShareSoc at 08:46, August 1 2013.

BAE Interims

BAE Systems (LON:BA.) issued its Interim results this morning. Sales increased by only 1%, basic earnings per share down but the share price goes up over 3%.  Presumably that is because of the forecast of "double-digit growth in underlying earnings per share in 2013" in the announcement, subject to "satisfactory conclusion of the Salam pricing negotiations (the deal to sell Typhoons to Saudi Arabia). But this saga has been running a very long time, and it seems deliveries of Typhoons to that country have been resumed. My business experience tells me that delivering anything before you have agreed a price is a basic error, but we will have to wait and see.

Posted by ShareSoc at 10:27, July 29 2013.

Hibu Shareholder Action Group formed

Hibu (LON:HIBU) (formerly called Yell) had its shares suspended last week. The letter from the Chairman on the 25^th July spelled out to shareholders that the lenders to the company are effectively acquiring the business as a result of the planned restructuring and existing ordinary shareholders will have no future interest. At the time of suspension the shares were priced at 0.17p valuing the company at £4 million. Bearing in mind that the last reported annual revenue for this company was £1.6bn (to March 2012, but later reported as £1.3bn to March 2013), you might think it would be worth more. But losses were £1.1bn in 2012, and net debt was £2.2bn. Unbelievably debt had been as high as £4.2bn in 2009.

Shareholders should not have been expecting any better. In December 2012 the company issued an announcement stating that “A number of capital structure options are being considered. The Group can confirm that the options being considered are likely to result in little or no value being attributed to the Group’s ordinary shares”. It has also been made plain that the company has been in breach of its banking covenants for some time, and hence might be vulnerable to demands for instant repayment, which of course it could not make. In essence the company has been under the control of its bankers for some time.

Hibu got in difficulties partly because its traditional business of publishing “Yellow Pages” directories was undermined by the internet, and it did not adapt fast enough. But there were a number of past strategic decisions that compounded the problem and resulted in the excessive debt.

Some ordinary shareholders are not willing to accept this fait accompli and have formed a “Shareholder Action Group” (you can find their forum quite easily on the internet). They are threatening legal action as they blame the current directors for ignoring their interests.

Comment: Shareholders surely needed to take action a lot earlier if they thought the directors were not acting in their interests. It is likely to be enormously difficult to change matters now because the bankers can dictate to the directors what they will do, under threat of pulling the plug and forcing the company into administration. Shareholders would likely see nothing in that scenario either, but the bankers might also be worse off so it may have been possible to force some recognition of the interest of ordinary shareholders. But was there any alternative refinancing or restructuring possible in this case that would have kept the company afloat? That is the question shareholders should ask because otherwise they may was well accept the inevitable.

It seems the restructuring will be done via a scheme of arrangement, which shareholders will need to vote for. No doubt there will be threats of “if you don’t the company will go straight into administration and you will lose everything anyway”.

The Action Group are requesting the share register with a view to requisitioning an EGM (presumably with the objective of changing the directors) but it will be a difficult fight at this late date.

The lesson for non-Hibu shareholders is quite simple. Never invest in a business that has more debt than sales because interest on the debt is likely to be similar to the net profit margin on the sales.  Indeed debt needs to a fraction of revenue, particularly if revenue is declining. The other moral is be very wary of investing in businesses in declining industries. However brilliant the management, the apparent value of assets, and the current profitability, it’s generally a downhill path.

Posted by ShareSoc at 08:49, July 24 2013.

Renishaw – No more chats with the CEO

Renishaw (LON:RSW) made a rather unusual announcement this morning, in their preliminary results. The results were somewhat disappointing – e.p.s. below analysts’ forecasts and down on last year. The share price promptly dropped about 7% although it had been heading downhill since January. But the interesting item was a “new investor communication policy”.

What the detail said on this was “During the year the Board has reviewed its policy on communications with shareholders and the analyst and investor community. The Board will provide all shareholders with information at the same time, in the same forum or medium, and ensure that the level and quality of information provided is significantly enhanced.

As a consequence, no private meetings will be held by directors with investors, potential investors or analysts, however, shareholder meetings with the Chairman, the Senior independent director and/or any other non-executive director may be arranged where a shareholder wishes to communicate their views.

The corporate website is being significantly expanded. The Group's year end and half year results will continue to be delivered by way of webcasts with time allowed for questions and answers.  In addition to the AGM, normally held in October, at which company presentations and tours are arranged, a corporate shareholder and investor day will be held annually in May.”

Private shareholders might welcome this new level playing field for all investors (so long as they can attend the “investor day” in May, which is not clear).

This announcement may create some interesting questions at the AGM, such as “what prompted this new policy”? Were leaks taking place that drove the share price down in advance of the results, for example? Or are the executive directors just too busy to talk to investors?

Posted by ShareSoc at 08:20, July 22 2013.

Elementis and Gulf Keystone Petroleum – Comments on board changes

This morning both Elementis (LON:ELM) and Gulf Keystone Petroleum (LON:GKP) announced some board changes. At Elementis the retirement of Chairman Robert Beeston was announced. This may not be surprising to those who attended the last Annual General Meeting of the company, or read our report on it (available from the ShareSoc Members Network). Indeed I did suggest at the end of the meeting to one of the other directors that it was time they looked for a new Chairman.

This was not solely because Mr Beeston had rejected my complaints about the company moving to a poll for all resolutions, and in the process misled shareholders on the merits of this move, but mainly from his performance in managing the meeting. As the headline of the AGM report read, a “surprisingly bad performance from the Chairman”. Telling one shareholder to “shut up” and to another it was “none of his business” how old he was, did not enamour him to the audience. This is a good example of how AGMs, and what is said at them, can perhaps influence what the board of a company does. It would be wrong to perceive AGMs as moribund institutions that have no purpose.

I covered the issues at Gulf Keystone (GKP) in a blog post on the 9^th July. Shareholders led by M&G had put forward resolutions for the AGM to appoint 4 new non-executive directors, including one person (Jeremy Asher) who had previously been ejected from the board after complaining about the remuneration policies. On the 15^th July the company issued a note pointing out their perceived defects in the proposed candidates, such as the “lack the requisite skills and track record”, that Mr Asher’s shareholding of 1.7% made him non independent, that it was inappropriate to appoint someone (Mr Asher) who had previously been a disruptive presence on the board, the track record of another proposed director (Mr Dimmock) at Equator and elsewhere, and numerous other negative comments on the backgrounds of the M&G candidates. It was the typical “hatchet job” one sees when a company is opposing an independent resolution.

But today, all is sweetness and light. The board has effectively conceded defeat and are now supporting the four new candidates, and two other non-executives up for re-election are now withdrawing. Simon Murray, the recently appointed Chairman, who now also gets the support of M&G for re-election, said “I am pleased the unity of purpose has been restored…..”.

Whether the candidates put forward by M&G were the best available may be debatable, but at least there has been a quick resolution of the matter. It may at least avoid the necessity for shareholders to go to Bermuda for the AGM.

Posted by ShareSoc at 09:43, July 20 2013.

VCT reports and Treasury Consultation

There are three reports of General Meetings at Venture Capital Trusts just posted on the ShareSoc Members Network. These are for Northern, Northern 2 and British Smaller Companies – all with good historic performance and paying high dividends, which are of course free of income tax as are all VCT dividends. The question of performance fees, and those based on dividends were some of the contentious issues debated.

It was pointed out by one of the fund managers that the Treasury has just issued a public consultation on the subject of share buy-backs in VCTs which is here:  https://www.gov.uk/government/consultations/venture-capital-trusts-share-buy-backs .

Enhanced share buy-backs, where investors sell and buy-back their shares to reclaim another set of tax reliefs are likely to be killed off. But there are also proposals in respect of dividend reinvestment which may get stronger opposition. Any VCT investors or ShareSoc Members who have views on this subject should contact ShareSoc as we are likely to submit a response to this consultation on behalf of our Members.

Posted by ShareSoc at 09:44, July 17 2013.

When an AIM delisting is not a delisting – Avia Health Informatics

Only yesterday I reported on the case of SocialGO - a company that is moving its shareholders into a private company, but retaining its AIM listing to use for other purposes. Today there is another example in Avia Health Informatics (LON:AVIA) . Like SocialGO, it never seems to have established a viable business, has had numerous fund raisings and its shares are currently suspended. At least it has spelled out its financial position very clearly (namely dire) and why the shares are suspended (unlike Silverdell (LON:SID) , another AIM company whose shares are suspended pending clarification of its financial position).

Now it is proposing to de-merge the existing operating business into a private entity, with existing Avia shareholders receiving shares in that on a pro-rata basis to their holding in Avia. This would be combined with an injection of capital from a third party.

Is this the latest clever wheeze to avoid a shareholder vote on delisting, or is it simply a way to avoid high legal and other expenses?  Will we see more of these transactions? It might at least improve the AIM market statistics in terms of companies leaving the market.

Posted by ShareSoc at 11:02, July 16 2013.

SocialGO gives up as a listed company and transmutes into Tavistock Investments

SocialGO (LON:SGO) listed on AIM in 2004 at 90p, and later the share price peaked at £2. Yesterday it fell to 0.1p after the company announced it was becoming a private company. But for some not very clear reason, instead of simply delisting they are moving their business activities into a new private company (in which existing shareholders will be offered shares pro-rata), and the existing listed company will become an investment vehicle (i.e. a cash shell presumably, at least initially). The company will be renamed Tavistock Investments to reflect this change. However the company does not have much cash at present, as they have just raised £200,000 via a placing for working capital just to keep afloat. The placing was at a discount of 80% to the previous closing price, which will no doubt not have pleased minority shareholders who could not participate. But perhaps they might not have wanted to after past events. 

The history of this company is an interesting tale for all those who invest in AIM companies, and one I have been keeping an eye on for some time without ever investing in it because in the last few years it has been selling a “social networking” web service – effectively giving users the capability to build their own social network site. ShareSoc actually uses their main competitor to provide our “Members Network” web site. Great concept, that surely lots of organisations need, but not apparently saleable at a profit (I doubt their major competitor is making much money either).

It’s worth noting (as I just discovered) that if you type in SocialGo to Google, the competitor actually appears at the top of the list because they have obviously paid for keyword advertising on that word. They should not have been able to do that if SocialGo was registered as a trade mark because it would be contrary to Google rules (as well as trade mark law of course). Indeed it appears to be registered as a trade mark owned by SocialGO so why they are not enforcing their rights here is unclear. But it is some evidence that they really have not got the basics of running a web focussed business right. Having your main competitor come up ahead of you on a Google search must be quite damaging commercially.

Needless to say the company has never had any substantial revenue (last year it was £0.57m) and losses have always exceeded revenue (last year it was a £1.54m loss).  As the announcement says, the business “has not flourished” in a number of commercial guises. When it listed it was developing an interactive educational children’s toy. No doubt the history of SocialGO will have been very educational for some investors.

Note: the proper registration of a company’s trademarks is often a good indication of whether it has got some of the business basics right – which is why it features as one item in the ShareSoc AIM Scorecard (see www.sharesoc.org/scorecard.html) . This contain: “Question 31. Are the company’s main products/services, and is the company name itself, all covered by registered trade marks? (which can easily be checked on-line)”. AIM investors would find it useful to run through that checklist before investing in a company.

Posted by ShareSoc at 13:11, July 15 2013.

Templeton Emerging Markets IT AGM – more excitement than expected

Templeton Emerging Markets Investment Trust (LON:TEM) is a well known investment trust, probably one of the largest of those who focus on emerging markets, and has a good long term track record. At the AGM on Friday the 12^th July, no particular excitement was expected as such meetings at large investment trusts tend to be rather uneventful, if educational, events for shareholders.

After the usual witty presentation from fund manager, Mark Mobius, we moved onto questions on the formal business of the meeting. Eric Chalker pointed out that the company had spent £11m last year on share buy-backs. He said that although he was generally supportive of buy-backs, he would be voting against this year, because it’s a reduction of the capital for investment. He suggested the company should be preserving its capital. The answer he got from the Chairman (Peter Smith) was that this is a complex issue and the board is taking a long term view. He said the board wanted to provide modest assurance to shareholders that when they want to sell, they won’t face a large discount. 

This is an issue worthy of more consideration because it comes up regularly at VCTs where buy-backs are often commonly used to maintain a minimum of liquidity in the shares. Indeed there is often not a lot of liquidity in many investment trusts (investors tend to buy and hold, rather than trade them), so the share price can diverge from the underlying value. There are always some shareholders who need to sell in a hurry due to financial distress, or their executors wish to sell shares, so it is best that the discount does not become too wide. If the share price of a trust goes to too wide a discount to net asset value (NAV), ShareSoc has argued that there should be some discount control mechanism instituted to try and reduce it (see our campaign on Graphite Enterprise for example where the discount exceeded 30%). Share buy-backs are one method, tender offers and increasing the dividend are others.

Share buy-backs in investment trusts also increase the net asset value per share (because the company is buying assets at a discount to market value), and the earnings per share. Indeed some see it as a “risk-free” investment opportunity with a guaranteed return. Of course it does reduce the overall size of the fund, but what matters to investors is their portion of the overall fund and so long as the fund manager is not having to dispose of holdings at an inappropriate time, and the buy-backs are not too large, it usually has no significant influence on their ability to manage the fund. So in reality, if kept in reasonable proportion, it should be beneficial.

One of the motivations I have seen in the past for those who speak against investment trust buy-backs is the desire to pick up shares at a large discount – effectively buying assets on the cheap. This only works of course if there is some subsequent realisation of value, or rebound of the share price.

Note that I am not arguing here for buy-backs in trading companies, which are another matter altogether and where companies can usually get a better return by investing in their business. The motives for buy-backs in such companies may often be very dubious.

When it came to a vote on Resolution 15 on share buy backs the show of hands vote initially looked like it was defeated (which would have caused a poll to be taken). The initial count gave 15 FOR versus 9 AGAINST (and this resolution required a 75% majority which would have meant defeat). But after two more recounts, the final figure was 21 FOR to 7 AGAINST.  Why so few people in the room of about 100 people put their hands up is not clear.  The board need not have worried because the proxy votes were overwhelmingly in favour, but at least the time required to conduct a poll was saved.

Note there is a much fuller report on this AGM on the ShareSoc Members Network, along with others on a couple of the Maven VCTs, and Tesco. We provide these as a useful service to members.

Well I certainly agree with you that this is a complex case and there are allegations being thrown about by everyone involved. The latest announcement from GKP makes particularly interesting reading. But the key point I was trying to make is that once a non-executive starts disputing what his colleagues wish to do, then he is often thrown off the board in fairly short order. In other words, because non-executives are appointed, and can be removed by other board members, it inhibits any contrary views being forcefully put and hence we have the kind of "groupthink" that is so common (and was the source of the problems at RBS and many other companies). Now you might argue that "consensus" is important, but also active debate is also. Dominant executives (and GKP seem to have one), tend to suppress debate when they should accept it as a fact of board life that not everyone will agree with them. Boards can of course vote on contentious issues to resolve conflicts, and they should do that rather than try to achieve unanimity on every issue.

M&G are unhappy apparently with the corporate governance at the company, and the excessive pay of Chief Executive Todd Kozel who received $13.6m in total remuneration plus $9.1m in deferred cash bonus in 2012. The company had revenues of $32m last year but a pre-tax loss of $80m. The Telegraph noted that a former non-executive director, Jeremy Asher (one of the M&G nominees) had been ousted in 2010 after what he characterised as “a confrontation with Mr Kozel and other senior managers over their proposed compensation arrangements”

Do you think it is good corporate governance for a 5% shareholder to parachute in 4 NED's, most of whom are clearly not independent, nor possessing of the skill set of a FTSE company??? Some of the work profiles of the 4, especially Asher and Dimmock leave ALOT to be desired.

Additionally has it been proven that Asher was kicked off the board because he disagreed with the remuneration being proposed and not, as GKP BOD have said, because he was a disruptive influence? His approaching of the Competent Authority of Kurdistan, without recourse to GKP, illustrates that. The KRG has apparently stated it does not want Asher on the BOD, nor does it want to work with Asher in any capacity.

The Corporate Governance / TK pay is a smokescreen. The timing of M&G's move itself is highly suspicious given how close it is to the Court Case judgement. M&G's modus operandi is questionable as well given they met JG in early June but did not mention their NED nominations at that time....one wonders why if one has the ear of management they kept their own counsel....

More to this than meets the eye that's for sure.

Posted by ShareSoc at 09:28, July 9 2013.

What happens when a non-executive director disputes pay?

What happens when a non-executive director disputes the pay arrangements at a company? In essence he is usually soon out of a job. The Daily Telegraph reported today on the case of Gulf Keystone Petroleum (LON:GKP) where M&G are trying to get four new non-executive directors appointed at a forthcoming AGM.

M&G are unhappy apparently with the corporate governance at the company, and the excessive pay of Chief Executive Todd Kozel who received $13.6m in total remuneration plus $9.1m in deferred cash bonus in 2012. The company had revenues of $32m last year but a pre-tax loss of $80m. The Telegraph noted that a former non-executive director, Jeremy Asher (one of the M&G nominees) had been ousted in 2010 after what he characterised as “a confrontation with Mr Kozel and other senior managers over their proposed compensation arrangements”.

The company has recently appointed a new non-executive Chairman, Simon Murray, an oil industry veteran aged 73. The announcement of his appointment declares 43 other directorships that he currently holds. Perhaps no need to point out that would definitely rule him out from consideration based on the ShareSoc guidelines for such roles but at least they will have a non-executive Chairman now when previously Mr Kozel acted as Executive Chairman. Field Marshal Lord Guthrie is Chairman of the Nominations Committee.

The AGM is on the 25^th July, but if you wish to go, it is worth mentioning that it is in Bermuda where the company is registered.

The key problem here is of directors determining their own pay and appointing themselves, as ShareSoc has said before. The fact that some of the directors are in nominally independent remuneration and nomination committees does not help when they know they can be ousted if they don’t please the Chairman or dominant Chief Executive. Likewise it’s hardly in other directors interests to bring pressure to bear on excessive remuneration because they are on the same gravy train. This system needs substantial reform, as ShareSoc has suggested in the past, with fully independent committees determining those matters. Shareholders can only control pay in extremis by their votes, but this may be one such case where they might have an impact – we have yet to see.

Posted by ShareSoc at 12:52, July 6 2013.

Silverdell and the dangers of AIM

On Tuesday the 2nd July, Silverdell (LON:SID) issued this somewhat bare RNS announcement: “Silverdell has requested a suspension of its shares from trading pending clarification of the Group's financial position.  Further announcements will be made as and when appropriate.”, and that was all. No further news has yet been forthcoming, so the following is based on what little is known at this point in time, but those kinds of announcements usually forebode very bad news.

Interestingly, I and a number of other ShareSoc members attended presentations by this company recently (at Mello and other meetings). I looked at it and decided I did not like the financial profile – very low net margin, poor return on capital and questionable cash flow. I also did not like the business model and could not see what they were offering that their competitors could not (i.e. no obvious pricing power and few barriers to entry).

After the above announcement, the company got heavily debated on bulletin boards such as ADVFN and Motley Fool. Some very useful information did get posted there in due course, but a lot of the commentators seemed to think it was a minor hiccup, and all will come good in the end. I am very sceptical it will.

Here’s some of what was revealed. Apparently a subsidiary of the company (Kitsons Environmental Europe Ltd) was the subject of a winding-up petition on the 13^th June (a court process), presumably because it had not paid some debt owing. Now this is not necessarily a serious thing – I remember that many years ago a public company where I was a senior manager received such a petition when they could clearly afford to pay some money owed to a supplier, but had been dilatory in doing so. A winding-up petition can be relatively low cost legal process to force the issue, and they certainly got paid promptly in that case. However, it seems Kitsons may have paid the amount due but did not appear in court to contest the petition, so it was passed and the company is now in administration (administrators Zolfo Cooper according to an article in Construction Enquirer). I am relying here on multiple posts on bulletin boards and the company does not seem to be willing to respond to questions on the matter, but it appears fairly certain this is the gist of the matter.

The company (i.e. parent company Silverdell) made no announcement about the above which you might consider fairly unusual. Why not?  It’s also somewhat unusual not to have a “suspension announcement” without more details being supplied, at least within a few days. As a result of this uncertainty a lot of people have been poring over the past accounts of this company and asking a lot of questions.

The view of the company’s bankers is of course key to what happens next. Is the banks mandate breached, and do the assets continue to cover the debt? Is more finance required to keep it afloat? Perhaps we will soon find out. But it is quite possible that the company might be forced into a fire sale of assets, an emergency equity fund raising (i.e. a placing that will dilute minority shareholders), or the bankers might suggest a “pre-pack administration” where operating assets are quickly sold off and shareholders are left with nothing.

However you look at it, if or when the shares are allowed to trade again (and many companies never come back from “suspension” at all but effectively go bust) then the share price might be rebased a lot lower because of the uncertainty about the future, the questions on past accounts, and the lack of confidence in the management that this has engendered.

This sequence of events is not uncommon in AIM companies and just shows the dangers for investors who may not be experienced in evaluating companies. But now AIM companies are to be allowed in ISAs which is the typical starting point for new stock market investors in the UK. ShareSoc did suggest some additional warning be given to such investors about AIM shares, but the Government said no in essence. So the old phrase applies to AIM shares - “caveat emptor” even more than it does so to main market shares.

Note: I am not trying to put off people from investing in AIM shares, just encouraging them to do a lot more research on them before they invest. Meeting the management at company presentations and hearing what they say in response to questions, is one very good way to improve one’s knowledge about a company which is why ShareSoc promotes such events.

Posted by ShareSoc at 19:23, July 2 2013.

AIM company puffs – Blur Group

This is what Blur (Group) (LON:BLUR) issued today in an RNS announcing a new R&D centre:

“This move by blur Group, one of the most successful recent Tech IPOs in London, shows a commitment to a region which with 4 of the country's top 20 universities, a track record in innovation and entrepreneurship and where start-ups have attracted more than $550 million in investment and returned more than $800 million to shareholders, shares many characteristics with the original Silicon Valley and is in a prime position to become the UK's leading tech region.”

In addition the CEO Philip Letts said: “Choosing this location was very straightforward. ..one ingredient that everyone overlooks in finding the next Silicon Valley was pointed out to me on the first day of my tenure in the Valley - and is very prevalent here - the sea."

Can you guess where this new R&D Centre is to be located? Perhaps not. The new R&D Center is to be in Exeter.

Top marks to Mr Letts for the florid prose, but investors in this AIM company should perhaps read the AIM prospectus on the company before getting too enthusiastic – available from their web site of course. It makes interesting reading.

Posted by ShareSoc at 08:47, July 2 2013.

AIM Shares in ISAs – Government to push ahead, but investors beware!

The Government has published a summary of the responses to the consultation on “ISA Qualifying Investments” and has decided to push ahead with implementation. Legislation will be laid before Parliament this month.

There were clearly a number of concerns expressed by respondents on the quality of AIM companies and their regulation. We pointed out these issues in our own response (see below), and in addition noted the problem of the frequent delistings of AIM companies and asked for a change in the legislation to protect investors in such circumstances.

The Government’s response on these issues can be summarised in this statement:

Overall, the Government does not consider that any new safeguards – in addition to those within the current regulatory framework and ISA rules – are necessary as a result of its proposal.

And they also said:

The Government recognises that all stocks and shares investments carry a degree of risk and believes that investors should make sure they fully understand the risks involved before investing. The Government also recognises the need for investor protection safeguards to be in place, such as the existing conduct of business standards for ISA providers and the requirement to conduct suitability assessments of clients before recommending investments.

 This of course ignores the fact that many ISA “self-select” investors take no advice whatsoever.

So in summary, investors beware! Indeed the Government specifically rejected the suggestion that investors be warned about the higher risks of investing in AIM shares, so yet again we have a basic lack of understanding on how the markets operate from the Government.  

ShareSoc also raised the problem of the effective disenfranchisement of ISA investors with many stockbrokers not providing easy to use voting or information rights to the beneficial owners (or even information on their availability). The Government’s response was “contact HMRC for advice on the relevant rules”. That is not helpful at all.

I am sure ShareSoc members will welcome the inclusion of AIM shares in ISAs, but we might need to take on the task ourselves of educating investors on the risks of investing in many AIM shares. 

The submission to the Government consultation by ShareSoc is present here: www.sharesoc.org/ShareSoc_AIM_Shares_in_ISAs_Consultation_Response.pdf)

The Government’s summary of the consultation and their response is present here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209879/isa_qualifying_investments_summary_of_consultation_responses.pdf

Mark I know very little about Gold miners so have steered clear of what looked like a huge bubble. I'm not sure fundamentals will make much difference though as traders and chart pickers dictate where the price goes.

Maybe you can tell me does is the Bloomberg figure of average $1,200/oz include some sort of cappex/depreciation charge or is this all oppex? The reason I ask is that surely mines won't be mothballed if for example they've sunk $1000/oz in as cappex and now are running at $200/oz oppex.

Log

According to Bloomberg this morning, the average total cost of mine production is now $1,200/oz.

“In the long term it will provide big support, but in the short term it won’t really make any difference at all,” said Charles Morris , who oversees about $2.2 billion at HSBC Global Asset Management in London , referring to production costs. “I’m still bullish long term, but I just think we’ve got a big nasty bear market in the meantime.”

ISTM that in the long term the price needs to average $1,400+ if mine supplies are not to shrink (unless miners' costs fall). Short-term, I guess price behaviour will depend on when gold investors/speculators realise that the current price is unsustainably low and that it therefore represents a bargain.. Contrary to most opinion I read, it is possible that we have now seen the bottom - but I'm not counting on it!

Gold is peculiar as a commodity because very little of it is consumed: most of the gold produced is still in circulation. Hence a complicating factor is that for short-term supply/demand, mine production is only a small contributor. Scrappage of jewellery  is a bigger source of supply, short term.

Posted by ShareSoc at 07:57, July 1 2013.

Gold and Gold Miners – should you bail out?

With the gold price falling to its lowest level in three years, it has prompted some thoughts on the subject of whether you should be holding gold or gold mining stocks. Clearly the latter’s profits are very sensitive to the price of gold, and one question to ask is whether at $1,200 some mines might be marginal if not loss making.

Of course it’s not just gold that has been falling but other metals also, leading some to claim that this is the bear phase of a commodities super-cycle. As a result, mining stocks in general have been battered in the last year. So those cautious folks who invested in commodities and mining investment trusts, unit trusts or OEICS have performed very poorly against wider stock market indices. There are of course a number of reasons why all mining stocks tend to be cyclical, and a particular problem of late has been the reduction in Chinese demand. Metals can be stockpiled but gold of course is expensive to “hold” as a physical asset.  Meanwhile production is relatively inflexible – new mines of all kinds take a long time to get into production and finding new sources of ore also takes time. Gold mines are particularly problematic in that regards because folks have been searching for gold for millennia so there are few unexplored gold bearing areas. Indeed its very scarcity has always made it a useful currency analogue – it’s expensive to extract from the ground, not easy to replicate by alchemy and it’s easily identifiable.

But the particular problem with gold is that the spot price for gold is driven to a large extent by speculation – at least that is what many people allege. Indeed there are as many explanations as to how gold should be valued as there are pundits. As there is no yield from investing in it, determining a fair value is difficult. So chartists, technical analysts and momentum traders predominate in the commentaries on this subject. Needless to say most of these folks are bearish at present – “negative technical trends” and “broken below resistance levels” are typical comments.

Here are a couple of useful comments from gold bulls though: “A gold price decline or increase by 5% barely has an effect on physical possession, since probably only a share amounting to tenths of a percent of the total available stock changes ownership. The paper market by contrast consists of countless promises issued by a vast variety of counterparties.” and “According to an LBMA study, total trading volume in 2011 amounted to 50 billion ounces. That is 600 times annual production.” (source: “In GOLD we TRUST 2013 – Incrementum).

Some people consider that you should hold gold as an insurance against financial disaster (or mismanagement of the economy, excessive debt and the risk of rampant inflation), or as an asset that has a low correlation with other assets. But you need to be very stoic in outlook to stick with gold when the sun is out, the economy seems to be improving and the gold price is falling off a cliff. With no yield, this is why gold holders tend to panic and run for the exit when a consistently falling price trend is identifiable.

The problem with all of this debate is that trying to predict the price of gold is as difficult as predicting how the economy will perform. Indeed it’s probably more difficult, as it’s even more affected by rumour and expectations and probably reacts more slowly to demand and supply factors. There is one thing that they have in common though: both can be directly affected by Government interventions as gold is stockpiled by national Governments.

It seems to me that there is only one conclusion to be drawn – that you should probably assume that the best forecast of what the gold price should be is likely to be the current spot price – that certainly works in the economic sphere after you have added some long term trend and inflation adjustments.

Now let’s just consider the position of gold miners and it’s no secret that the high price of gold in the last couple of years has driven a lot of new exploration and the development of new mines. Some of the new mines may already have become uneconomic if the gold price does not bounce back up (that’s particularly so bearing in mind that expected yields are often lower than forecast and unexpected mining difficulties often arise – and that’s ignoring the political and other risks in parts or the world where gold mines are commonly located). So when looking at producing gold mining companies the key factors are the costs of their production and the business related risks they are facing in future.

You probably don’t need to be told that gold exploration companies and those whose mines are still to be developed are particularly likely to suffer. These companies may simply become worthless as nobody will be willing to finance development of the mines at a lower gold price, or take the risk that the price will fall further and make them uneconomic.

But as regards existing producers, it is necessary to take a long term view because the price of gold will surely rise in the long term, but the prognosis for the next month or year is not something anyone can predict. At $1,200 per ounce most established gold mines will still be profitable, even if not as profitable as they might have been at a much higher gold price. For example, Pan African Resources announced only this morning the first production from a re-treatment plant that has estimated costs of $800 per ounce.

Now all those gold buffs out there will probably consider this analysis to be simplistic, or simply wrong. Do send in your own views on this subject.

But bear in mind that it’s very easy to fall in love with gold, and with gold mining companies – even more so than with other investments. I have seen this in the past too frequently.

Posted by ShareSoc at 17:02, June 28 2013.

Latest Tesco offers – 2 for the price of 3, and Nigerian Guinness

Yes you can learn a lot from going to AGMs, and the above is some of what you can now buy in Tesco (LON:TSCO) according to shareholder comments at today’s Annual General Meeting (AGM) of the company.  This is a very condensed version of the full report that is present on the ShareSoc Members Network.

Readers do not need reminding that Tesco has had a set of quite dire results recently. It’s worth picking out some highlights from the management-speak of the Chairman’s Statement in the Annual Report: “We will continue in 2012/2013 to address long-standing business issues…”, “laying the foundations for sustainable future growth”, “the capacity to name issues is the essential first step towards addressing them”, “a willingness to face up to tough decisions….” And “Some of these decisions had painful short-term consequences”. It’s all very depressing is it not?

The Chairman, Sir Richard Broadbent opened the meeting. Comment: he acted and spoke like a civil servant which is what he was in former career. Sir Richard said that it had been an important year for Tesco. The CEO has been addressing some of the business issues. There is a need to re-orient the business to a rapidly changing world. Some decisions, e.g. the US withdrawal, and UK retail space decisions, have created substantial losses. The real work is now beginning. We are focussing on putting the customer first (comment: what retailer does not say that?). He continued by saying they are doing what the customer wants, and it will not necessarily generate a short term return. A focus on quarter to quarter earnings is inappropriate. In future Tesco will consume less capital, with a target ROCE or 12% to 15%. There is a commitment to future dividend growth. There is a new executive committee (Comment: an unbelievable 17 people according to the Annual Report), a new UK leadership team and a smaller board of directors (down to 11 people now), with a higher proportion of non-executives.

The audience was then shown a video which talked about multi-channel retailing, about making shopping a “leisure activity” and that Tesco wants to make shopping “exciting”. Comment: not convinced that is what shoppers want – surely founder Jack Cohen had it right when he said “stack em high and sell em cheap”.

The CEO, Philip Clarke, then spoke. He said the world is changing, and “we are part of that change”. He had never seen such rapid change before in his long retail career – and it’s exhilarating. Mr Clarke restated the company’s core purpose – Tesco exists to make things better for our customers, our community, et al…..

Questions were then invited. I’ll report only a few of them as FTSE-100 company AGMs tend to be dominated by speakers who wish to grandstand, make political or social points, they often ramble, don’t come to the point and generally waste the audience’s time. Questions took well over an hour and the Chairman did not do a good job of making speakers be brief.

One lady asked why Tesco was selling Nigerian Guinness when she knew it was brewed in Dublin. The CEO said there was a growing demand for the Nigerian version of Guinness in the Afro community – apparently it is much sweeter. Therefore they stock it in some stores, but they always stock both kinds.

Shareholder and Tesco employee Ann Carter, asked about shrinkage and wastage which she considered too high. Could the company improve it? (Note: “shrinkage” is the euphemism for staff nicking the stock, or “browsing”, in the retail trade). The CEO said they are likely to return to independent teams doing stock audits. Comment: astonishing they are not doing this from my experience of the retail trade.

Another shareholder asked about why Tesco was offering “2 for the price of 3” in her local store on a preprinted label. Even the store staff could see nothing wrong with it. This generated some laughter.

There was a question on why Tesco sells lad’s magazines. The Chairman said he went to one of the company’s stores recently and bought such a magazine, and was “startled”. Times have changed. He said they will try and respond on this.

The votes on the resolutions were then taken using voting machines so that the results could be announced at the end of the meeting. Note: this is very good practice and if a poll is to be done as a matter of course, this is the best way to do it. Almost all votes “FOR” exceeded 90%, with 95% for the Remuneration Resolution (I voted against), 96% to re-appoint the auditors (a surprisingly amount of opposition), 91% to authorise the directors to allot shares (again unexpected), only 95% in favour of political donations, and only 88% for the change to 14 days notice of meeting (I voted against as normal).

In summary a somewhat tedious and depressing meeting, although the company strategy seems sound. But “retail is detail” as others have said. It’s all about execution and it is not clear whether the company has yet got back on track versus its competitors. You may judge that better by doing your regular shopping in Tesco stores and forming your own view. 

Posted by ShareSoc at 09:39, June 27 2013.

A moral dilemma raised by British Smaller Companies VCT

Yesterday ShareSoc issued a press release advising shareholders to vote against a change in the manager’s fees at Northern VCT which would increase the fees paid to the manager. Today I received a notice of the AGM of British Smaller Companies VCT (LON:BSV) who changed their management fee in 2009. I objected at the time because it was clear it would raise the fees paid substantially and so it turned out to be. The new performance fees were based on dividends paid and this is what I wrote to the Chairman, Helen Sinclair in July 2012:

“Although the performance of the company has been satisfactory in many regards, in the last few years, the new management incentive arrangement that I wrote to you about back in 2009, has clearly had the perverse effect that I expected.

Namely that we now have very high management fees being paid (total expenses were 6.6% of net assets last year) because of the revised management fee structure put in place at that time.

In addition because the fees are based on dividends paid, there is a strong incentive for the investment manager to advise that high levels of dividends can and should be paid. In fact, in the last year, earnings per share were 2.92p, but 23p was paid in dividends (i.e. almost 8 times so the dividend is very obviously not “covered” by earnings). So I have voted against the dividend resolution.

Although shareholders may be happy to receive very large dividends (effectively being paid out of capital), they perhaps do not realise that this results in very large payments to the fund manager because of this daft incentive scheme you put in place.”

Guess what is in the latest AGM notice? It transpires that the dividends paid during the year ending March 2012 were done illegally because although the company had sufficient distributable reserves (which need to cover dividends paid), the necessary interim accounts reflecting this had not been filed with Companies House. So shareholders are being asked to approve a resolution that retrospectively ratify the payments, absolve the shareholders who received them from liability and release the directors from any claims.

The company is of course arguing that this is purely a technical oversight, and it is not the first time I have seen such resolutions – it’s happened at least twice before in companies I hold. Perhaps readers could advise me whether I should vote against it on the basis that in my view the company has been paying excessive dividends anyway and I voted against the 2012 dividend?  Or should I rubber stamp this administrative cock-up?

However, I will certainly be voting against the re-election of the directors because yet again the dividends in respect of the last year (of 6.5p) exceed the earnings per shares of 2.8p. So the company is continuing to pay out more in dividends than it has obtained in profits. So I will certainly be voting against the directors of this company who adopted the peculiar and inappropriate management incentive arrangement and wish to pay these excessive dividends. I may also need to vote against the dividend payment resolution again which no shareholder likes to do.

But at least the overall management and administration costs were not high last year at 2.7% of assets at the year end, mainly because the management incentive fee fell very substantially.

Posted by ShareSoc at 10:40, June 25 2013.

Northern Venture Trust – Shareholders recommended to vote against new performance fee

Venture Capital Trusts (VCTs) are one of the stock market oddities, and Northern Venture Trust (LON:NVT) was one of the first to be launched back in 1995. It was launched without a fund management performance fee in place but they are now proposing to introduce one. ShareSoc advises shareholders in this company to vote against the resolution to approve the change in the management fee at the forthcoming General Meeting to approve the change.

The existing management fee is a fixed 2.06% of the net assets. The board of directors is proposing to add an incentive fee of 15% of the total return (net assets growth plus dividends) subject to a “hurdle”. The hurdle is defined in a rather complex way but in essence is 7% on investments except for cash, with the latter being 3%.  There is no proposed cut in the fixed fee to compensate shareholders for the reduction in the returns they will receive in future.

What will those reductions be? The company gives the figures for what the fee would have been in two prior years if such performance fees applied, and they would have added 0.88% and 0.31% to the charges payable. It is likely therefore that it might imply on average a figure of 0.5% in additional fees.

Shareholders in VCTs are probably already aware that they pay very high total charges in comparison with most investment trusts. For example, last year the total expenses (administration and fund management fees) of Northern were 2.6% of net assets at the year end. So this might rise to 3.1%. Indeed that is the figure charged last year by Northern 2 VCT (LON:NTV) which already has a performance fee at a somewhat lower rate. So it might be higher than 3.1% overall.

Now Northern Venture Trust has a very good performance record unlike many VCTs. The board argues that other VCTs commonly have performance fees, it will align the manager’s interests with shareholders and the need to remunerate the managers investment executives in a competitive marketplace. But why should shareholders approve a change in the terms on which they subscribed for shares in this company?

If the company has been run competently and successfully for the last 18 years with the existing fee arrangements in place, why should it be changed?

Comment: Unfortunately there is no evidence that performance fees in investment trusts actually improve performance so really it’s just an excuse to raise the pay of the fund manager to the prejudice of shareholders. This is surely a symptom of the fact that VCTs are often run in the interests of the fund managers rather than of the investors. Has any VCT fund manager ever resigned his mandate because they considered they were not paid enough? Not to my knowledge.

Shareholders should ignore the sweetener of the special dividend and vote against this proposal.

Posted by ShareSoc at 14:40, June 24 2013.

Money buys influence on financial regulation

Fed up with reading stories of our Members of Parliament selling their favours? You may not be surprised to learn that a lot of money is spent by fund managers, banks and other financial institutions to try to influence the EU regulation of financial markets (from where most of the regulation now emanates). The FT reported that “Blackrock, Fidelity, KBC, Amundi and Union Investment spent up to €800,000 on lobbying last year” while Deutsche Bank and BNP Paribas Securities allocated over €3.1m to lobbying. In comparison the funding or groups that represent individual investors is minimal. Guillaume Prache, Managing Director of EuroFinuse (which represents European shareholder groups and of which ShareSoc is a member) said in the same FT article that “his organisation was fighting an uphill battle against some powerful lobbies” and bemoaned the lack of funding.

With the growing complexity of regulation, it is very difficult for small organisations with limited resources to find the resources so as to adequately respond to new initiatives and put their case forward in a proper manner. Small investors are hence likely to see their interests ignored while larger fund managers and other financial institutions get what they want.

This emphasises the importance of individual shareholders being properly represented by bodies such as ShareSoc, and why we need to become financially stronger. This will no doubt be a topic for discussion at our forthcoming AGM.

Ah I see you still have a bee in your bonnet Roger over Bae, and D Olver in particular.

And,as evidence, you compare apples and oranges.

Firstly they are not really in the same sector - Babcock is not a pure Defence manufacturer, Bae essentially is.

You claim "Babcock is the second largest defence contractor."

Doesn't say much for UK defence manufacturing then does it. From Babcock's last financial accounts I see that "Defence & Security" only accounts for 25% of group revenue! Not only that but Baback doesnt manufacture any PLATFORM systems. Bae is a platform manufacturer - Eurofighter, F35, Type 45 frigate/Armoured combat vehicles,Howitzers. They're two completely different businesses, requiring two completely different strategies even if, for arguments sake, they are both classified as defence companies.

http://www.babcockinternational.com/media/462758/babcock_ar_2013_final.pdf
Bab's Defence & Security 25% group revenue/ Support services
Marine & Tech 37% (It/Support servs and maintenance)

Involvement in nuclear power, power generation support for example.....

Revenue 2009 £1.91bn, 2013 £3.2bn
PBT 2009 £120.9m 2013 £317.8m
Basic EPS 2009 41.9p 2013 71.3p

Yes pretty decent performance, and better than BAe's as you say over the time period but given they aren't comparable that was a pointless exercise on your part.

http://bae-systems-investor-relations-v2.production.investis.com/~/media/Files/B/BAE-Systems-Investor-Relations-V2/Annual%20Reports/BAE-annual-report-final.pdf

BAe is a major "platform" manufacturer, to both US and UK markets as well as likes of Saudi, South Africa and other interesting places. Not only are they in a different product segment but they're also far larger.

As you well know, the larger you get the more difficult it becomes to keep increasing performance year in , year out. And that's before you consider that expensive platform systems are usually the first to get scaled back,or worse. It's hard to be fleet of foot when you're so large. Babcock is but a minnow in a very large pond.

As the Babcock Annual Report says, the results have come from a successful delivery of strategy over the last ten years. The Chief Executive of Babcock, Peter Rogers, has been there over 10 years and the Chairman, Mike Turner, has been there 5 years. Perhaps they should have got a knighthood instead of Olver rather than make do with their CBEs? - See more at: http://www.stockopedia.com/content/sharesoc-chairmans-blog-66211/#sthash.f7zTW2Lj.dpuf

Different product segment requires different strategy. I know you're still smarting over the failed EADS merger and the supposed lack of judgement of Olver in pursuing it but you really to get a grip and end this anti Bae/Anti Olver crusade you seem to be on.

BAe is a stand out British defence company, housing the remnants of once great British engineering names, ensuring that the talent & knowledge survive, and employing tens of thousands of people - the largest European contractor,and the 5th or 6th global manufacturer behind mainly American companies.

Perhaps they should have got a knighthood instead of Olver rather than make do with their CBEs? - See more at: http://www.stockopedia.com/content/sharesoc-chairmans-blog-66211/#sthash.f7zTW2Lj.dpuf

Ah so that's what this continued anti BAe position is REALLY ALL about. You blame Olver for the failed EADS merger and think that therefore he shouldn't get a knighthood.

Thankfully people like you, who aren't aware of what actually goes on in the murky world of defence, don't make any important decisions otherwise we'd all be in trouble.

Posted by ShareSoc at 09:01, June 23 2013.

Rewards for failure – BAE Systems and Babcock

I was reminded of the reward to Dick Olver, the Chairman of BAE Systems (LON:BA.) , of a knighthood in the Queens Birthday Honours List by a tip for Babcock International (LON:BAB) in the latest edition of Momentum Investor. It points out that Babcock is the second largest UK defence contractor and it’s very educational to compare the performance of that company with BAE Systems under the leadership of Mr Olver (now Sir Richard Olver of course).

Over the last five years, Babcock has grown revenue and profits very substantially – revenue up from £1.5bn to £3.0bn and earnings up from 29.4p to 52.5p.  Meanwhile BAE Systems has moved revenue from £14.3bn to £16.6bn, while earnings have moved from 25.4p to 32.6p.  Which company would you rather be a shareholder in?

The performance and the view of shareholders is very much reflected in the share price which has gone up by 81% at Babcock but fallen by 10% at BAE over the same five year period.

And just in case you are wondering, the comparable share price performance over ten years (the length of Mr Olver’s service) is a rise of 3.6 times in the BAE Systems share price after it fell to  a severe low just before he joined, but a rise of 10.4 times at Babcock.

Both companies have done a number of acquisitions in that period, and both have been badly hit by cuts in defence expenditure in western economies, but Babcock has grown a profitable business by nimble footwork while BAE seems to have had feet of lead. Oddly enough they are both participating in the consortium to build the two Queen Elizabeth Aircraft Carriers. Apart from the leadership, the main differences seem to be in the size of the companies with BAE being substantially larger, and Babcock having less reliance on overseas markets such as the USA. 

As the Babcock Annual Report says, the results have come from a successful delivery of strategy over the last ten years. The Chief Executive of Babcock, Peter Rogers, has been there over 10 years and the Chairman, Mike Turner, has been there 5 years. Perhaps they should have got a knighthood instead of Olver rather than make do with their CBEs? 

Posted by ShareSoc at 10:09, June 21 2013.

Intercede Voting Recommendations

ShareSoc has been running a campaign on Intercede (LON:IGP) for some time after a prejudicial LTIP was announced. In addition this company shows the typical problems that arise when there is an Executive Chairman with a large shareholding. The last set of financial results were exceedingly disappointing - revenue down slightly, administrative expenses up substantially with an overall loss for the year being the result. But Richard Parris continues to be bullish about the activities of the company and called this a “resilient financial performance”. ShareSoc has issued a voting recommendation opposing his re-election at the AGM on the 25^th September – see the latest update report at the foot of this page for more information: www.sharesoc.org/campaigns2.html

Posted by ShareSoc at 09:36, June 20 2013.

Should directors of banks be criminally liable for reckless behaviour?

The above question was tackled by the Parliamentary Commission on Banking Standards which published a lengthy report yesterday entitled “Changing Banking for Good”.

Now before discussing this issue, it’s worth stating that one of ShareSoc’s manifesto policies is that “The legal framework for companies should be changed to improve accountability”. This refers primarily to accountability by the directors to the owners of a company, i.e. to the shareholders. The burden of proof under civil law is lower than under criminal law and there are surely some potentially large problems with introducing criminal law to tackle the issue of the reckless or incompetent behaviour of directors.

As Lord Lawson said in an interview on the BBC when discussing the work of the Commission (on which he sat), there are significant problems when tackling such behaviour. One is what he called the “Orient Express” excuse where, as everyone is potentially guilty, they can evade moral responsibility individually. Boards of directors take joint decisions, supported by advice from others, so it’s somewhat easy to pass the buck. They can also blame failings on their subordinates or advisers. This is very unlike the position in maritime law where the captain of a ship is responsible for what happens and the incompetence of others on board, and his ignorance of what was going on is not an excuse.

This problem of “pinning the tail on the donkey” in the recent history of bank mismanagement is one reason why there have been no significant legal sanctions against former directors of the banks that were almost destroyed in the financial crisis.

The Banking Commission suggested tackling that issue by replacing the “Significant Influence - Approved Persons” regime for financial institutions by a “Senior Persons” regime. In addition, formal responsibilities would be assigned to specific individuals so that they would more easily be made accountable. That would surely be a positive step and assist with both civil law suits and regulatory enforcement.

In addition the Commission has concluded that there “is a strong case in principle for a new criminal offence of reckless misconduct in the management of a bank”. This would be focussed on the aforementioned “Senior Persons” and only be applied where there were major failings in banks.

Now some people will say that the introduction of criminal law might deter people from becoming directors of banks, but it might also ensure they take a lot more care. Is it wise to introduce criminal law into the commercial world? In the case of large banks, on which the country’s economy and the financial stability of the whole population is so dependent, it is surely appropriate. These are not simply companies that if they go bust damage their customers, suppliers and their shareholders – they can create a much wider impact. So for the same reasons that Governments introduce criminal laws to regulate aberrant personal behaviour in the name of the general well-being of society, it is surely appropriate to consider criminal law in this area. It’s about enforcing moral standards to the benefit of the community as a whole.

But the devil is in the detail. As the Commission says: “While all concerned should be under no illusions about the difficulties of securing a conviction for such an offence ….”, they do suggest it might give pause for thought amongst the senior management of banks and that is surely true. 

There is a lot more in the Commission's report that is worth reading – for example they tackle the issue of the defective underlying culture in banks, the lack of competition in the banking market and the “dysfunctional” remuneration system as they call it. In summary, a report with many good points. Let us hope the Government will take action on it.

Well Emptyend, as usual you seem to want to stimulate some debate. These are facts: The PIBS were called Permanent Interest Bearing Securities when sold to investors - not subordinated bonds. To suggest that most of the investors in these PIBS (from Britannia or others, and I have talked to a lot of the West Brom ones) should have read the prospectus may be true in theory but in practice it was exceedingly unlikely. Most of the investors were unsophisticated retirees who were advised to buy them by their financial advisers or stockbrokers (most of whom seem not to have read the prospectus in detail or understood it, and considered it a safe investment suitable for investors who wanted "low-risk" investments). The latter is perhaps not surprising because I read the West Brom one and it was in my view ambiguous and grossly misleading. Some West Brom holders seriously considered taking legal action on the matter but the costs and the ambiguity deterred them from doing so. Basically the PIBS investors were "mis-sold" these investments on the pretence they were like a building society bond when they were very different.

Anyone who bought the Co-op/Britannia PIBS more recently (after the above had become wider knowledge) may be rightly criticised - but some may not be as well informed as you and me (I have never invested in PIBS except for a nominal holding enabling me to attend the West Brom AGM)). But I think you will find that most of the holders are not more recent speculators but mainly the original investors because there is generally little active trading in PIBS. Such investors might have a claim against their financial advisers of course - but I have not studied the Britannia prospectus in detail.

Posted by ShareSoc at 09:25, June 17 2013.

PIBS holders to take a haircut again at the Co-op (Britannia)

It seems likely that there will be an announcement soon on a refinancing for the Co-operative Bank. This has got into financial difficulty following its takeover of the Britannia Building Society who had been doing commercial property lending which turned sour. Yes it is the same story as the West Bromwich Building Society and HBOS it seems, but Britannia did a good job of concealing the issue for some time. 

Now the Britannia and Co-op had issued some PIBS (Permanent Interest Bearing Securities) which have now become subordinated debt of the Co-op (i.e. debt that ranks below other loans). PIBS were often sold directly to retail investors by stockbrokers and the suggestion was that the high fixed interest they paid was indeed fixed and could not be varied, i.e. that it was a secure investment. This has turned out not to be the case because the wording of the terms of this debt does enable the interest to be suspended or varied in many cases. In addition, when the organisation gets into financial difficulties, the bank can try to force the holders of the debt to swap their debt for lower value debt (i.e. paying a lower rate of interest) or for equity of some form. The PRA (the successor of the FSA that now regulates banks) has in the past condoned such procedures to enable the bank or building society concerned to continue to meet its regulatory requirements. It seems to have paid little attention to the interests of the retail bondholders despite that fact that it has a duty to do so. The typical excuse given to the bondholders is: “this bank/building society will go bust or be nationalised unless you accept this proposal as no other refinancing is possible”, but the different equity and bond holders are not necessarily all treated equitably. Those who carry the most clout (i.e. the institutional senior debt holders) tend to have more influence on the outcome.

Unfortunately this looks to be very like the scenario that took place at the West Bromwich Building Society (PIBS investors effectively lost all their income and capital values were as a result instantly reduced by 85%) or the West of England B.S. (acquired by the Bank of Ireland) where there was an attempt to force conversion which holders strongly resisted. You can read more about the events at the former here: http://www.wbpcl.co.uk and Mark Taber’s Fixed Income web site has more explanation on the position at the Co-operative here: www.fixedincomeinvestments.org.uk/fixed-interest-blog/troubleattheco-op .

Regrettably many investors bought these PIBS or subordinated bonds for retirement income without fully understanding them or based on misleading advice. It is sometimes alleged that only “sophisticated investors” bought them but this is very far from the truth.

I would suggest that holders of these subordinated bonds need to get together as soon as possible to ensure that their interests are properly represented because they may get the short end of the straw in any restructuring.

Posted by ShareSoc at 11:05, June 16 2013.

Tax avoidance and a register of beneficial owners

There has been much discussion of late on the problem of corporate tax avoidance. Companies such as Google allegedly create front companies in low tax jurisdictions to handle the sales and profits generated elsewhere. Indeed naming that company alone might not be appropriate as many UK FTSE-100 companies own companies registered in low tax jurisdictions such as Holland, Luxembourg, Ireland and the Channel Islands. Why they need them is never very clear, except that tax planning is undoubtedly one of the main motivations.

David Cameron wants to establish a register of the owners of companies to try and tackle this issue and the general problem of tax avoidance. He has committed to the G8 summit that British overseas territories and crown dependencies (such as Bermuda and the British Virgin Islands) will disclose ownership in future.

Surely though this is a symptom of a wider malaise? It’s not just tax evasion and money laundering (another use for secretive companies) that should be tackled. It’s simply that the creation of impersonal limited companies whose ownership and operations nobody knows about, tax authorities included, has gone too far. As I said in the last ShareSoc Informer Newsletter the original principle in Company Law was that you could know who were the owners of a company by examining the share register. This ensured that you might have some trust in them, particularly in respect of the dominant shareholders who might influence the affairs of the company and effectively appoint the directors. That concept has been lost over the years so now it is impossible for other shareholders to know who their fellow owners are, or easily communicate with them. Indeed often the companies themselves have difficulty in finding out who the real owners are.

It’s surely time for lawmakers to consider again the role of Company Law in this area, before the UK gets a reputation for permitting dubious businesses and shady directors to register and promote companies.

Would it not be best if there was a proper share register of all companies registered in the UK (or their associated territories), where all beneficial owners were declared? This would also solve the problem of nominee accounts that is the bane of retail investors. This register should also be accessible to all, but unfortunately it seems that even if the above proposal is proceeded with, it might only be available to the tax authorities. It definitely should be available to all because the owners of companies should not have the benefit of incorporation and limited liability without declaring who they are.

There is no reason to keep the information requested confidential - it is not business sensitive information, and excuse d) does not apply either (unless they argue it is undesirable for the company to answer awkward questions). But in any case, neither excuse was invoked - Olver simply refused to answer.

Posted by ShareSoc at 12:32, June 11 2013.

Pay romps ahead for directors, yet again

Manifest and MM&K have published a survey of directors’ salaries in 2012. This shows that overall remuneration rose substantially with FTSE-100 chief executives getting 10% more. The main reason for the rise, which is of course way ahead of the change in average earnings of all staff, is the increase from bonus schemes such as LTIPs. These typically are based on the total return to shareholders which to a large extent is based on the share price of the company. The stock market is in a bull phase, allegedly driven by Quantitative Easing (QE). Indeed the CEO of Manifest said that QE was printing money for CEOs.

The average pay of FTSE-100 CEOs is now over £4m per annum, and the highest paid was the CEO of Burberrys who got the eye-watering figure of £16.9m.

Comment: This is what Ian Gregg, the former CEO of Greggs had to say in his recently published book (reviewed in the June ShareSoc newsletter): “This situation of a small minority continuing to take excessive salaries while the vast majority suffers financial hardship is in direct contradiction to the Greggs’ value of treating everyone with fairness. It is not acceptable and has to be changed”. One cannot but agree with him. Whether the incoming “binding vote on pay” will really change this I am very doubtful about. Although base pay is being moderated, the complex bonus schemes are still in place and nobody seems willing to scrap them and go back to basics. Remuneration resolutions have had significant votes against them in recent years, but the amount of opposition actually fell last year as minor changes seemed to ameliorate the stance of institutional shareholders. The core problem is the combined role of Remuneration Committees and remuneration consultants, which act in the interests of the directors and not of shareholders or the wider community. ShareSoc continues to advocate that shareholders should directly determine the pay of directors. Remuneration committees should only contain a minority of directors, with shareholders (and preferably those with a direct interest) plus other stakeholders having the majority. In effect, much more substantial reform of the present corporate governance structures in the UK is required, but of course nobody in major companies wants to go down that path.

In the meantime it would help if individual shareholders actually used their votes at AGMs on remuneration resolutions, which they signally fail to do. Although institutional voting is generally increasing, that of private shareholders is falling.

Anyway for those company directors who want to check whether they are keeping up with the Jones’s the full report will cost them Amundi SP500 US (LON:500). Cheap at the price no doubt.

Posted by ShareSoc at 11:10, June 5 2013.

You may be forced to stay off the booze by the FCA

The Financial Conduct Authority (FCA) has published new rules that will ban the promotion and sale of “Unregulated Collective Investment Schemes” (UCIS) except to “sophisticated” investors. Such schemes include investment in wine, diamonds, stamps, coins, bamboo plantations and other exotica. It is also likely to restrict the promotion of film production schemes, theatrical angel investments and traded life policy investments. The FCA says that when such schemes were examined it was found that where they were sold to retail investors, only 25% of them were appropriate investments.

But if you are a sophisticated investor you will still be able to be sold such investments. You may ask what is a “sophisticated investor”? This is either a “High Net Worth” individual, i.e. someone with an income of more than £100,000 per year or investment assets of more than £250,000; or a “Sophisticated Investor”, i.e. someone who has extensive business and investment experience (i.e. have invested in unlisted securities/companies or been a director of them). You actually need to become “certified” as one or the other but there is a “self-certification” process.

But the good news is that there is no intention to restrict the promotion of EIS or VCT companies to retail investors which was feared at one time. That would have reduced the viability of those companies. Similarly overseas investment companies that invest in listed securities are also OK.

Of course these new rules won’t stop a fool and his money from being parted, which is the common thrust of regulation these days. Instead we may see the more active promotion of dubious small cap stocks that are already common on AIM.

Posted by ShareSoc at 11:07, June 2 2013.

BAE Systems and Questions at AGMs

Yesterday the Financial Times ran a full page article on the successor to Dick Olver as Chairman of BAE Systems (LON:BA.) They tipped Sir Roger Carr to be appointed soon as Olver’s replacement, as have other publications. It was not particularly complimentary in that it suggested that Sir Roger might be a “second best” choice in that the company might not be able to attract anyone better. It also voiced concerns about his past work in roles at Cadbury and Mitchells & Butlers.

Now it just so happened that on the same day the article appeared I returned from holiday to find a letter from Dick Olver. I had written to him after the debacle of the AGM when I failed to get some questions answered, and simply put these two questions again:

a) Bearing in mind the fact that the company has already indicated that they are actively looking for a replacement for you as Chairman, has the company given you notice as required under your contract (6 months notice I believe)?

b) What were the costs incurred in financial or investment advice, or any other directly related costs, in the aborted merger discussions with EADS?

But in his letter, Mr Olver did not answer these questions saying that the issue of his succession was discussed at the meeting and “I wish to say no more on the matter”. This is surely not adequate to two simple factual questions.

So I have written back to him again pointing out that my questions were submitted in writing in advance of the meeting and I was clearly present at the meeting (there is a full report on the AGM which I wrote afterwards on the ShareSoc Members Network).  In addition there is a legal obligation under Section 319A of the Companies Act (as introduced by the Companies (Shareholders’ Rights Regulations 2009)), which states that:

“319A.—(1) At a general meeting of a traded company, the company must cause to be answered any question relating to the business being dealt with at the meeting put by a member attending the meeting.” 

I have suggested to Mr Olver that he reconsiders his response, but it is surely apparent that he is trying to avoid answering awkward questions. Shareholders in any companies should of course bear this provision of the Companies Act in mind (which was introduced as a result of the EU Shareholder Rights Directive).

Posted by ShareSoc at 11:04, May 24 2013.

PV Crystalox Solar AGM – A token victory for private shareholders

As shareholders in PV Crystalox Solar (LON:PVCS) will no doubt be aware, the business of this company has been devastated by the collapse in the open market price of solar wafers. As a result the company has incurred heavy losses in the last two years (€122m last year alone) and has been rapidly downsizing. The share price has collapsed from about 100p in early 2009 to about 12p today, only slightly perking up of late on the announcement of a return of cash of 7.25p to shareholders in the near future. Indeed it became obvious from what was said at the AGM on the 23^rd May that the only reason why the company has survived is because it had previously entered into long-term contracts for the sale of what it produces when the market was desperate for such wafers, at prices that are way above the current market price. The reason why market prices collapsed was the establishment of large volume production in China (financed by bank loans) which exceeded likely worldwide demand and the resulting products were then sold at prices which were less than the economic cost of production.

There were about a dozen shareholders who attended the AGM at the offices of lawyers Norton Rose near Tower Bridge. The meeting commenced with a presentation from CEO Dr Iain Dorrity - definitely a good point which ShareSoc would like to see at all AGMs. A full report on the AGM is present on the ShareSoc Members Network, but it’s worth highlighting one event later on in the meeting.

A shareholder spoke against resolution 12 which was the variation to 14 days notice for meetings. As he pointed out, this means shareholders who have taken 2 weeks holiday might miss the vote. I supported what he said and noted that it effectively disenfranchises some shareholders – those in nominees would have difficulty getting their votes in on time and it is a particular problem for European voters. In effect the company is putting up two fingers to the EU Directive which was designed to protect shareholders (and which was incorporated into the 2006 Companies Act, which mandated 21 days notice).

On the show of hands vote for that resolution, the required 75% majority was not met (it being a “special resolution) – I think the votes were 8 for and 4 against. I said to the Chairman that legally he could either withdraw the resolution or call a poll, but someone asked for a poll. The Chairman suggested that shareholders might want to change their minds to avoid the necessity for a poll (he was of course suggesting the proxy counts would ensure it was passed). But I and others who had voted against did not respond so a poll was called.

Note that it might be particularly important in this company because it is shrinking to a size where it might consider delisting from the market. Often these are rushed through with absolute minimum notice to avoid opposition (a recent example was VSA where if sufficient notice had been given, it might have been voted down).

Anyway the poll result after a further hour was 237.3m for, 3.3m against on resolution 12, i.e. 98.75% in favour which is only slightly less than most of the proxy counts so it was only a token victory in reality.

In summary, a useful and informative meeting. It’s a pity the CEO could not be a bit more upbeat about the prospects of the company, but that might simply be his personality. What a contrast to the CEO of Halfords in their results presentation on the same morning which I commented on elsewhere. It might also help to inspire confidence in shareholders that this company has a future if the Chairman and another non-executive held shares in the company, another issue that was raised in the meeting.

Posted by ShareSoc at 10:20, May 23 2013.

Halfords and Paypoint – a contrast in fortunes

This morning both Halfords (LON:HFD) and PayPoint (LON:PAY) announced their preliminary results but they were very different in nature. Halfords’ revenue and earnings were slightly better than forecast, but they announced an unexpected cut in the dividend (or to put it in the conventional euphemism, it’s being “rebased”). In addition their forecasts for the future are for no short term growth in profits as they invest to get back some sales growth. As a result the share price immediately fell about 15%.

Paypoint meanwhile delivered a growth in net revenue of 17% and earnings up 14%, both ahead of forecasts, and the full year dividend up 15%. In addition they announced a special dividend of 15p per share.

Halfords problems include a rise in their cost base, lacklusture retail sales, and profits in the Autocentres division lower even after the growth in outlets. But it was interesting to watch their presentation to analysts (delivered as an on-line video and available for you to see – indeed it’s still going on at the time of posting this blog). New Chief Executive, Matt Davies, spelled out the issues very clearly in a vigorous and positive presentation. For example he said “Halfords is a good business with a good strategic plan. But the single most important issue is to drive profitable sales growth. Investment is required to achieve this repositioning”.  For example they plan to invest £38m alone in new IT infrastructure over 3 years.

Mr Davies spelled out exactly what the problems were and what the company is going to do so you certainly cannot criticise the lack of information or openness. He comes across as young, vigorous and enthusiastic.

But the key strategic issues in Halfords are overall like-for-like sales down 0.7% last year, while costs have been rising. The focus going forward is to extract more from the same stores by improving customer service, modernising the stores by enhancing the “look and feel”, and improving the web site. Whether this will be enough to improve profitability substantially remains to be seen. But as a “mature” business in essence, even after the share price fall it will still be paying a dividend yield of about 5% this year. However it was later said that dividends will be covered twice by earnings in future so it might be 4.5% or less.

Paypoint of course is in a very different situation being exposed to the growth in new electronic payment areas, but it is therefore rated higher by the market on a p/e basis and has a lower dividend yield (but still over 3% ignoring the special dividend).

So as a choice for investors, it’s the same old dilemma of “growth” versus “value”. Which you follow might depend to some extent on your faith in the new evangelical approach from Matt Davies.

Roger Lawson 23/5/2013

Posted by ShareSoc at 09:28, May 21 2013.

Investment Trust Income Distributions – HgCapital et al

One thing that investors in investment trusts need to watch out for is the way that dividends are paid by such companies. Normally these are paid in the same way as for operating companies, i.e. the dividend is paid net of a deduction of 10% from the gross amount where that 10% is called a tax credit and is used when calculating your personal income tax liability.

But the last dividend from HgCapital Trust (LON:HGT) (a private equity investment trust) was actually paid as an “income distribution” and 20% will have been deducted as “withholding tax” as it would be on bank interest payments. See page 97 of the HgCapital Annual Report for a brief mention of this issue.

It seems that the ability of investment trusts to pay dividends in this way was introduced when the REIT regulations were brought in and investment trusts have the option to do this if their distribution is being made out of income. Having discussed this with the Investor Relations department at HgCapital it seems that the company can benefit from a reduction in the corporation tax they pay by using this arrangement and hence it is beneficial to shareholders.

But your personal tax position needs consideration and how you hold the shares. For example, an individual who holds the shares directly and who does not normally pay income tax cannot reclaim the tax credit on a dividend payment, but can reclaim the withholding tax on an income distribution from HMRC.

One thing particularly to look out for is where the shares are held in a tax-exempt vehicle such as a SIPP or ISA. In that case, the operator of the account can reclaim the withholding tax from HMRC, but you may need to remind them to do this as some do not seem to be aware of the difference between the two different types of dividend payments.

Posted by ShareSoc at 13:27, May 20 2013.

A daft idea or not? Quadractic voting systems (QVB) at company AGMs.

One of my recent blog posts was on the issue of revitalising AGMs. A related issue is the question of revitalising the voting at AGMs by ensuring people vote after due consideration of the issues. In reality at most UK company meetings, 70% or less of available votes are cast. This is not just because people have difficulty in voting (both private individuals and institutions), it is also because there is a general apathy about voting.

In addition, there is the well known “agency” problem that those voting may not be looking at some resolutions on the agenda as if they are owners (because institutions are often only representing someone else’s financial interest). As a result they may not care less about whether remuneration is too high (indeed their interest may be to raise the general level as they swim in the same pool), or care whether the directors are competent or not.

Here’s a solution to this problem being advocated by academics Eric Posner and Glen Weyl: simply introduce a system where people have to pay for votes, i.e. a claim on the assets of a company or on the dividends would not give you a vote, but you would have to buy any votes you wanted to use. In addition the price of votes would be based on a quadratic function. So one vote might cost you a £1, but two votes would cost you £4 and three votes would cost you £9. In this way, the stronger your interest in voting, the more you would be paying and this would ensure the best and most optimum decision making.

Indeed they argue in an academic paper (which you can find on the internet under the title “Quadratic Vote Buying as Efficient Corporate Governance”), that this demonstratably produces a more efficient outcome and encourages wiser voting by those with an interest in the matter. In market economies, it’s usual for demand to reflect the strength of feeling on a matter. If you have a strong desire for ice cream when availability is limited, you are willing to pay more for it. But that does not apply to the corporate voting world so we get apathetic voting or no voting.

The money paid for votes would also help to cover the cost of AGMs and would otherwise be returned to shareholders. Read the full paper for an explanation of why quadratic rather than a simple proportional system works better, and for other aspects of such a system.

Mr Posner and Mr Weyl argue that “people with stakes in companies are generally too ill-informed to cast a vote wisely, or even to bother to vote” so they suggest that their QVB proposal would be a major improvement in the world of corporate governance.

Comment: An interesting idea and not quite so daft as it might seem at first glance. One advantage is that it might stop individual investors, who really care, being swamped by institutional voters who do not. Post your comments if you can see any holes in this proposed system.

Thanks, I'll take a look at the ICSA document which I was not aware of.

This is certainly an issue we have been pushing to solve at every opportunity. For example, I raised the problem of nominee accounts at a meeting at the Treasury earlier this week. As you point out, one big problem is those brokers who do not make it easy for nominee shareholders to vote and we have highlighted those who we know do provide a good service in that respect on this page of our web site: www.sharesoc.org/nominee_accounts.html . We also encourage our members to look at this issue and use such brokers, but getting people to change brokers is never easy. Ideally the Government should mandate that brokers should provide such systems to their clients (which they can do via third party software suppliers quite easily).
Roger Lawson, ShareSoc

We all know the Market Makers need to make a profit on AIM stocks, however these two trades show them for what they are.!!

Feedback PLC:

Thur 16th May 2013.

Sale of 900,000 shares @ 0.15p 9.36AM

Buy of 1M shares @0.38p 10.42AM

Posted by ShareSoc at 09:15, May 18 2013.

Tornados in Texas, and crying Wolf in the FT

Attending the AGM of Amlin (LON:AML) , a major “catastrophe” insurer, reminded me to consider the issues of climate change again. Coincidentally there were tornados in Texas last week and also an article in the Financial Times by their correspondent Martin Wolf entitled “Why the world faces climate chaos”. Without debating the question of whether humans via the generation of CO2 are creating climate change (which Mr Wolf argues is “basic science” in his usual polemical style when many others disagree) it’s worth noting that he simply concludes with the observation that there is no political will do to anything about it. At least the FT did print a letter from someone with a contrary view of climate change science. Mr Wolf is good at crying wolf but fails to offer any practical solutions.

Meanwhile at the Amlin AGM more immediate issues came to the fore. One questioner raised the issue of the recent tornados in Texas (six people dead and widespread devastation) and would this have any impact on the company. The simple answer was no because the company budgets for some catastrophes so shareholders could still sleep at night.

Although climate change is argued to create more “variable” weather and hence more frequent disruptive events such as tornados, cyclone and floods this of course might actually help Amlin’s business as there will be more need for insurance cover and the cover will become more expensive. One comment made at the AGM was that insurance companies were actually moving into the catastrophe segment because it was counter-cyclical, i.e. better perhaps to invest in that than in the financial or commodity sectors.

But it surely is true that if you want to hedge your bets on climate change then investing in catastrophe insurers such as Amlin might be a solution. If the science is true then the business they write will grow. If it is not true then their claims rate will be low but people will be scared enough by all the talk of disasters to buy insurance anyway. Amlin investors should probably encourage Mr Wolf to write more articles of the same tone.

Other issues that arose at the Amlin AGM were the appointment of a new non-executive director who already had seven other roles/directorships, how the company managed to improve the returns it made on bonds last year, and whether the company could insure against an exit from the EU – on the last question the Chairman indicated they were probably self-insured.  

A full report on the Amlin AGM is present on the ShareSoc Members Network for those who wish to learn more.

Posted by ShareSoc at 14:05, May 15 2013.

Presentations at AGMs – Michelmersh Brick is setting a good example

Revitalising the Annual General Meetings (AGMs) of public companies is one of the objectives of ShareSoc. One way to do that is for a company to include a presentation to investors at their AGMs covering the financial results of the last year, the current state of trading and any other useful information about the opportunities and challenges the company faces. Of course the company has typically already prepared and given such a presentation to City analysts when they announced their preliminary results, so it’s little more effort to do such a presentation. Doing so not only helps to attract individual shareholders to attend the AGM, but also turns it into a meaningful and useful event rather than the tedious meetings they often otherwise are. A presentation also helps to stimulate interesting questions, and interesting answers.

Congratulations to Michelmersh Brick Holdings (LON:MBH) who are giving just such a presentation in the hour before their AGM on the 22^nd May commencing at 10.00 am at the offices of Tavistock Communications in the City of London. Investors with an interest in this company may wish to attend.

Perhaps ShareSoc should start a campaign for companies to do such presentations? If you think that is a good idea, please let us know.  Quite a few companies actually do such presentations, but very few announce the fact in advance.

Another recent bad example (after the BAE Systems (LON:BA.) AGM previously commented upon) was the AGM of Royal Bank of Scotland (LON:RBS) yesterday. Only 127 shareholders attended the meeting in Edinburgh, which is well down on the figures in previous years. Perhaps shareholders have become apathetic about the future of their financial interest in the company since it has been eroded so sharply?

Posted by ShareSoc at 11:08, May 13 2013.

Blinkx results – a good example of how to present them

This morning Blinkx (LON:BLNX) announced their preliminary results. Blinkx is a technology business based on an internet video search engine and advertising platform. The results were better than expected, but the key point worth noting is the live web cast of the analysts’ conference call that anyone could participate in. Why do not all companies do it this way? If a small company such as Blinkx can do it why not others?

The web cast (including the subsequent question and answer session) is available from the Blinkx investor relations web site, plus the associated Powerpoint presentation and it’s well worth listening to.

Here’s a summary of some of the key information from the announcement and the presentation:

Revenue was up 73% at $197m, adjusted earnings were up 94%, and cash on the balance sheet rose 45% to $55m.

Brian Mukherjee, the CEO, said that we started as a technology company and that remains the core of our DNA and 95% of our revenue comes from video advertising. He said you could see the effect of operational gearing in these results. There was a smooth transition of senior management roles last year and the company has several captive growth opportunities ahead of it this year.

Widespread broadband connectivity is driving the massive wave of video use and advertisers are following them on-line. But the following figures give some idea of the opportunity. Some $60bn is spent in TV advertising but only $3bn is spent on on-line video. Blinkx has built an ad-supporting ecosystem around their core technology. Their differentiation is that they do speech recognition and video analysis of video which enhances consumers’ service and advertisers focus.

The CFO, Edward Reginelli, said that margins are now positive and improving. They are very focussed on cash generation.

Questions were then taken. One was about the customer concentration – the answer was only one customer was near 10% of revenue with all others less. Another question was how much is coming from mobile and connected TVs. The answer was very little at present – they are still mainly focussed on PCs (there was some discussion of the opportunities in the mobile space later).

After a question on margins, it was stated that marketing expenditure might grow at 15% this year, but G&A costs are likely to only grow by 3% to 5%. On corporation tax, the rate was forecast to be in the 25% range going forward.

It was noted that currently revenue overwhelmingly comes from the USA (at 98%). There are still lots of organic opportunities there and hence the focus. But the company’s next step would be to focus on English speaking countries and then the rest of Europe. The view on Asia is that the market still needs to mature.

In summary, this company seems to be on a roll with lots of organic growth potential. There was a question about the possible threat from Facebook who are wanting to move into video apparently, but the comment was that this might simply validate video which might be good for the entire industry.

Listen in to the presentation if you want more information on this company.

I'm surprised that there were so many "hecklers" there on a Wednesday morning - presumably none of these individuals worked (that, or their human rights/amnesty international or employers of similar ilk gave them time off to protest), Failing that they're most likely students who should be spending their time more profitably.

A list of such people, with their personal details, should be taken and cross referenced with those currently in education or in receipt of welfare benefits of any kind related to looking for work imo - if you're on welfare you don't have time to turn up to such meetings and protest. Having seen the activities of the NUS in my day,and their propensity to causing trouble in some pointless cause, I'm well aware of their loony inclinations. It really wouldn't surprise me if those protesting were there on the basis of owning 1 share, either being associated with the NUS or some "welfare /rights organisation"

During Mr Olver’s oration he was continually interrupted by noises, coughing and expletives from some shareholders present (at least I presume they were shareholders to enable them to get into the meeting but I doubt if they had any significant financial interest in the company as they were almost all young, and many of them female). It would appear to have been an organised demonstration. I did suggest to the Chairman that they be removed but he carried on after giving them a mild warning.He gave the protestors a second warning at the end of his speech, and then a third warning and security staff removed the worst protestors at this point and thereafter.

This kind of behaviour shows that those engaging in such have no etiquette whatsoever.....I thought the Eco inspired disruption of the BP AGM, pertaining to the Canada sands and the same reworded questions being posed on numerous occasions was tiresome enough, but this took the biscuit.

If it's obvious that attendees are clearly not interested in the company, nor invested to any significant degree (holding 1 share is frankly ridiculous) and merely attending to disrupt then they should be swiftly removed from the building - preferably with a forcible boot up the backside.

There will come a point where the majority attending an AGM will sort out such "politically inspired" disruptions themselves. I half expect such to occur first at a BP AGM in the not distant future.

Posted by ShareSoc at 14:44, May  8 2013.

BAE AGM – Olver’s swansong disrupted by political activists

This morning BAE Systems held it’s Annual General Meeting in a converted hangar in Farnborough - the location of the company’s headquarters of course. There were probably about 300 shareholders present, but as many as a third of them seemed to be protestors unhappy with the company’s activities – and mainly of the view that weapons kill people and the company should be a lot more careful about what they sell and who they sell them to.

The meeting commenced with a promotional video for the company ending with the slogan “inspired work”, followed by Chairman Dick Olver giving a thirty minute speech on the progress of the company and the issues it faces. As the company is already looking for a successor, this seemed to be a rather valedictory oration justifying his stewardship of the company and went on rather too long for my preference, even though he seemed keen to rush through it toward the end.

During Mr Olver’s oration he was continually interrupted by noises, coughing and expletives from some shareholders present (at least I presume they were shareholders to enable them to get into the meeting but I doubt if they had any significant financial interest in the company as they were almost all young, and many of them female). It would appear to have been an organised demonstration. I did suggest to the Chairman that they be removed but he carried on after giving them a mild warning.

He gave the protestors a second warning at the end of his speech, and then a third warning and security staff removed the worst protestors at this point and thereafter.

Ian King, the CEO, then gave a short review, but there seemed not to be a single piece of new information in that or the Chairman’s speech. Neither was there anything new of significance so far as I could see in the Interim Management Statement issued early this morning (an “unchanged outlook” in essence, the Salam contract still not concluded and the impact of US defence cuts still uncertain), or in the written Q&A responses the company provided. Questions were then taken from the audience but these were dominated by “politically focussed” questions such as an attendee who wanted to give the Chairman a “whitewash” award for producing “killing machines” (I think he was going to throw something at the Chairman but was blocked by security staff before he got near). Another asked about the change of venue (was it to avoid awkward questions? Answer: No), will drones be displayed at the Excel event, about gender equality in Saudi Arabia and the company’s continuing to do business there, and others.

After over 30 minutes of this and no questions apparent from real shareholders (and more attendees being removed – up to 8 in total), I suggested to the Chairman that he adjourn the meeting but he did not do so. I therefore left as I have better things to do with my time. I will have to write to the Chairman to put the questions I wanted to put.

I will also be giving him some suggestions for his successor on how to turn the meeting into a purposeful event for real shareholders, not a platform for political protestors to make points. For example, shareholders with nominal shareholdings might be cordoned off in a separate area, only allowed a limited number of questions, and larger shareholders could be given priority in asking questions.

Now let no one assume that I object to shareholders, who have real concerns about the activities of a company in which they are invested, raising any issues they care to at AGMs. But such meetings are for shareholders with an economic interest in the company and should not be turned into a bun fight. The Chairman also has the duty and responsibility to keep good order for the benefit of all attendees, which he signally failed to do. As it was many genuine shareholders had no doubt travelled long distances to attend a meeting which turned out to be utterly pointless.

So if Dick Olver thought that he was going out on a high note, he was certainly mistaken.

A fuller report on this meeting is now available on the ShareSoc Member’s Network.

Posted by ShareSoc at 09:20, May  5 2013.

Should you vote to increase the size of an investment trust?

Should you vote to increase the size of an investment trust? This question came to my attention when a notice of a General Meeting of Scottish Oriental Smaller Companies Trust arrived on my desk. They are asking for approval to issue more shares “to meet the continuing demand for the Company’s shares”.

At their last AGM in January they obtained authority to issue more shares and have subsequently issued about one million new shares at a premium to the prevailing NAV. But they judge that will soon be insufficient, and hence want approval to issue more shares up to a nominal value of £400,000 (i.e. 1.6m shares) representing 5% of the existing share capital.

This company has a remarkably good performance record in the last few years. Total return up 43% over one year and up 95% over three years, well ahead of other “Asia Pacific ex Japan” investment funds which is the benchmark they use. As a result it has recently traded at a premium to net asset value which is of course somewhat unusual for an investment trust. As investment trusts are “closed end” funds, any strong shareholder demand to purchase more shares simply drives up the share price of course, and with such a good performance record you can see the result being reflected in the premium.

But let’s look at the issues. Is maintaining a cap on the share price premium by issuing more shares good for existing investors? Or is it more in the interests of the fund manager? One obvious consequence is the fund grows in size. That certainly increases the overall fund management fees and no doubt trickles down into higher pay for the individual fund management staff (or as they might put it, enables them to attract and retain high quality staff).

Is an increase in fund size otherwise a good thing? It presumably enables larger stakes in larger companies to be purchased, but as this is a “smaller companies” fund that might not be a good thing. As larger companies might be ruled out, and obtaining bigger stakes not appropriate, it might simply mean expanding the universe of holdings to include more companies, i.e. a more diversified portfolio will result. In general, more diversification means more diluted performance, so that would not be a wise move.

In reality it might alternatively mean they buy more of the same stocks already held, thus driving up the share prices – great for the existing portfolio performance but not necessarily a wise policy either.

It is well known that the larger a fund, the worse the performance becomes. To quote from the wisdom of John Bogle: “In the field of fund management it seems apparent that nothing fails like success” (from his book Don’t Count on It!). He demonstrates with actual data that for open-ended funds, good performance draws in large investment inflows, which subsequently damages the fund manager’s ability to perform.

Is there any particular reason why shareholders would worry about a high share price premium to NAV? No particular concern comes to mind. As with all share prices, it would surely have a natural limit, in the same way as high discounts tend ultimately to disappear. In effect, by issuing new shares when the shares are at a premium the company is simply doing the opposite of buying back shares when the discount becomes excessive – and most people might support that in investment trusts to avoid shareholders facing unrealistic prices when they want to sell. But why they would worry about unrealistically high prices seems odd.

Note that the premium at Scottish Oriental Smaller Companies has never been very great – it’s currently 1.4% for example, whereas companies only start to worry about discounts when they exceed 15%.

So the conclusion is surely that issuing more shares in investment trusts should be viewed with scepticism, and in this particular case shareholders should consider voting against.

Posted by ShareSoc at 08:27, April 29 2013.

Charges can wipe out your gains

Charges can wipe out your gains. Yes that was the title of a fascinating article from Terry Smith in this weekend’s FT Money. He spells out all the charges (both disclosed and undisclosed) taken by the average fund manager on collective funds, and summarises the bad news in the single sentence: “In other words, more than 100 per cent of the expected income on portfolios is being absorbed by charges”. As most of the returns from stock market investment come from dividends and not from capital growth – indeed there have been long periods when capital growth has been nil – this is a recipe for erosion of your real wealth.

He advocates cutting out as many layers of “intermediation” as possible so as to minimise the charges you pay. In addition, even though he runs an actively managed fund himself, he suggests using low cost index tracking funds.

Now this is undoubtedly sound advice. But as is so common when listening to the advice from a city professional, he omits the even more obvious solution. That is simply to invest directly in shares. Cut out all the financial advisors, fund management fees and platform fees. Just buy shares directly through a low-cost on-line stockbroker. Chances are your stock-picking and investment returns will be as good as any professional fund manager (indeed random selection will do as well as them and even better than an index fund), so long as you don’t trade too frequently.

Unfortunately you won’t see any advertisements in the Financial Times or any other publication for this approach and Government policies (such as taxation arrangements) discourage it. But if you really want to get good returns from your stock market investments, you should “do it yourself”.

The next time you talk to your M.P. you might also urge the Government to pay less attention to their investment world advisers and develop a culture of direct stock market investment. The late Margaret Thatcher’s move to establish mass share ownership by privatisations did not achieve that purpose because the basic rules of the game were not changed. The Retail Distribution Review (RDR) is one step in the right direction, but investment taxation and education policy also needs changing to stop the bias against direct investment.

This is of course well summarised in ShareSoc’s adopted policies – see www.sharesoc.org/policies.html for more information.

Posted by ShareSoc at 15:47, April 25 2013.

Elementis AGM – a surprisingly bad performance from the Chairman

When a shareholder gets told to shut up by the Chairman for asking a fairly simple question without getting a straightforward answer, you know something is wrong. No, it was not me who was the victim, although I did ask some other awkward questions at the Elementis (LON:ELM) AGM today. And at the end of it I came to the conclusion that this company needs a new Chairman.

A full report is on the ShareSoc Members Network here:

http://sharesoc.ning.com/forum/topics/the-agm-forum?commentId=6389471%3AComment%3A22757

Elementis shareholders should make it essential reading.

Posted by ShareSoc at 15:51, April 23 2013.

Are you a shareholder? Probably not.

The vast majority of individual shareholders in public companies hold their shares in nominee accounts, i.e. in accounts created by their stockbrokers to record their interest in the shares of companies. Does that mean that in law you are a member of the company with all of the rights and protections provided by Company Law (i.e. under the Companies Act 2006)? The simple answer is no!

This legal position was reinforced by a recent High Court judgement in the case of Eckerle and others versus Wickeder Westfalenstahl GmbH. Mr Eckerle (who was represented by ASB Law) opposed the re-registration of the latter company from being a public company to a private company. There is a little known provision in the Companies Act that enables a holder of more than 5% of the shares in a company to oppose such re-registration as being prejudicial to the financial interests of a minority, by application to the Court.

The defendants (represented by Orrick Herrington & Sutcliffe) simply argued that the plaintiffs had no legal standing in law because they were not “members” of the company (i.e. not shareholders on the share register), and that claim was upheld by the court. Therefore the application was rejected.

Wickeder Westfalenstahl was a company registered in England but formerly traded on a German stock exchange. As is common in Germany, all the shares in the company were actually held by a bank as trustee with the interests of individual shareholders being recorded by them, i.e. they acted as the nominee operator and simply recorded the “beneficial interest” of individual shareholders in their trust records.

The lawyers for Mr Eckerle argued that he was enfranchised by the Company’s Articles of Association and section 145 of the Companies Act. However, the Court determined that the Articles of Association could not be interpreted that widely. This left Mr. Eckerle without redress as a minority shareholder.

Mr Justice Norris stated that this was not a particularly comfortable decision for him to make as it deprived the claimants, as indirect investors, of the sort of protection which those who formulated the Act thought ought to be extended to minority shareholders.

Now you might think that this is of academic interest, or unlikely to be something that will concern you. But that is not the case, for anyone who invests in smaller quoted companies.

For example, consider the recent events at VSA Capital Group which was an AIM listed company and the subject of a delisting proposal. There are more details of what happened at that company in a separate report on our blog and in this newsletter. The directors narrowly won the delisting vote, mainly because a number of shareholders in nominee accounts seemed to have difficulty in voting, or their votes were delayed and hence not counted. In many respects, the vote was questionable. Now another provision of the Companies Act (Sections 342/343) enables any shareholder (or group of shareholders) with more than 5% to apply for an independent review of a vote. But obviously in this case with shareholders mainly in nominee accounts, they may have no legal standing to do so!

Would the nominee operator do so on their behalf? Probably not because although they might have a legal responsibility to vote as requested by the beneficial owner (as applies to ISA accounts for example), they have no duty to take wider action.

In practice VSA Capital Group might now choose to convert to a private company and there would be little to stop them, based on the above precedent.

So in essence, the nominee system not only makes it difficult for shareholders to vote (and act as owners of the company which is what in essence they are), but it also fatally undermines your rights as a shareholder.

Use a Personal Crest Account rather than a Nominee Account

There is one simple answer to this problem that all shareholders should be aware of:

Do not hold your shares in a nominee account. Hold your shares so that you appear on the share register of the company. You can guarantee this by holding a paper share certificate (not particularly recommended in the modern age), or by being a Personal Crest Member (which is highly recommended). The latter is an electronic share registration system which operates similarly to a nominee account and is usually no more expensive. However only a limited number of stockbrokers support such accounts – some of them are Charles Stanley, Brewin Dolphin (inc Stocktrade), Killik, Redmayne Bentley and W.H. Ireland (you can find a complete list by using the search facility on the APCIMS web site here: www.apcims.co.uk/buy-and-sell-shares/find-a-firm ).

Investment Laws and Regulations need changing

That still leaves the problem of ISA and SIPP accounts which currently have to be in nominees. ShareSoc would like to see this situation changed by revision of the relevant Regulations. Please support our stance on this matter.

There should also be a new “name on register” electronic system to replace share certificates, as is being mandated by the EU as part of the “dematerialisation” proposals to ensure all share trading is done electronically.

Investors should be warned

ShareSoc would also like to see all clients of stockbrokers being warned about the dangers of nominee accounts when they open accounts. Apart from the issues covered above, most nominee accounts are “pooled” with no clear identification of individual holdings. This can create enormous difficulties when stockbrokers get into financial trouble and go into administration or liquidation – not an uncommon event in reality. Often there are poor records and inadequate reconciliations of holdings in the nominee name (and hence on the register of the company) with individual holdings. It sometimes takes years to sort out who owns what, with some shortfalls also common.

Summary

To summarise, although ShareSoc encourages investors to invest directly in companies, and act like owners, if you are in a nominee account you are not legally a shareholder. You are simply someone who holds an indirect interest as a “beneficial owner”, i.e. you are entitled to receive any dividends that result, can buy or sell that interest, and may be able to instruct your nominee operator how to vote, but you do not have all of the rights afforded to registered members and your interests may not be protected by the Companies Act as you may otherwise have thought.

This is not only dangerous to your legal claim on those shares, but also fatally undermines your rights as an investor.

Please support ShareSoc to get this changed.

Posted by ShareSoc at 16:35, April 22 2013.

Asian Total Return Trust Investment Trust - it’s all change

It’s not often an investment company changes its name three times in fewer years, dumps the former fund manager for a new one and buys back half its shares in a tender offer. But that’s exactly the recent history of Asian Total Return Investment (LON:ATR) whose AGM was held today.

Concerns were expressed by several shareholders at last year’s AGM of Henderson Asian Growth Trust (as it was then called), specifically about company past performance against its peer group and the investment policy. I even had a meeting with the Chairman, David Robins, to discuss the situation of the company and to try and get more understanding of the issues. The company undertook a strategic review later in 2012 and decided to appoint Schroders after a beauty parade of 26 fund managers. Soon after they also undertook a tender offer which was taken up in a big way, particularly by institutional investors.

At the AGM today, about 30 shareholders heard from one of the new fund managers based in Singapore, and it seems there has been a total turnover of the portfolio and a new investment strategy has been implemented. The board is surely to be congratulated on this vigorous action to improve matters, but we will have to see in due course what the outcome will be. But with a bit of luck, the company won't have to change its name again.

ShareSoc members can view a full report on the ShareSoc Members Network here: http://sharesoc.ning.com/forum/topics/the-agm-forum?commentId=6389471%3AComment%3A22492

Hi emptyend,

You're paraphrasing my words somewhat!!!!!

But yes, FWIW, this would have happened even if Dave had bought the stock into say a CREST sponsored account, because the same settlement issue would have occured.

Also, FWIW, I'm pretty sure that FSA (FCA) rules prohibit stock-lending of retail punter shares without express authorisation from the retail investor.

JakNife

emptyend,

I've spoken to Dave and the explanation is as follows:

1. Dave held a small number of stock in a nominee account. He wanted to vote against the proposal and knew that he needed physical stock to do that. He bought more stock equal to about ten times his original holding. Dave thinks that he bought on a T+1 or T+3 basis.

2. By the date of the AGM the second purchase had only partially settled, this was about two weeks after the purchase. A little over 50% of the physical stock had been delivered to settle the bargain. Dave was restricted to voting only those shares that had been physically delivered.

I know from experience that settlement issues are not uncommon but normally they don't matter. There is precedent though in the case of Room Service Group where a broker over-sold stock causing significant settlement issues and was later judged to have created a disorderly market. The facts are different but they may be sufficient to base a claim upon.

The other point to note of course is that at no point in time would the FSA (FCA) judge this bargain to be at risk since cash should only have transferred from Dave's broker to the seller on a matched (delivery versus payment) basis and hence if the trade had failed entirely then Dave's broker would still have had Dave's cash.

JakNife

Dave holds the majority of his stock via spreadbets, if that's how he held his stock in this instance then it makes perfect sense to me that there may not be enough stock in the account. I think that you need to get Dave to comment on the specifics of the facts before drawing a conclusion.

Posted by ShareSoc at 11:15, April 20 2013.

Spectris AGM Report – after disappointing news

Yesterday Spectris (LON:SXS) issued an Interim Management Statement, which was unfortunate timing in some regards as their AGM took place later the same day. The statement reported that sales had fallen by 8% in the first quarter.

Weakness was reported across all regions and segments. But the “opportunity pipeline remains strong” with revenue growth still anticipated during the year, “albeit at a more moderate rate than previously anticipated”. The share price fell by 15% on the day on quite high volumes, reducing the price to 1,908p which is pretty well where it was last November. At one point it had reached 2,470p in March (i.e. a 30% rise in a few weeks on a quite racy valuation), but had already fallen back somewhat before this announcement. The company also said it had taken actions to reduce the cost base in 2013 by about £10 million so as to underpin the full year profit.

After listening to the analysts’ conference call I travelled to the AGM held at Great Fosters Hotel in Egham – a grade one listed historic house originally built in 1550.

Apart from asking some questions about the above, I asked why the total pay of the CEO (including share awards) had doubled to £3 million last year, when eps only went up by 11% (the overall net profits of this company are only £141m). Mr King, the Head of the Remuneration Committee, replied that they have to reward people for the time and effort put in, and suggested that they had done a good job of aligning pay with performance (a chart on page 63 does somewhat demonstrate this, based on Total Shareholder Return). However I pointed out that it was a typical remuneration scheme one sees in large public companies – a complex mix of different bonus schemes resulting overall in excessive pay. I think I was the only person who voted in the room against the remuneration report, but there were 8% of votes against on the proxy counts.

A full report of the conference call and the AGM is present on the ShareSoc Members Network here: http://sharesoc.ning.com/forum/topics/the-agm-forum?commentId=6389471%3AComment%3A22382

Posted by ShareSoc at 15:54, April 17 2013.

VSA Capital Group delisting – some most peculiar events

On the 28^th March, VSA Capital (LON:VSA) announced a proposed delisting from AIM, with a vote to be taken on the 17^th April (today). That was of course immediately before the Easter bank holiday, making it somewhat difficult for shareholders, particularly those in nominee accounts, to get their votes in on time. And so it turned out to be.

A number of shareholders opposed the delisting, led by Nick Brown who set up a web site to co-ordinate support – see www.keepvsalisted.co.uk . Whether the board has a justifiable case for delisting is not something I propose to cover here. Shareholders can read the information on that web site and that issued by the company to decide for themselves. But the subsequent events give ShareSoc grave concerns.

Only a few people turned up at the General Meeting (some having to attend because otherwise their proxy votes would not apparently have been received in time). Major shareholder John McCartney asked if the board had consulted any of their major shareholders before putting the delisting proposal forward. They said they had but he had not apparently been consulted although he claimed to be the third largest shareholder.

The final outcome of the vote was a narrow majority in favour of delisting – 77.6% FOR, and 22.4% AGAINST when 75% was required. But David Stredder (D.S.) who attended the meeting as a shareholder with a “letter of representation” from Pershing (used by his broker as the custodian, i.e. nominee operator) was told by the Registrars (Capita) that some of his claimed shares could not be voted. How can that be? Either Pershing have allocated shares to D.S. which they do not have title to (i.e. that exceed those held on the register of the company), or they have lent the stock out without his knowledge.

In fact there were other shareholders who also held their shares via Pershing and so there is an even bigger shortfall than may have been immediately obvious (because D.S. could have otherwise voted those as being in the pool held by Pershing assuming these are pooled nominee accounts operated by Pershing as they usually are). In addition the Registrar said that some of the proxy forms in respect of the other holdings were not received in time from Pershing so could not be counted. About 4% of votes received by Capita were apparently disallowed.

This demonstrates exactly the evils of the nominee system. It’s simply a mess at present. It is incomprehensible as to what should happen and there is no audit trail of votes cast. Nobody can be certain their votes are going to be recorded, and have been cast, if they hold them via a nominee account. The delisting of VSA would have been defeated if shareholders in nominee accounts had a reliable voting system.

Shareholders are reminded not to hold their shares in nominee accounts unless they absolutely have to do so, and in that case they need to very careful about who they use if they wish to ensure their votes are cast.

Join ShareSoc and help us put a stop to this iniquitous system.

Posted by ShareSoc at 08:08, April 17 2013.

Tesco Results – mostly bad news

Tesco (LON:TSCO) ’s preliminary results this morning were disappointing. Apart from announcing the definite write-off of the US Fresh & Easy chain at a cost of £1.2bn, other elements of the report were also negative. Sales of £64.8bn were less than analysts’ forecasts and only up 1.4% on last year (which of course is less than inflation). Both trading and underlying profits were also both down substantially but that was expected.

The final abandonment of the US operations was well signposted in advance and was surely well overdue. It was obvious many months ago that it was never going to be a profitable operation in any realistic timescale.

The comments about the property operations in the UK make particularly interesting reading. It seems they own 100 sites which they no longer plan to develop and hence have written down their value by £804m. They were bought “at a higher point in the property cycle”, i.e. they overpaid and disposal now is going to prove to be at a lower value.

In addition, they are scaling back the “sale and leaseback programme” to reflect their new property policy. This will reduce underlying property profits and hence overall earnings per share. Is this good or bad? It’s actually a good sign because the idea that you can create real profits from a sale and leaseback arrangement is surely a mirage. It’s simply financial manipulation that converts potential long term profits into short term gains at the expense of incurring long term costs.

So the bad news is in the numbers, but the good news is that the new CEO seems to be taking sound steps to improve the operational and long term performance of the business. But he still has fairly unambitious targets for growth in earnings and dividends – essentially “mid single digit”.

The share price fell by over 3% in early trading as a result.

Posted by ShareSoc at 16:56, April 16 2013.

Bradford & Bingley – a day in court

Bradford & Bingley shareholders are still trying to find out why the company was nationalised so peremptorily in 2008, when it had a very strong balance sheet in comparison with other banks such as RBS. To that end the Bradford & Bingley (B&B) shareholders led by David Blundell have been using the Freedom of Information Act to obtain information. But Government targets such as the Cabinet Office have been obstructive and used certain exemptions in the FOI Act to avoid answering. After an appeal to the Information Commissioners Office (ICO) on the grounds that it was in the public interest that the facts be disclosed, the ICO’s judgement was that they had the right to refuse but it was indicated that the issues were finely balanced. So David Blundell appealed to the First Tier Information Tribunal and today had his day in court – in reality it turned out to only be 3 hours but it was still a quite exhaustive examination of the issues.

These hearings are actually quite like a normal court hearing with three people on the bench – a lawyer leading (Robin Callender-Smith in this case), and two “lay” members – Richard Fox and David Wilkinson. David Blundell did not have any legal representation, but the ICO and the Cabinet Office were so represented and with additional supporting staff there were in total 8 people! Only one other former B&B shareholder attended.

The basis of the appeal was in essence that there is a “public interest” justification for disclosure which can override the exemptions in the act – which relate primarily to the disclosure of the formulation of Government policy and Ministerial communications. But the previous precedents make it important that the facts of the case be considered. For example, if the material is no longer of topical relevance or would not prejudice current policy, then the balance for disclosure might be higher.

Of course David Blundell was not aware of what the material consisted of because his original request was broadly based. So he was somewhat hampered in arguing his case. But the court adjourned for some “closed sessions” with only the respondents present to consider the evidential basis.

David also argued that not only were the events of 2008 now quite historic with little current relevance or need to protect confidential information, but that policy had been settled well before the events being referred to had happened. David emphasised that it was in the public interest for the 800,000 share and bondholders in B&B to know what happened as their property was expropriated without compensation.

The lawyers opposing David emphasised the need to protect policy discussions so as not to discourage open communication, particularly in times of crisis (as they argued was the case when B&B was nationalised).

We will know the outcome of the Tribunal hearing in a few weeks time when the judgement is given. But even if disclosure is authorised, it may not necessarily reveal anything new of course.

In the meantime a similar FOI Act request to the Treasury revealed the information that Adair Turner (Head of the FSA) wrote to Alistair Darling on the 27^th Sept 2008 saying B&B no longer met threshold conditions for authorisation and that a run on B&B would destabilise the market as a whole with likely knock-on effects [on who is redacted out], and hence he encouraged use of the Banking (Special Provisions) Act to nationalise the company.

So it would seem the reason for nationalisation (rather than treating the cash liquidity and withdrawals problems in other ways) was probably panic about the impact of a bank run at B&B on other banks. 

Posted by ShareSoc at 14:51, April 15 2013.

Healthcare Locums – the final denouement

ShareSoc has reported extensively on the past events at Healthcare Locums (LON:HLO) , but it now looks like it will soon be the end of the road for it as a listed company. Following a negative trading statement on the 23^rd January which caused another precipitous fall in the share price, an offer for the company has now been made at 0.75p per share. That values the company at £6.3m million which you may not consider much for a company that has revenue of over £200m per annum. But it has significant debt, is needing the on-going support of its bankers and further funding, is currently loss making and future prospects are in doubt.

Of course this is a typical story when any concert party takes effective control of a company and could have been foreseen whatever the financial progress of the company since they took control. The new consortium buying the business is comprised of ACE Ltd and Toscafund who already own 72% of the business. They have also made it clear that if they get enough acceptances to get past 75% they will delist the company so this is a pretty negative outlook for minority shareholders even if the buyers don’t get the 90% of the shares required to squeeze them out. It is reported that one shareholder has already filed an action for prejudice of a minority in the High Court but we have been unable to confirm that at the time of writing. Shareholders also suggest that not all the relevant information about the financial position and future prospect of the company have been disclosed.

If you are a shareholder in Healthcare Locums, you may care to contact other people who oppose the offer by sending an email to notohcloffer@yahoo.com . But the chances of defeating this process look low, and shareholders should try in future to ensure that they never end up in a similar position as minority investors.

Posted by ShareSoc at 10:44, April 15 2013.

Is AIM Dead? And the UK Investor Show

On Saturday I spoke at the UK Investor Show at Excel (organised by ADVFN and Tom Winnifrith). One of the sessions was a debate between Tom and Richard Poulden on whether the AIM market was dead (or “toast” as Tom said). It was a lively session with Tom saying that there were 1450 companies on AIM but only 100 were making profits, with many having very limited liquidity, and regulatory issues. Indeed he suggested Nomads were desperate not to lose clients so will ignore bad behaviour. He mentioned the issues at Sefton Resources (who are currently suing him for libel) as an example of what goes on in AIM companies. Tom went so far as to say AIM should be scrapped and we should return to the Unlisted Securities Market (USM). Richard Poulden (who is involved in AIM companies so has some interest in the matter) argued there is liquidity - you can trade the shares, and companies that need to be disciplined can be delisted. He said we want more of the free market and let it rip, and AIM enables you to reinvent companies. He also argued London has the most successful small cap market in the world. At the end of the debate Richard won the vote of the audience but not by an overwhelming majority.

There are certainly some issues about the vitality of AIM. In the first quarter of 2013, 14 companies exited AIM and only nine new companies joined so the decline in numbers on the market continues. Fewer companies exited AIM due to financial distress apparently, but Laurence Sacker of UHY Hacker Young who commented on these figures said “It is concerning that there seems to be little enthusiasm among small or medium sized businesses in the UK or internationally to use AIM to support expansion or the kinds of new investments needed if we are to have a sustained recovery”. That is surely saying what I perceive – that AIM has lost the confidence of smaller companies as a good place to raise equity finance. And the fact that Tom Winnifrith would even consider hosting such a debate rather suggests that a lot of investors take a pretty jaundiced view of AIM also.

Mark Slater gave an interesting talk on his current investment likes and dislikes, and his general view of the stock market. Paul Scott has written an extended note on Mark’s speech which you can read here: www.stockopedia.com/content/uk-investor-show-2013-mark-slater-72472

Mark was followed by Nigel Farage, UKIP leader, who gave a very amusing and well pitched speech. He argued people were fed up with politicians who had never had real jobs, unlike himself who for 20 years had worked as a trader – “and worked damn hard ….up until lunchtime”.

From experience he had learned that Governments had a 100% failure rate in fixing the price of anything so was dismayed when Britain joined the ERM, and after the Maastricht Treaty was proposed he stood in a bye-election at Eastleigh where he at least beat Screaming Lord Sutch on votes. He said everyone laughed at me at the time for getting into politics, and then repeated Bob Monkhouse’s joke when looking back over his life which was “everyone laughed at me when I said I wanted to be a comedian, but they are not laughing now…”, and of course Eastleigh has been the location recently where UKIP achieving a major political impact.

He was not opposed to Europe, but simply “now wants Europe to leave the EU”. For investors attending the event, he suggested take your money out of Southern European countries but thought the Eurozone crisis could go on for another ten years. He intends to stay in gold because of the risks we face.

The exhibition area had over 50 companies present, but they were mostly small cap resource stocks. Unfortunately they are the kinds of companies that often need to keep on raising finance and hence will pay to exhibit at these events. To get a broader and more mixed investor audience attending, it would be good to have a more mixed list of exhibitors.

But it overall proved to be an interesting day.

Posted by ShareSoc at 15:53, April 12 2013.

BP AGM – shareholders support baroque pay structure

The BP (LON:BP.) AGM yesterday was notable for the presence of an institutional fund manager (Guy Jubb of Standard Life). He attacked the remuneration policy at the company and went so far as to say that they had voted against or abstained on remuneration resolutions in seven of the last eight years.

It would certainly be good to see institutions attending such events more often but it is indeed a rare sight. The pay arrangements at BP were described as “baroque” by Jonathan Guthrie in the FT this morning – CEO Bob Dudley has 13 category objectives to get his bonus and the remuneration report consists of 16 pages. So in essence it’s the typical complex, confusing and impenetrable remuneration scheme. Perhaps that is why at the end of the day only 6% of shareholders voted against it.

For a fuller report on the event (and the pay issues) by ShareSoc Director Stan Grierson, ShareSoc Members can go to the ShareSoc Members Network AGM Forum where this and lots of other reports on such meetings will be posted in the next few weeks.

Posted by ShareSoc at 08:22, April 7 2013.

Petropavlovsk – when a dividend is not a dividend

Petropavlovsk (LON:POG) have announced a final dividend of 7p, but it’s not quite what it seems. It actually comprises 2p in cash and 5p as a “scrip” dividend, i.e. the issue of shares of a value equivalent to 5p to all shares. This is a compulsory scrip dividend unlike the scrip dividends offered as an option by some large FTSE-100 companies.

A dividend is normally a distribution of cash, i.e. the company is returning some of its cash assets to shareholders. But a scrip issue is nothing of the kind. All shareholders are being diluted in equivalent amounts and the underlying value of the assets of the company are hence simply being spread more thinly over more shares. To call this mirage a dividend is surely grossly misleading.

It also creates particular problems for those private shareholders who hold their shares in nominee accounts as many nominee operators might not wish to deal with the complications of a scrip issue, or will charge for doing so.

It is not clear what the motivation might be for this arrangement except of course it saves the company cash and they may have wanted to maintain the apparent dividend while not increasing their debts further.

But this might be one of the rare cases where shareholders might wish to vote against the Dividend Resolution at the forthcoming AGM.

Emptyend: Re the RBS article comments: your analysis was very perceptive and perhaps you should offer your services to the legal and advisory teams working on their cases. Of course with both Barclays and RBS bidding for ABN-AMRO, some might say that the then experts viewed the company as worth acquiring with their full knowledge presumably of what you state. Shareholders did have a right to expect the prospectus for the rights issue to disclose all the relevant information though and one of the allegations is that they knew more about the defective underlying assets of ABN-AMRO that had come to light after the acquisitions than was disclosed.

Posted by ShareSoc at 10:31, April 5 2013.

HBOS – An accident waiting to happen

The Parliamentary Commission on Banking Standards today published its report into the collapse of HBOS under the title “An accident waiting to happen”. This is the third blog post on the topic of past problems in the banking sector from ShareSoc in two days– RBS and Barclays were covered yesterday. There is some commonality in the analysis of what caused the widespread difficulties in the UK banking sector – inappropriate culture, inexperienced and incompetent management and excessive appetite for risk driven by remuneration structures.

In the case of HBOS, the Commission’s Report lays the blame very directly on the directors including Andy Hornby (CEO), Sir James Crosby (former CEO and FSA board director), Lord Stevenson (Chairman) and Peter Cummings (Head of Corporate Banking) but only the last one has so far been penalised in any way.

The business strategy followed by HBOS after the merger in 2001 of Halifax and the Bank of Scotland was to expand lending, and a lot of this was financed by money market lending. The latter is short term finance in reality when they were often lending long. Lending otherwise raced ahead of customer deposits, so the leverage effectively increased. The closure of money markets caught out Northern Rock and others when money market lending disappeared, but HBOS had other problems. Many of its loans went bad - it had an even worse impairment ratio than RBS at over 10% of its loan book. Indeed in the corporate loan book managed by Mr Cummings it had £25bn of impairments equivalent to 20%. In other words, it was making risky loans and this was well known to players in the property market who told LloydsTSB not to acquire the company before their disastrous takeover (at least for LloydsTSB shareholders) and before the real picture became apparent.

To quote from the Report: “HBOS set a strategy for aggressive, asset-led growth across divisions over a sustained period. This involved accepting more risk across all divisions of the Group. Although many of the strengths of the two brands within HBOS largely persisted at branch level, the strategy created a new culture in the higher echelons of the bank. This culture was brash, underpinned by a belief that the growing market share was due to a special set of skills which HBOS possessed and which its competitors lacked. The effects of the culture were all the more corrosive when coupled with a lack of corporate self-knowledge at the top of the organisation, enabling the bank’s leaders to persist in the belief, in some cases to this day, that HBOS was a conservative institution when in fact it was the very opposite.”

They also suggest that the company was “holed below the water line” before the money market funding crisis even arose and had an over-optimistic view of the risks they were facing even up to the last few hours of the crisis.

Needless to say the Commission pins the responsibility for these problems directly on the CEOs and Chairman in that period (named above) backed up by a delusional board, but they also criticise the regulation by the FSA who should have been more aware of what was happening. They are now asking the FSA to review the authorisation of the people concerned in this debacle.

Comment: as with many of the problems that arose in the banking sector during the financial crisis of 2008, there was not one sole cause. HBOS might have squeezed by if more credit had been available. But all accidents arise from a combination of circumstances and events. They key is to remove as many factors as possible to ensure they don’t happen again. Less gearing in banks, less appetite for risk by more appropriate incentive structures and better regulation are the keys. Those have been put in place already, but at the end of the day if you lend money at high risk without proper oversight or prudence, then you are likely to come a cropper.

The full report can be obtained here: www.parliament.uk/bankingstandards

Posted by ShareSoc at 09:26, April 4 2013.

RBS Legal Action – it finally gets serious

Investors who held shares in Royal Bank of Scotland (LON:RBS) at the time of the rights issue in 2008, and subsequent almost fatal collapse of the company, may have been wondering after over four years whether the legal cases allegedly being pursued were real. Were these real cases with sound claims and adequate finance, or just hot air generated by irate investors and backed by lawyers hoping to earn some fees? But last week one group filed an action in court, and yesterday another one did also.

This indicates that finally RBS, and the former directors (Fred Goodwin et al), may actually have to defend against these cases in court. You know it’s now serious because the adverse costs if the plaintiffs lose their case will start racking up. So it’s not just lawyers writing letters to the defendants any more and promoting their claims in the public arena.

As some may know, I was personally involved in one of these groups early on. The biggest problem faced was that the prospective size of the legal bills from both sides was enormous – running into tens of millions of pounds. Actually raising the necessary funds to pursue the case in court, or obtaining litigation funding from third parties, proved to be exceedingly difficult even though the legal basis of the claims seemed to have obvious merit. In addition adverse costs insurance was also required. RBS will no doubt be asking the court to require the plaintiffs to show they have sufficient funds to cover the costs if they lose so even getting started was problematic.

Private investors were some of those most directly affected by the collapse in the share price of RBS with many being impoverished as a result. Many investors, including former RBS employees, had very high proportions of their retirement savings in RBS shares (and other banks unfortunately) and were often relying on the dividends for living expenses. The crisis at RBS had a devastating effect on the lives of some of these investors. But it was clear that private investors could never finance the action alone (and the size of their claims would never attract litigation funding either).

It was therefore essential for institutional investors to step up to the plate, which they were slow to do. Many had business connections with RBS, and nobody wished to be seen to be effectively suing the Government (RBS is of course now owned 82% by the Government, i.e. indirectly by taxpayers). But these objections now seem to have been overcome. Perhaps institutions have come to realise that RBS will not be recovering quickly and the subsequent disclosures since 2008 of more financially damaging events has probably helped to change their minds on the probity of the action.

But the game has now definitely changed it seems.

The Basis of the Claims

To remind those not familiar with the case, these legal claims have been focussed on the prospectus issued in 2008 when the bank raised £12bn in a deeply discounted rights issue at £2 per share (it subsequently fell to under 20p and is not comparable to the current price as there has been a subsequent share consolidation). The general legal principle, based on the Financial Services and Markets Act, is that a prospectus must disclose all relevant information to investors, and must not be misleading. There should be no significant omissions. Both the directors at the time, who personally signed off the prospectus, and the company, are responsible and hence are named in these lawsuits. This does of course mean that shareholders are to some extent suing their own company, and the size of the claim will certainly run into billions of pounds because the share price collapsed after the rights issue and shareholders lost enormous amounts of money. RBS is not really in a position to absorb the likely size of the claim if they lost, and it’s possible some of the directors would be bankrupted (no doubt that might please some shareholders of course).

The basis of the claims is simply that the prospectus misled investors over the financial position of the company, gave an over-optimistic view of its future prospects and omitted some very specific information. For example one group is now alleging that the company had been forced to undertake the rights issue by the FSA, but this was not disclosed to investors. As someone who read the original prospectus at the time, I certainly believe it gave too rosy a picture of the financial position of the company and did not suggest that the rights issue was needed to financially rescue the business from a funding crisis. It also suggested that the funds raised would ensure that the company had adequate liquid cash resources for at least the coming year, which definitely turned out not to be true as the Government had to step in soon after to stop it going bust when it simply ran out of money.

No doubt the company and its lawyers (Herbert Smith) will claim that this is all hindsight and that the prospectus was based on what was known the directors and the company at the time. The evidence will be undoubtedly voluminous, and subject to extensive legal debate. Particularly the issue of how much the company and its directors knew about the problems in the ABN-AMRO acquisition before the rights issue. The discovery phase of the legal process may of course reveal a lot more than is already known and may provide the basis for other legal claims.

Who are the Plaintiffs?

The two groups who have filed are:

a) Stewarts Law represents 21 claimants including the Trustees of the Mineworkers Union Pension Scheme, the Coal Staff Superannuation Scheme, Electricity Pension Trustees, Illinois Teachers and various ING funds.

b) Bird & Bird represent the RBoS Shareholders Action Group (see www.rbosaction.org ) who claim to have 12,000 individual shareholders (out of up to 100,000 affected) supporting them and a number of institutions such as Deutsche Bank and some Scottish funds. As is often the case, the institutional investors seem to want to keep a low profile. Private investors might ask whether they can still join this group, and it appears you probably can, but of course if the case is won (and the two actions are likely to be heard together as they are obviously very similar) then shareholders might be able to pursue a claim anyway. If there is a settlement before the claim gets into court then it might be more problematic.

The merits of the action

It’s worth stating that no doubt there will be the usual comments in the ill-informed sections of the media that shareholders should expect to lose money sometimes in the stock market because are they not repeatedly told that this is a speculative game and share prices can go up and down. In other words, the case is misconceived and morally defective. But that would certainly not be my view. If company directors have broken the law (in this case the Prospectus Directive), or have otherwise misled shareholders about the financial position of a company, then they should be accountable to shareholders. Investors in public company shares accept many risks, but they should expect companies and their directors to act with integrity and honesty. As to whether any failings can be proven in this case remains to be seen.

Roger Lawson

Posted by ShareSoc at 19:09, April 4 2013.

How much would you pay for a review of Barclays business practices?

If you were a director of a company, how much would you pay someone to tell you about your company’s business practices? Nothing on the assumption this is something you should know anyway? Perhaps ten thousand pounds to a consultant to review the matter and write a report? Well Barclays (LON:BARC) just paid £17 million for a report from Anthony Salz on the subject.

Is it worth the money? It’s certainly worth reading if you are a Barclays’ shareholder. You can see it here: https://www.salzreview.co.uk

It gives the history of Barclays and does of course cover the events in the company during the banking crisis of 2008 and subsequently. But much of this has been covered elsewhere and Barclays did of course remain relatively unscathed in comparison with other banks such as RBS, HBOS or Lloyds by avoiding taking capital from the Government. Many other things such as the LIBOR scandal have since damaged the reputation of Barclays and the report spends some time talking about culture and how it went adrift in the company. Barclays’ customers probably noticed the change as did the customers of other banks where there was a similar focus on transactional driven profits and return on capital.

The report suggests the growth of the bank and its ultimate size meant the directors failed to comprehend the business and the details of its operations at times. High pay and the pay structure seemed to also encourage a certain type of business behaviour to the detriment of the customers and the banks reputation. Indeed Barclays was paying significantly more than its peer group, and still is.

Recommendations include reforming pay with a strengthened HR function, lower bonuses and higher base salaries – all good policy surely and in line with what ShareSoc advocates.

The report supports the new CEO’s focus on improving the ethics and culture of the company, and it also suggests that Barclays’ relationship with their regulators needs to improve where in the past there seemed to be mutual distrust.

Rather surprisingly on page 15 the report even suggests that “The Board should design, adopt and publish from time to time a communications policy for promoting effective and open communication with shareholders and encouraging their participation in general meetings”. It would certainly be good to have more institutions participating in that event if that is what it means.

So in summary, it’s all sound stuff which no doubt Barclays’ directors and senior management will take to heart. Whether it’s worth £17m is another matter.

Posted by ShareSoc at 11:03, March 31 2013.

BAE Systems AGM and Voting Recommendations

We recommend shareholders vote against the re-election of Chairman Dick Olver at the BAE Systems (LON:BA.) AGM on the 8^th May, and against the Remuneration Report and some of the other resolutions. See this note which we have sent to supporters of the ShareSoc campaign on BAE for more information: www.sharesoc.org/BAE_Newsletter_5.pdf

Posted by ShareSoc at 14:34, March 27 2013.

Elementis and Voting at AGMs

Elementis (LON:ELM) have put a resolution on their AGM agenda to adopt new Articles. This of course is not a particularly unusual event in that Articles do need to get brought up-to-date occasionally, particularly to reflect changes in Company Law and practice. However, there are two specific changes to the revised Articles in this case which shareholders need to consider. These are:

1. They are mandating that in future all resolutions shall be determined by a poll. In other words the traditional “show of hands” vote will no longer apply and a poll must be taken on all resolutions. The company says “this is considered best practice, and should reduce the duration of the formal voting process”. On both points they are surely wrong. From past experience, polls often take time because a poll card must be completed and the votes collected, even if people do not wait around for the result. A “show of hands” vote is both quicker and simpler and the big advantage is that meeting attendees can see the mood of the meeting and get the results of the vote immediately (if there is any doubt about the verdict or there is any other reason to call a poll, the Chairman always has discretion to call a poll anyway). Poll votes alone, unless there is an electronic voting system with the results instantly displayed, undermine the vitality of AGMs. As to where they are getting the view from that polls are “best practice” is not known although it is now commonplace for registrars to give that opinion, even though it is not based on any independent advice from a responsible body. It is even more inappropriate to embed the requirement for a poll in the Articles when subsequent Chairmen might prefer to have discretion on this matter.

2. In addition they are increasing the maximum limit of total directors’ pay to £750,000 per annum. This of course applies only to directors’ fees and not to remuneration for the executive directors in respect of their operational duties. One might ask what the current limit is as it is not obviously present in the AGM documentation. Well the answer is £500,000. In addition, there is a provision in the current Articles that says it can be increased by an ordinary resolution, either temporarily or permanently, so it is not at all clear why they need this clause to be changed. Are they reluctant to put any increase required in an ordinary resolution and hence perhaps bring the spotlight upon it? If so that is a poor excuse for putting it in as a change to the Articles. One might also ask whether £500,000 is adequate for the existing number of directors anyway, and why such a large increase is now justified.

Shareholders might like to consider whether they should vote against the resolution to change the Articles at this company.

Posted by ShareSoc at 09:38, March 26 2013.

ShareSoc Technology Company Seminar Report

Last week ShareSoc held its first “Technology Company Seminar” in the City of London, with dotDigital (LON:DOTD) , Deltex Medical (LON:DEMG) and Escher Group (LON:ESCH) presenting. This was an opportunity to learn more about three technology companies, and we plan to run such events on a regular basis. That is particularly so as the first event was a resounding success with over 50 people attending which is really the limit of capacity if people are going to get the opportunity to ask all the questions they wish to put to the presenting executives.

Why are we running these events? Because informed investors are better investors and it’s very worthwhile for investors to meet the management of companies in which they hold shares. But the focus on technology companies is because we see a gap in the market. There are lots of seminars on small-cap mining and other natural resource companies, often raising funds for speculative exploration projects. But there are few on those profitable (and often dividend paying) technology companies that sometimes have a low profile in the marketplace.

We expect this to be the first of a series of such events focussed on technology companies and the organiser Mark Bentley, is already planning the next event for June. Thanks to Mark for organising this first event so well and it went off without any hitches.

A full write-up of the event and a copy of the individual company presentations, plus the financial analysis specially done for this event by Stockopedia are now on the ShareSoc Members Network.

If you have any suggestions for companies who it would be good to cover, or who are keen to present at such events, please contact ShareSoc.

Posted by ShareSoc at 13:21, March 25 2013.

Bankers Pay falling, but it’s all relative

Bankers’ pay has been falling relative to other professionals according to a report commissioned by the FT from PWC. It’s now only 5.8 times the private sector average when it was 9.5 times in 2006. It seems that deliveries of Aston Martins to Canary Wharf have also fallen sharply in recent bonus seasons when they used to be a commonplace sight. One might ask why it should even be 5 times, let alone 9 times. Keep up the good work must be the message to bank boards because they still have a long way to go to get more commonsense into bank pay structures.

Readers will be pleased to hear that it is possible that ShareSoc’s blog and newsletters will not be subject to the allegedly draconian measures in the new bill to regulate the press. We might otherwise have been subject to exemplary damages if we libelled those overpaid bankers (for example). Not that we would of course, but other bloggers might welcome the change.