Collective Engagement Dashboard 2018
| Governance (by the Board) | Execution (by the Management team) | |||||||
| Strategy | Leadership and Succession | Capital Allocation | Corporate Governance | Corporate Action | Operational performance | Management information | Reporting and communication | |
| Centrica | ||||||||
| Imperial Brands | ||||||||
| Reckitt Benckiser | ||||||||
| Shire | ||||||||
| Unilever | ||||||||
| Victrex | ||||||||
Centrica plc
Governance (by the Board)
Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)
Operational performance
Management information
Reporting and communication
Engagement period: Dec 17 – Jun 18
Size: FTSE 100
Number of participants: 8
% of company: ~13%
| Governance (by the Board) | Execution (by the Management team) | ||||||
| Strategy | Leadership and Succession | Capital Allocation | Corporate Governance | Corporate Action | Operational performance | Management information | Reporting and communication |
Background
The Forum engaged with the company between December 2017 and April 2018.
The Board had overseen a number of challenges, but Participants expressed the view that collective engagement could help to highlight the areas of concern. There was a particular focus on customer attrition, capital allocation and the company’s dividend policy.
Engagement Objectives
The objectives of the Forum’s engagement were to encourage the company to clarify its strategic direction, increase confidence in capital allocation decision-making and to better understand the company’s potential for future growth.
The Participants were keen to encourage the Board to demonstrate the effectiveness of its oversight and to build shareholder confidence that there was an appropriate balance between innovation and growth initiatives relative to “fixing the core business”.
Outcomes
We met with the company on a number of occasions in the first quarter of 2018. The Chair met with a number of leading investors, and the company made a significant effort to address many of the issues raised when it announced its 2017 results in February 2018, identifying 10 key issues of importance. Centrica also hosted a governance event in April 2018 which included contributions from both Executive and Non- Executive Directors.
We continued to monitor developments with Participants during the second quarter and closed the engagement in June 2018.
In our view the engagement gave the Participants an important opportunity to reinforce their concerns, and Centrica was open to discuss the issues raised through a series of interactions.
Reflections
- Although investor concern had been increasing, it was only following share price weakness in late 2017 that the appetite for collective engagement was formed.
- Investors participated in the engagement to ensure that the Board received consolidated feedback on the strength of their concern on the key issues outlined above.
- Throughout this period the shareholder register remained, largely, unchanged and it is notable that many of the largest shareholders have continued to support the Company.
Imperial Brands plc
Governance (by the Board)
Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)
Operational performance
Management information
Reporting and communication
Engagement period: Feb 18 – Sept 18
Size: FTSE 100
Number of participants: 7-14
% of company: ~20%
| Governance (by the Board) | Execution (by the Management team) | ||||||
| Strategy | Leadership and Succession | Capital Allocation | Corporate Governance | Corporate Action | Operational performance | Management information | Reporting and communication |
Background
Participants had concerns about the long-term organic growth potential of the company, positioning with regard to next generation products and the company’s ability to maintain the stated dividend policy.
We identified a wide range of views – from a desire for continued patience through to calls for
a comprehensive strategic review to consider all options to recover shareholder value – and worked with participants to consolidate these views.
We initially worked with 14 investors, including members and non-members, to formulate an engagement strategy. Seven of these investors supported an engagement with the company, with two other shareholders joining as the engagement progressed.
Engagement Objectives
Following a significant fall in the share price in the second half of 2017, the engagement sought to reinforce at Board level the participant’s appetite for action to rebuild confidence in the company’s strategic direction and operational execution. In addition to challenges with the changing product landscape, the engagement highlighted concerns about the brand portfolio and the ability to deliver the expected financial returns. There was also a focus on the potential to enhance the group’s divisional disclosure.
Outcomes
The Chairman engaged rapidly and very constructively with the Forum, and many of the issues highlighted were addressed in the interim results announcement in May 2018. We maintained a dialogue with the Chairman through the year and continued to monitor developments ahead of the full year results.
During 2018, Imperial Brands was very active, announcing a disposal programme, enhancing
its communications on its approach to Next Generation Products and implementing changes to segmental reporting at the full year results. All of these initiatives were welcomed by shareholders. While frustrations remain, the engagement was closed in September given action taken to address many of the key concerns.
Reflections
- The feedback illustrated that investors had identified a complex series of challenges faced by the company, and that a wide range of participant perspectives needed to be considered in the collective engagement.
- Division within a shareholder base often creates a challenge for a company, but disparate views need to be addressed and overcome.
- In situations such as this, multiple steps are required to reconcile these conflicts and rebuild market confidence. Investors value engagement by the Board, as well as the executive, for example by way of a Stewardship and Strategy Forum.
Reckitt Benckiser plc
Governance (by the Board)
Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)
Operational performance
Management information
Reporting and communication
Engagement period: Nov 17 – Oct 18
Size: FTSE 100
Number of participants: 10
% of company: ~7%
| Governance (by the Board) | Execution (by the Management team) | ||||||
| Strategy | Leadership and Succession | Capital Allocation | Corporate Governance | Corporate Action | Operational performance | Management information | Reporting and communication |
Background
Reckitt Benckiser has a well-defined culture and a long-term track record of outstanding operational delivery, which has generated strong returns for shareholders. However, there has been a debate over several years with regard to remuneration policies, business practices and Board effectiveness. This engagement was proposed following product safety and marketing issues which were felt to have the potential to negatively impact the company’s reputation and franchise value.
The company announced a series of changes to refresh its Board in September 2017. While there was a long period between the announcement of the new Chairman and his appointment at the AGM in May 2018, the Chair-elect began to meet shareholders during that period.
Engagement Objectives
The objective was to encourage the incoming Chair to review the effectiveness of the Board and reassure investors that it provided appropriate challenge and oversight to management. Given investor concerns that the company’s strong delivery-focused culture might be exposing shareholders to unnecessary risk, we also sought to highlight the importance of focusing on sustainable business practices in generating long-term growth.
Outcomes
The company were very responsive and we had a series of meetings with investor relations, the company secretary and the Chair-elect. This culminated in the company hosting a Board event, based on the Stewardship and Strategy Forum format, in May 2018 shortly after the new Chair took over.
This was the first time that the company had organised an event specifically for the Board to meet with investors and it was well received.
The event was structured to introduce the newly refreshed Board, to address the issues raised in our letter, and to provide investors with an opportunity to understand the Board’s thinking in relation to recent changes to the strategy. Various members of the Board, the Chairs of the committees and members of the executive team attended the session, while investors were represented by individuals from across the investment disciplines, including governance specialists, portfolio managers and sector analysts.
Reflections
- Dialogue with a company ahead of a round of investor meetings was helpful in giving context for individual discussions and increasing awareness of, and sensitivity to issues of concern.
- Chair succession can create a vacuum when there is a long period between announcement and stepping in to the role, but meeting as Chair-elect can be a positive way to understand investor views and prepare the forward agenda during this period.
- Board events work best where the agenda is co-created with investors, to ensure that subjects are appropriately prioritised.
Shire plc
Governance (by the Board)
Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)
Operational performance
Management information
Reporting and communication
Engagement period: Jul 17 – Sep 18
Size: FTSE 100
Number of participants: 11-19
% of company: 17%
| Governance (by the Board) | Execution (by the Management team) | ||||||
| Strategy | Leadership and Succession | Capital Allocation | Corporate Governance | Corporate Action | Operational performance | Management information | Reporting and communication |
Background
Investors viewed Shire as a growth company with a positive long-term future. Members were frustrated, however, with discussions on remuneration leading up to the 2016 AGM and were concerned about the scrutiny of capital allocation, following the transformative acquisition of Baxalta.
The company experienced a great degree of change during engagement – announcing a strategic review of its neuroscience business, the unexpected resignation of the Finance Director, and ultimately an agreed takeover by Takeda.
Engagement Objectives
In the first phase of the engagement the objectives were to evaluate the effectiveness of the Board in providing scrutiny and independent challenge, to clarify the capital allocation and risk framework, and enhance understanding of the Board’s strategy for management development and succession.
The second phase of the engagement reinforced the original objectives, highlighting investor unease over the widening gap between the perceived intrinsic value of the franchise and the market price.
Outcomes
The Chair and SID engaged very constructively when approached by the Forum in July 2017, and agreed to host a “Board of Directors Overview Meeting” in September. The company’s appetite for frank discussion and willingness to listen were well received by investors. Board members welcomed the chance to interact directly with their major shareholders in an efficient and effective format.
While shareholders were pleased with the company’s responsiveness, concerns remained. Given the important strategic decisions which were pending, the lack of confidence in the capital allocation framework was felt keenly by investors. Additionally, the resignation of the Finance Director raised questions about the efficacy of the strategic review.
In March 2018 the Forum communicated an increase in investor frustration in resolving the original objectives, a lack of confidence in the strategic review process, and concerns about the reduction in medium term revenue guidance.
Members were considering next steps in the engagement when Takeda announced that it was planning an approach to Shire regarding an offer for the company. The possible bid illustrated a classic competitive reaction to a depressed share price resulting from the lack of investor confidence.
With important strategic issues still outstanding and the possibility of other bids emerging, the engagement entered a second phase. 15 investors agreed to support a letter to the company given concerns over the best route to achieve value for shareholders.
In light of the extended timetable relating to the offer from Takeda, participants decided to send a further letter to the company in late June to express the importance they attached to delivering an effective operational performance by the stand- alone business during this period. The engagement was closed in September 2018.
Reflections
- This engagement was a clear example of remuneration concerns representing a symptom, rather than the cause, of investor frustration with a company. It took time and persistence to demonstrate the substantive nature of the underlying investor concerns.
- Engagement with companies which are not in visible crisis requires coordinated input to ensure that the company takes on board the seriousness with which investors regard the strategic issues.
- The Stewardship & Strategy Forum was an important mechanism to help sensitise the Board’s understanding of investor concerns, through face-to-face conversations between investors and Non-Executive Directors.
- When large gaps emerge between perceived intrinsic value and market valuation, more forceful intervention at an earlier stage might help to recover value in the business. In this instance, it was noticeable that a number of investors joined the second phase of engagement as the company’s operating performance began to deteriorate relative to expectations.
- Ultimately if shareholders express significant concerns over long-term value, it is important that the Board can propose a convincing response.
Unilever plc
Governance (by the Board)
Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)
Operational performance
Management information
Reporting and communication
Engagement period: Mar 18 – Oct 18
Size: FTSE 100
Number of participants: 17-23
% of Unilever plc shares: 11%
| Governance (by the Board) | Execution (by the Management team) | ||||||
| Strategy | Leadership and Succession | Capital Allocation | Corporate Governance | Corporate Action | Operational performance | Management information | Reporting and communication |
Background
Unilever has enjoyed strong and consistent support from long-term investors in recent years, particularly during the hostile approach from Kraft. However, when Unilever proposed a corporate simplification in 2018, significant concerns were raised over the decision-making process and the choice of domicile.
Some investors focused on index exclusion and forced selling, while other investors identified shareholder rights, takeover protection, dividend withholding tax and capital gains tax as concerns regarding the proposals. Insights were also sought regarding the Board’s decision-making processes.
The burden of proof for the proposal was high, and this was acknowledged by the company, given the requirement for support from 75% of plc shareholders and a majority of those who voted.
Engagement Objectives
The objective was to highlight the scale of investor concern regarding the proposed approach to unification. Shareholders asked the Board to make a more effective case as to why incorporation in the Netherlands was essential to the proposed restructuring.
Ahead of publication of the final circular, the Board was encouraged to articulate clearly
the benefits of their actions to demonstrate a robust decision-making process and to reassure investors with regard to the ongoing effectiveness of the company’s structures and processes under Dutch law.
The company was also asked to clarify the tax treatment of future dividend payments to international investors, its position on the possible introduction of a 250 day ‘time out’ period in Dutch Law and its intentions regarding the voting of any uninstructed ADR proxies.
Outcomes
Unilever engaged comprehensively with the Investor Forum, alongside its extensive direct interaction with shareholders. The dialogue was constructive, and the company sought to clarify a number of the issues raised.
In addition to the collective engagement, a number of institutions took the unusual step of publicly declaring their intention to vote against the proposal. Pressure from media and retail investors was also very intense, and The Investor Forum decided to make public its involvement at the request of Members. The company announced the withdrawal of the simplification proposal on 5th October 2018.
- Reflections
A frequent challenge for collective engagement is agreeing the objectives and identifying the common ground; in this case, while the specific concerns and aims differed, it was clear that a single factor – the implications of the choice of domicile for simplification – was the driver of investor unease. - It took an extended period for many investors to finalise their views, given the complexity of the decision.
- While the ultimate decision represented a binary choice, there were many complexities to consider in reaching
a view. The Forum was able to source external input from corporate lawyers, investment bankers and company executives who had faced similar decisions. The Forum became a centre of accumulated knowledge, and a valuable reference point for Members. - It is rare for such a major corporation to reverse such a significant proposal. In this case it required the combined impact of individual investor dialogue, collective engagement, public announcements by investors, media coverage and retail investor pressure for the proposal to be withdrawn.
Victrex plc
Governance (by the Board)
Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)
Operational performance
Management information
Reporting and communication
Engagement period: Jan 18 – Feb 18
Size: FTSE 250
Number of participants: 13
% of company: 22%
| Governance (by the Board) | Execution (by the Management team) | ||||||
| Strategy | Leadership and Succession | Capital Allocation | Corporate Governance | Corporate Action | Operational performance | Management information | Reporting and communication |
Background
One of Victrex’s Directors also served as Audit Committee Chair of Carillion plc. As the Carillion insolvency was unfolding, investors were keen that its Directors had sufficient time to focus on that situation. Investors were also sensitive to the reputational impact on companies where Carillion Directors also served.
Engagement Objectives
Investors contacted the Forum as they felt it was appropriate to send a clear message, individually and collectively, to the Chairman of Victrex about concerns over the re-election of a Director at the upcoming General Meeting.
Outcomes
Victrex engaged with, and listened to, its shareholders, and announced prior to its AGM that the Chairman of the Audit Committee had resigned from the Board of Victrex, which they believed to be in the best interests of the Company.
Reflections
- In addition to the more complex engagement assignments, investors use the Forum’s engagement platform and framework as an effective mechanism to move quickly to send a clear collective message, which amplifies the individual expressions of views.