Analysis: Facebook has cancelled its plan to issue a new type of non-voting share following pressure from investors, but some have said UK pension funds lack the size to exert similar influence.
According to data provider Proxy Insight, 18 out of 20 large investors, including asset manager BlackRock, Norges Bank, which operates Norway’s oil fund, and Calpers, the largest public pension fund in the US, voted in favour of fewer management recommendations at annual meetings in the year to the end of June, compared with the previous year.
A class action trial against social network provider Facebook had been scheduled to commence on September 26.
Investors had challenged the company’s proposals, which they argued gave an unfair level of control to the social media network’s founder Mark Zuckerberg, who would have retained a majority voting right, even while reducing his share in the company as part of a pledge to give away most of his wealth.
Institutional investors, including Sweden’s AP7 state pension fund with its default portfolio, were involved in the litigation.
It’s great to see shareholders pushing back and Facebook not getting away with it
Catherine Howarth, ShareAction
As investors successfully wield influence through activism and the threat of court action overseas, might UK schemes consider increasing their level of shareholder activism in order to advance their interests?
Use your vote
The lawsuit was originally filed in 2016. Stuart Grant, managing director at law firm Grant & Eisenhofer, who was the case’s leading shareholder attorney, said investors were concerned over a decision that would increase “the wedge between the percentage of votes [Zuckerberg] has and the percentage of the economics [Zuckerberg] has”.
According to Grant, this scenario “leaves open the possibility for bad decisions”, owing to Zuckerberg’s expected lower economic stake in the social network.
Investors also stood to sustain real financial loss from the reclassification of the shares. The company had proposed reclassifying each Class A share, which carries voting rights, as two Class C shares, which do not.
Academic evidence suggests that following the rebundling of A shares into C shares, the non-voting shares “wind up selling for less collectively than the single A before the reclassification, and that leakage has been shown to be anywhere from 2-6 per cent,” Grant said.
Richard Gröttheim, chief executive officer at AP7 and co-lead plaintiff in the case, said: “This shows that even though we are mainly a passive investor, we can with activism change behaviour in companies.”
Gröttheim said AP7 uses a range of tools to engage with companies, including the use of voting rights, dialogue and an exclusion list of companies. “We thought this was a very important case, especially [from] the corporate governance perspective,” he said.
Facebook did not respond to a request for comment.
UK activism is hampered by fragmentation
In 2015, the Association of Member Nominated Trustees developed its Red Line Voting programme, which established standards for environmental, social and corporate governance following a 2014 recommendation from the Law Commission.
However, Neil McPherson, managing director at Capital Cranfield Trustees, said the majority of schemes would currently achieve a limited impact with shareholder activism.
The fragmented nature of the UK pensions landscape, in terms of the number and size of schemes, makes it unlikely they would be able to replicate the activist achievements of their counterparts overseas.
The decline of shares in scheme portfolios, and the growth of liability-driven investment and derisking strategies, also lower the potential for shareholder activism among UK pension schemes, he added.
“In Holland they’re down to about 300 very large funds. Here we still have 6,000-odd funds, most of which are small to mid-size, and a handful of very large schemes… which means that the majority of funds in the UK are investing in pooled funds, rather than direct investment in equities,” McPherson said.
UK shareholder activism is thus predominantly conducted by the fund managers responsible for constructing these portfolios, rather than the institutional investors themselves, as seen in the US.
Schemes should be more active
Shareholder activism can be divided between the reactive kind seen on display in the case of Facebook’s shareholders, and proactive activism.
Earlier this year, the Church Commissioners for England led 62 per cent of ExxonMobil’s shareholders in a resolution demanding greater disclosure over the impact of climate change on its business. Asset managers such as BlackRock were among those in favour of the resolution.
Catherine Howarth, chief executive at responsible investment campaign group ShareAction, said BlackRock’s participation, given its position as one of the world’s biggest fund managers, was “a kind of sea change moment”. She noted an uptick in long-term investors monitoring boardroom developments since the 2008 financial crisis.
Why shareholder engagement should be on your scheme's agenda
Shade Duffy, head of corporate governance at Axa Investment Managers, argues that with active shareholder engagement, asset managers can use their influence as investors to encourage companies to mitigate key environmental and social risks relevant to their sectors.
“I think the Facebook case is encouraging… it’s great to see shareholders pushing back and Facebook not getting away with it,” she said.
“Equally though, there’s no room for complacency,” she added. “Institutional investors have been very passive [and] very disengaged from voting on the long-term issues and risks that really matter to pension savers”.
