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Whose company is it anyway?

Paul Jackson wrote an in-depth analysis of the RBS Shareholder Committee campaign and the issues raised in the prestigious Investors Chronicle, 22 June 2018 issue, which is read by tens of thousands of investors. We are grateful to Paul and Investors Chronicle for giving us permission to reproduce this article.

A rather strange thing happened at the RBS annual general meeting at the end of last month. UK Government Investments (UKGI) used its 70 per cent stake to help scupper a resolution to establish a Shareholder Committee – even though just a few months ago, the government viewed such committees as a way of improving how companies conduct themselves. So why did UKGI (which is wholly owned by the government, through HM Treasury) fail to support the concept?

In a terse statement, UKGI simply said that: “the creation of an RBS Shareholder Committee was not compatible with its mandate to protect and realise value for taxpayers from the sale of the government’s RBS shares”. A curious statement. Was it suggesting that a shareholder committee would somehow block or delay future sales of RBS shares? Or, perhaps, reduce the RBS share price? On the face of it, UKGI could hardly be said to be succeeding on that score. Shortly before UKGI was created in 2015, the government sold 6 per cent of RBS for 330p a share; earlier this month, the best price it could get for the sale of a 7.7 per cent stake was 271p. Since the initial 84 per cent stake was acquired for £45.5bn, equivalent to 502p per share, both these sales crystallised substantial losses for the UK taxpayer.

A clash of interests

So what would be the point of a Shareholder Committee? ShareSoc (UK Individual
Shareholders Society) and UKSA (The UK Shareholders’ Association), who came up with
the resolution, believe that RBS would benefit from a forum of informed, loyal investors
to exchange questions and views. While the committee would steer away from interfering
with the day-to-day management of the company, it would focus on governance and

“But that’s our job!” was the reaction from RBS’s directors. Ahead of the AGM, they
urged shareholders to vote against the resolution, saying “it is the role of the Board,directly elected by shareholders, to promote the success of the Company for the benefit of
its members as a whole… the Board’s commitment to building long-term sustainable
value is underpinned by understanding the issues that are important to our shareholders
and wider stakeholders… we want to be trusted, respected and valued by our customers,
shareholders, employees and communities…”

Past failures

Which is all very well, except that the RBS board has somewhat of a chequered track
record. About 10 years ago, the directors backed chief executive Fred Goodwin’s
transformative acquisition of ABN AMRO. Instead of questioning the wisdom of this as
the financial crisis deepened, hubristic group think seemed to stalk the boardroom. This
threw doubt on exactly how independent its directors were at that time.
Suitably transformed, RBS then had to be effectively nationalised to save it from collapse.
The government replaced directors, but it tied the hands of its new chief executive,
Stephen Hester, (now at RSA). Instead of allowing RBS to trade its way out of its
difficulties, it pushed RBS to reduce its exposure to property loans, to increase its capital
reserves and to increase profits. So unlike Citigroup in the US, RBS cut its investment
bank, much to the delight of its competitors. It also began to sell off parts of itself, such
as Hoare Govett, Direct Line, WorldPay, Coutts International and Citizens. In contrast,
Citigroup (which was bailed-out at about the same time as RBS at a cost of $45bn) was
allowed to keep trading. Within a couple of years, it had been sold back to the market at a
higher share price. US taxpayers made a profit of $12bn (£7.6bn). UK taxpayers have so
far seen losses booked of £3bn.

Since Ross McEwan, RBS’s current chief executive, was appointed in late 2013, a number
of scandals have come to light. The most notorious was the Global Restructuring Group,
into which RBS was said to have transferred over 16,000 so-called distressed companies,
collectively worth a staggering £65bn. It then imposed high fees, and often demanded the
early repayment of loans. This enabled the group to acquire customer properties and
stakes in the more promising of these customer companies at low prices, to be sold later
for significant gains. When all this was publicised by Buzzfeed and BBC Newsnight in
2016, RBS initially denied that the practice was systematic. Following a grilling by the
Treasury select committee, it had to admit to profiteering and the details were eventually
published in a report released by the Financial Conduct Authority earlier this year. So:
another failure of corporate governance. And, if we take the more charitable view, it also
illustrates a frequent problem in large organisations: the gap between how those at the
top believe their businesses operate and what really goes on in practice.

A shareholder committee that has employee representation could become an informal
conduit for bringing such unacceptable practices to the attention of top executives and
directors. This might alert them earlier to such issues rather than more heavy-handed
whistleblower procedures.

Small shareholder exclusion

The more fundamental reason for having a Committee is to address a failing in the
current way companies are controlled. RBS disputes that there is a problem. It argues
that throughout the year, senior executives regularly meet its largest institutional
investors, as does the chairman, “to hear their feedback on management, strategy,
business performance and corporate governance”. It says that this is then fed back to the

And that, precisely, is the point, says ShareSoc. Because think what this means in
practice. The process has potential inconsistencies. During a consultation, you meet
different investors with different ideas. If you take these into account, your proposals will
change, so you then have to go back to those you consulted first. The whole process is
messy. Wouldn’t it make more sense to gather those concerned in one place, so that a
consensus might be more readily reached?

Then think what happens at the AGM. Small shareholders don’t get a look in. True, they
can ask questions, but most of the institutional votes have already been cast, so small
shareholders have no opportunity to influence the outcome. Take the Remuneration
Report. It covers a host of issues. If the concern is about high pay for one individual, all
that shareholders can do is to vote against the whole report. Raise it as an issue and,
inevitably, replies from the platform are defensive. And in any case, shareholders are
being asked to confirm what the board has already done. Wouldn’t it make more sense to
have a forum of shareholders to discuss this and other specific issues in advance rather
than just responding to events? That way, a broader range of shareholders could have an

Missing talent

Of course, that’s the last thing that companies want. RBS says that giving an advance say
on pay and nominations to the shareholder committee would undermine the role of the
directors. Not so, says ShareSoc: it had deliberately phrased its proposal as ‘advisory’ to
avoid this. Well, wouldn’t such a committee entrench large investors and exclude small
ones? No, not if the committee chooses a smaller investor as a member. ShareSoc
deliberately kept its proposal flexible, but the intention was to keep numbers small, so
that the committee would be both efficient and truly independent. One suggestion was
for members to comprise three of the most loyal institutional investors, someone to
represent RBS’s 180,000+ individual investors plus an employee representative and
possibly another stakeholder. So where, RBS asked, do you find a representative small
investor willing to engage with companies?

This underestimates the ability of ShareSoc members, some of whom make a living out of
investing. At a recent conference, a fair number said that investments in their ISA’s had to
grown to over £1m. Lord Lee (whose own ISA is worth significantly more than that) told
of the time that his questions at one company’s AGM so impressed the board, that they
asked him to become a director. A person with the experience, scepticism, perception and
insights (among a host of other qualities) needed to be a successful investor, would have
what it takes to become a valuable member of the sort of shareholder committee that
ShareSoc envisages. It believes that there’s a range of talent there, willing to be harnessed.

Well, it’s not needed, RBS says. Apart from regularly meeting its largest shareholders and
feeding their views back to the board, it also hosts events for retail shareholders “to hear
about developments, ask questions about progress so far and hear about plans for the
future”. But, ShareSoc would argue, that’s too passive. Small shareholders deserve more
of an influence – and that would benefit companies, too.

The ownerless corporation

The concept would also address another common criticism: that large shareholders err
on the side of the top management. The view is that, as long as everything appears to be
going well, directors fail to probe as deeply as they should and institutions give the tyres
only a cursory kick. This willingness to accept top management at face value leaves the
chief executive and, to a lesser extent, the finance director running the show. The extent
of this will vary from company to company, but there is a view that this complacency
effectively turns many companies into self-perpetuating entities. Some see Shareholder
Committees as a way of breaking this mould.

RBS was no doubt chosen as a test case both because of its past failings in corporate
governance and because most of its shares are owned by UKGI on behalf of the
public. The government, which is supposed to represent their wishes, advocated the
concept. True, the proposal was dropped from its recent efforts to reform corporate
governance, but that was probably because Brexit got in the way. Large shareholders are
not in favour, but then they already have regular access to top management. The irony is
that small shareholders, who collectively could be seen as more representative of the
ultimate owners, the UK taxpayer, are the ones who are excluded from the RBS
consultation processes. The Shareholder Committee concept has its attractions and its
time might come. But not yet.

Paul Jackson, by kind permission

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