Shareholders In The United Kingdom

Paul L. Davies

University of Oxford- Faculty of Law

European Corporate Governance Institute (ECGI) – Law Working Paper No. 280/2015

Abstract:

This paper, a version of which will appear in Research Handbook on Shareholder Power (Randall Thomas & Jennifer Hill eds, forthcoming 2015) analyses the extent of shareholder power in the United Kingdom. In part, it confirms the generally held view of institutional dominance of the share registers of listed companies and the consequent capacity of institutional shareholders to influence the ‘rules of the game’ as they relate to shareholder influence over management. This is especially true for rules set by subordinate rulemakers (ie not by the legislature directly) or self-regulatory bodies. However, institutional shareholder influence has always been more extensive in relation to rule setting than with regard to interventions to alter managerial policy at portfolio company level, a disparity which is attributed mainly to free-rider problems and conflicts of interest.

However, the paper argues that the standard account of institutional shareholder influence in the UK is likely to be significantly affected for the future by four developments. First, the proportion of the overall market for listed shares held by UK institutions, especially insurance companies and pension funds, has declined this century to the point where it is little or no higher than it was in the 1960s. Second, their place has been taken foreign investors, predominantly US or continental European institutional investors. Third, government is no longer content to leave the level of portfolio company intervention to be decided by the institutions in their own interests but, through the imprecise notion of ‘stewardship’, generates some pressure on institutional shareholders to intervene, to combat ‘short-termism’. Fourth, hedge fund activism, although less developed than in the US, is a distinct feature of the current market.

The combined result of these factors for institutional activism, at both ‘rules of the game’ and portfolio company level, is uncertain. UK institutions may have a lesser capacity to intervene in view of their lower overall holdings, whilst foreign institutions may be less motivated to do so. The coordination costs of both types of investor may increase. This does not bode well for the stewardship policy. On the other hand, the crucial matter for intervention, at least in the medium-term, may not be the concentration of share ownership but the concentration of share management. There is some evidence that investment in the UK market continues to be concentrated in the hands of UK-based managers, even whilst institutional shareholding has become less concentrated. Finally, the coordination costs of institutional shareholders, domestic and foreign, may be reduced by hedge fund activism.

Shareholders In The United Kingdom – Introduction

The influence exercised by shareholders over the running of the companies in which they are invested varies from jurisdiction to jurisdiction. An extended analysis of that influence in a single jurisdiction – the United Kingdom in this case – therefore requires some justification. From a comparative perspective, it is suggested that there are a number of reasons why such an analysis may be of interest to scholars whose primary concern is not with the UK.

Like the United States, the UK displays a pattern of dispersed share-ownership in publicly traded companies, in contrast to the dominance of controlling shareholders in many other advanced economies. In a dispersed shareholding environment, the agency costs of the shareholders as a class are potentially high. They have been extensively analysed in the literature. (Armour, Hansmann and Kraakman, 2009) However, it would be wrong to equate the UK pattern of shareholding with a fully atomised dispersal in which, for example, the largest shareholder typically holds no more than 1% of the voting rights. A distinct feature of the UK system, at least since the 1960s, has been the ability of (semi) dispersed shareholders (primarily pension funds and insurance companies) to achieve a sufficient level of coordinated action to be able to influence the environment in which their investee companies operate. At least in certain conditions, significant but non-controlling shareholders have been able to coordinate their actions so as to do two things: the first is to influence the management of portfolio companies directly and, second, to influence the setting of the rules which determine the mechanisms of accountability of management to shareholders. It is arguable that, to date, they have been more active and more successful in the second role than the first. From the perspective of a comparison with US, the interesting feature of the emergence of a ‘semi-dispersed’ shareholding environment in the UK is that the process has been in advance of a similar development in the US by some two or three decades.

A further question is whether the reduction by dispersed UK shareholders of their agency costs through coordinated action was simply a function of the partial re-concentration of
shareholdings.2 It seems likely that this development was facilitated in part by a legal framework in the UK which traditionally has put fewer barriers in the way of shareholder coordination than has the US and in part by lobbying on behalf of the new category of shareholders for shareholder-friendly governance arrangements (Black and Coffee, 1997).

Shareholders

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