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Shareholders must exercise their democratic rights

"Democracy is the worst form of government apart from all the others" ~ Winston Churchill

by  David Pitt-Watson  |  11 Nov 2019


As Churchill pointed out, democracy is not perfect. But most of us understand it as a vital component of civil society. Indeed, when my children were young, I encouraged them to come with me to the ballot box, to witness the exercising of a right which our ancestors sacrificed so much to secure.

However, we are more reticent when it comes to recognising the importance of economic democracy. Many people I speak to, though they are perfectly well educated, are entirely unaware that their pension, and any other investments they have, confer democratic rights. In the UK, every year, every director of every public company has to stand for election. Director remuneration is subject to approval through the ballot, as is the appointment of the company’s auditor.

Who enjoys this right to vote? It is the shareholders. Those shareholders are the millions of people saving for a pension. They are individuals and families setting aside their wealth for coming generations. They are endowments and charities trying to secure their future.

All of these shareholders have an interest in ensuring that the companies they invest in are well managed, that they trade purposefully and profitably, and that they avoid damage to the society and environment in which we all live.

So you might have thought that we would all take an active interest in who is on the board of the companies we invest in. Unless we do, boards of directors are largely unaccountable. When it comes to a general election, we know that exercising our vote is an important part of maintaining civil society, and consider it with care. But similarly, if we want to create a civil economy of trustworthy and prosperous companies, votes must be cast with the same consideration.

How well is shareholder democracy exercised and is due consideration given?

In some aspects, we have reason to be cheerful. Twenty-five years ago, perhaps 20% to 30% of shares would cast their vote. Today, it is more like 70%.

But when it comes to whether due consideration is given, the evidence is more mixed. This is in part for practical reasons. A big index fund manager broadly invested across many geographies might hold shares in thousands of companies. Each company might require ten votes. That is why fund managers often – perhaps too often – rely on recommendations from proxy agencies, companies which specialise in giving advice to shareholders on how to vote.

However, fund managers can be lazy and simply vote thoughtlessly for management proposals, hoping that others will have raised any difficult issues. Indeed, given that almost every vote is passed with more than a 90% majority, there is some evidence that this may be happening.

In all the examples I have given, it is a fund manager who is casting the vote. But the investment usually belongs to someone else: an endowment, a pensioner, an individual. It is absolutely critical that those whose funds are being managed know exactly how their shares are being voted.

Here is one example of how the system can easily fail, if shareholders are not on their toes. I have just stepped down as Chair of the £400 million endowment at NESTA, a charity dedicated to promoting innovation. One question we asked of our fund managers was whether they might be approving bonus packages for company directors that would encourage them to generate short-term results at the expense of long-term investment in innovation. None of the fund managers had even thought about it. And it turned out that this was exactly what they had been doing. That meant that NESTA’s endowment was being managed in a way which was in direct conflict with our beliefs. Our votes were discouraging long-term, profitable investment. We resolved never to appoint a fund manager who had not given proper consideration to voting.

No one is claiming democracy is perfect. But when I took my kids to the ballot box I wanted them to learn that the considered exercise of democratic rights was a foundation of a civil society. Proper exercise of shareholder votes is similarly important if we want to create a prosperous and sustainable economy.



As an ex-Trustee of Nesta, the former founder of the Hermes Focus Funds and Chair of the UNEP Finance Initiative, David Pitt-Watson is an expert on engagement and responsible investing and forms part of Sarasin’s Advisory Panel of external advisers. He is currently a trustee for the Institute for Public Policy Research.