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Powerless shareholders

28 September 2015 by Henry Ker

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Can minority shareholder opposition actually cause change?

Just days before Sports Direct’s annual general meeting, one of its independent shareholders, Royal London Asset Management (RLAM), announced it would not be backing the re-election of its Founder and Deputy Executive Chairman Mike Ashley.

Alongside this, for the second year in a row, it voted against re-electing the board’s non-executive directors. Although this generated a large amount of negative press for Sports Direct, whether it actually had any tangible effect on the company is questionable.

The long list

The cause of RLAM’s remonstration of Sports Direct was its alleged ‘long list of corporate governance failings’. It expressed concerns about the retailer’s decision to lower earnings targets for the executive director’s bonus scheme and changes to the share scheme. For a leading institutional investor to state ‘we have lost confidence in the board’ is damning. However, this was all the ‘pre-game show’. Amid accusations of unfair treatment of staff (one investor claimed staff were so scared of calling in sick that an employee had given birth in the factory toilets) and the zero-hour contract drama, the actual meeting saw 30% of independent shareholders refuse to back current chairman, Keith Hellawell.

Controlling stakeholder

Taken alongside RLAM’s statement this may sound like a dramatic revolt, but remember that Mike Ashley has a controlling 55% shareholding. RLAM has 0.6%. This means a ‘30% of independent shareholders’ statistic actually counts for a lot less in terms affecting an outcome. In the vast majority of decisions there can be no real challenge to Mike Ashley’s decision. ICSA Policy and Research Director, Peter Swabey comments on this point: ‘There are plenty of governance issues at Sports Direct, but unless more institutional investors are prepared to do something about it, the action of RLAM looks like an unwinnable battle.’

Despite garnering support, the nature of the power balance between the independent shareholder and deputy executive chairman means it is not enough to affect change. Peter argues there is scope for challenging the non-executive directors, as ‘there is a new FCA requirement that non-executive directors be elected by a majority of independent shareholders – i.e. by the majority of the 45% that Mr Ashley doesn’t control’. He added ‘even then RLAM needs the support of other investors’.

Rocking the boat

So the question then becomes, what was the point of RLAM’s actions? Peter explains: ‘the only sanction [requires] a full vote of all shareholders, [and] as a 55% shareholder himself, [Mike Ashley] would undoubtedly carry that. What that means in practice is two things. First, investors can say what they want, but have no influence over the outcome of this vote – there is an embarrassment factor, but that is all. Second, and given that first point, it is likely that some investors will choose to vote against their inclinations and support Mr Ashley, thereby not rocking the corporate boat – and risking a negative effect on the value of their investment – when they have no prospect of victory’.

This negative publicity will have undermined investor confidence in Sports Direct but how this will really help RLAM’s cause is unclear. Perhaps the publicity will encourage Mike Ashley and the board to address governance deficiencies in an attempt to alleviate investor mistrust. Yet until any actual evidence of governance failure is presented they are not beholden to do this. The situation remains one in which most individual Sport Direct shareholders – even one as respected as RLAM – are powerless.

Henry Ker is Deputy Editor of Governance and Compliance

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