3 AIM Shares With Good Corporate Governance: Part 2

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This is the second of a two-part transcript in which Fool.co.uk's David Kuo chats with ShareSoc director David Stredder -- who is well-known to the Motley Fool community as Carmensfella -- about the rise in shareholder power. They look at how private investors can influence the way companies behave following the successful shareholder revolts at ,, and  David explains how easy it is for private individuals to get their voices heard. He also reveals three AIM-traded companies with exemplary corporate governance.

You can read the first part of this transcript here. You can listen to or download the full podcast here.

EDITOR'S NOTE: What follows is a lightly edited transcript of David Kuo's conversation with ShareSoc director David Stredder.


David Kuo: So let's have a look at some of the things that the government is trying to do. So if we have a look at Vince Cable's plan to make directors' pay more transparent, he is talking about one single figure with regards to how much a director takes away as remuneration, rather than this complicated equation that you have, how much his salary is, how much his deferred pensions are, how much is deferred bonuses are going to be -- do you think this is a good idea, from the Business Secretary?

David Stredder: I think it's a good idea; I'd love to see what the overall figures end up being, because I don't know how they're going to come up...

David K: You were going to say "garbage," weren't you?

David S: Well, I just find it embarrassing when ... I went to the AGM of Barclays, and asked a question there. Now, the Barclays' remuneration report was just so long and detailed, and even before I attended the AGM, four serious newspapers -- not the gutter press or tabloids, as many seem to want to say -- the actual decent financial press, all quoted amounts that Bob Diamond was earning, and other directors -- they were all quoting different amounts. Nobody having reviewed it seemed to know exactly what somebody was going to earn anyway. So if they can't understand it, having spent hours, and no doubt had the lawyers looking over it to make sure they weren't quoting something terrible, if they can't understand it, what hope has the man on the street and the shareholder got? It's just impossible.

David K: So do you think Vince Cable will be able to address this problem? Because I have a figure of somewhere between 5 and 20 million pounds, that's what I saw with regards to Bob Diamond's remuneration. Five was bad enough!

David S: I mean, ShareSoc, to be honest, really would like to see all pay in very similar terms, and we'd like to see bonuses that are never more than 50% of someone's annual salary anyway. Why should somebody have the chance to earn a bonus that's 20 times their salary? It's just wrong. I hate to say it, but the oil companies, for example, the resource companies that we've been going against, where people are given multi-multi-million pound options, that are just almost on the flip of a coin whether they hit the oil in the right place on the right day, it's just wrong. Why should there be that situation, when shareholders have to put in the money in the first place to give them the chance to find it? And the shareholders, if they don't find it, get nothing. In fact, they lose all their money, but the directors have still been paid handsome amounts all the way through, even before they find it or don't find it. It just seems wrong.

David K: Now, listeners who are listening to this podcast may say, yes -- I want to get involved in this, I want to have some say in influencing these companies, but many of them buy their shares through nominee accounts, which therefore means that they don't even know when the AGM is, if there is one, and they don't get to vote on anything, so how can they do something about this?

David S: We do have a very poor system -- I'm fairly outspoken on this.

David K: It's cheap, though.

David S: It's cheap, though -- you're right, and you get what you ask for, I guess, which is poor in itself, but it's true.

David K: Cheap rubbish.

David S: Yeah. I mean, I'm a small-company investor in the main, but I mean, I looked at the system for everybody, in the larger companies and smaller companies. Over the years, people seem to have wanted a cheaper and cheaper way of buying their shares. I'll be honest, I'm a bit of a dinosaur -- I don't even have an online account, so I'll probably get bombarded by emails tomorrow saying, here's a new online account for you. I mean, I buy my shares --

David K: Shall I give out your email address?

David S: No, don't do that! I buy my shares, I pay a reasonable amount for somebody to go into the market and negotiate a price for me, and that's the way I do it, and I get everything that I possibly can to make sure I can follow my investment from that point. But it seems to me now that the vast majority either have an online account, and they just want a quick trade, and they'll pay 7.50 pounds or whatever for going into the market, and exiting the market. They don't seem to see their holding in the same way that I do, in that, as you say, it's in a nominee account. They won't get all the paperwork that I get. They probably don't know when the AGM is; they certainly don't attend the AGM, because when I go to the AGMs, there's probably only three of us there.

David K: What kind of companies are you involved in?

David S: Well, they're not all big companies, but I've been to big-company AGMs, and I'll tell you, there's no more than 10 or 15 people there, and maybe half of those are what we call the suits, the people who are there as advisors to the companies, so it's not unusual. I'm really impressed if I go to an AGM and there's 20 or 30 people there, and usually it's an old family firm where they're ex-employees, and it's become part of the annual reunion. So really serious investors going to AGMs, you don't get very many, I can tell you. And the institutional holders, who have the vast majority of the shares in most companies, they never ever attend an AGM, and they never ever send their representative to an AGM. So if the serious investors actually attend an AGM, and ask some really awkward questions, and also prize out some really good detailed information from the directors, as they ought to -- if they're invested in the company, they want to know exactly what's going on; the institutional holders never get a clue. They wouldn't know a thing that's happening there, and so if it was a serious issue that really ought to be followed up, and decided on whether during the year it's actually been accounted for and changed, or followed up, the institutional investors wouldn't know anyway. So there's no chance that even one private investor who might follow it up would have enough sway with the directors to say, well why haven't you done this? It's the institutions that need to know these things.

David K: The thing is, The Motley Fool is very passionate about shareholder activism and shareholder involvement in companies, but again I go back to this question about the nominee account -- what can we do about it, if all we have is an online broker who doesn't tell us when these things are going on?

David S: Well, maybe there needs to be a different grading within nominee accounts. Maybe you pay a little bit more, and you get everything. I've had people complain through ShareSoc about nominee accounts, because they want to attend the meeting when there's a really serious issue, and we've got an action group together, but they find that the minute they want to attend the meeting, the nominee company says, oh -- that'll be 30 pounds, sir, for your letter of representation. But, of course, if you're paying only a few pounds for your original deal, they're not going to do everything for free, because they'll be making a huge loss on the transaction, so this is the problem that we have.

David K: And what's more, if your involvement in the company is only to the tune of say 500 or 1,000 pounds, and they're going to charge you 30 just to send a letter out, it's getting on for about 10% of your investment. You're going to say, hey -- am I really interested in this? I'll just let the big guys decide what they want to do.

David S: Yeah, and quite a lot of people, of course, do only invest small amounts, but when they're grouped together, which is what ShareSoc does, they do make a difference. So even though you might be small, a hundred small guys adds up to two or three big guys, so it can make a difference.

David K: Okay, now then, I want to draw your attention to something that the IMA, or the Investment Managers' Association, said, and they are the trade body for about 3.9 trillion pounds' worth of assets. They said, "It would not be good for U.K. companies to be bogged down in regular arguments with shareholders." What is your view about this?

David S: Why are they thinking that they're going to be involved in "regular arguments with shareholders"? I mean, maybe in the recent past, that we'd got issues over executive pay as an example, but once all that's calmed down, and everybody's back running the businesses as they should be, and earning reasonable amounts of money, as they should be, I don't see that there'd be any major arguments all the time anyway. Maybe they're feeling a bit ready with guilt and expecting some arguments, I don't know.

David K: Okay, so just before I end, as a private investor yourself, and you have an eye on corporate governance, which you consider to be quite important, what are the kind of companies that you think private investors should be looking at, in terms of corporate governance? In other words, I want to know what you invest in, David.

David S: I'm fairly well-known to invest in what I consider sensible, rather than small companies, and there's quite often a common thread in the companies insofar as they tend to be family-founded companies where there are lots of family members involved as shareholders, and you tend to find that the boards of those companies have been well set up over the years. They know that they're doing things not just for themselves, but for a huge wide base of shareholders that quite often involve tonnes of family members, so they tend to do things in the right way. Yes, okay, they have a family mentality, and you're not always going to get quite the same things that you would in a FTSE 100 company, but it's amazing how they tend to do the right things overall, and they're very sensible and cautious with taking risk, etcetera.

David K: Give me a name, David?

David S: FW Thorpe  (ISE: TFW.L) is a fairly well-known one; I know The Motley Fool have backed them in the past.

David K: Very keen on that one.

David S: Yeah, so James Latham's (ISE: LTHM.L) another one; Robinsons  (ISE: RBN.L)  -- there are lots of them, and in the downturn, yes, every company has to batten down the hatches a little bit, and be sensible, and generally those companies don't have big bank borrowings either, so they've all weathered through, and done very well over the years.

David K: So are you saying that there is a relationship between heavy family founder involvement in the company, and the long-term performance of that business?

David S: I think what I'm saying in a roundabout way is that you tend to get more problems in companies where there's absolutely no loyalty to shareholders. Loyalty to shareholders is something that obviously is gained over the years, and where shareholders and directors and management generally come together on a regular basis, and get to know each other, and everybody realises who they're looking after. If you can imagine, if a firm has been set up literally with just a very blue sky ideal, some sort of project that might or might not come to fruition, they've raised lots of money in the City, the money has moved on, and now you've got just a few shareholders who never go to AGMs; the directors haven't got a clue who's on the shareholder base, because it's all in nominee accounts. If you can imagine, would those directors really, if you're honest with yourself, would they really have any loyalty to shareholders? They've never met them, they've never seen them at an AGM. They have an AGM every year maybe, and nobody turns up! Do they really feel that there's anybody to satisfy except themselves?

David K: But isn't there a flipside to that, David, and that is that, if you have a very closely-knit family-run-type business, then it becomes a kind of closed shop? They actually look after themselves, rather than other people, so therefore they see you as some kind of outsider, some kind of usurper, if you come in, ruining their party?

David S: Yeah, well not ruining the party -- joining the party. I'm bringing my drink to the party, so that they can't shut the door on me.

David K: Only if you bring the corkscrew, yeah?

David S: Yeah, only if you bring the corkscrew. But I find that if I attend the AGMs of these companies, and I engage with them on the telephone, get to know them, they know who I am and that I'm not going to disappear overnight; that I'm a long-term shareholder -- they tend to make me part of the family, is the best way I can say it. If I'm sensible with my comments, and ask questions that they understand from day one, and they know why I need to know, we all get on fine, and I just become part of the family as well, and if they're doing things in a sensible way, I can only be happy.

David K: Okay, well that's wonderful. Well, before we end, David, how can listeners get involved in ShareSoc? Have you brought an application form for me?

David S: For joining -- you're not already a member, David? That's outrageous! Why did I do the interview?

David K: Well, that's why you're here -- I was hoping you would actually bring the form, so I wouldn't have to send it off.

David S: Yeah, I'll give you a form -- I've got one in my bag.

David K: Okay -- save me a stamp.

David S: Anybody can join ShareSoc, even if you've only bought one share in your life, and you don't even have to have bought a share in your life, but if you've got an interest in investing, it's good to be in ShareSoc. We've got a website. Everything is done automatically online as well.

David K: What is the website address?

David S: The website address is www.sharesoc.org, and you can join online, and we even have a network within ShareSoc where you can post your own views on different things that you've had a problem with, and we help each other online, so it's lots of self-help in there. It's our AGM on Saturday, so I hope there'll be more attendance at our AGM than there is at some of the companies that are on the FTSE. The odds are that, over a long period of time, because our membership is growing rapidly, over a long period of time you're going to hear more and more about ShareSoc, so it's certainly something that, by joining, you can get involved, and see where our engaging activism gets us.

David K: And did you say it was free?

David S: It's totally free.

David K: Contributions are accepted, yes?

David S: Well, in the long term, we're hoping that, by being successful with some of the actions that we're joining with shareholders in, anybody who then sees the investment that they've made because ShareSoc got involved, hopefully they'll make a donation, so that it helps the organisation keep going. But generally, a lot of members become an original member for free, and then they decide actually, we'll upgrade to a full membership, which means they've got voting rights, and they get a newsletter in full every month, and lots of other things that maybe those who are free don't get, but it's a really minor difference. Anybody who joins as a full member really does it because they appreciate what's being done.

David K: That's excellent -- I'm joining, David.

David S: Great.

David K: Now, thank you very much for coming in today. I have just one more chore to perform, which is to find a quote to sum up today's podcast. I think you'll like this one -- the quote comes from a man called Paul Heyne, who said: "The gap in our economy is between what we have, and what we think we ought to have. That is a moral problem, not an economic one" -- and I think that refers to many of the chief executives of companies -- it's what they have, and what they think they ought to have, and quite often they just dip their hands in the till and take whatever they want. So, this has been Money Talk, I have been David Kuo, and my guest has been David Stredder from ShareSoc. Now, don't forget you can sign up for The Motley Fool's take on what is happening in your world of finance by going to fool.co.uk/davidkuo, and until next week, happy investing!

That was the second of a two-part transcript in which Fool.co.uk's David Kuo chatted with ShareSoc director David Stredder about the rise in shareholder power. In the first part of the transcript, they discuss how private investors can influence the way companies behave. Just click here to continue reading.

David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors Of 2012" -- while it's still free!

The article 3 AIM Shares With Good Corporate Governance: Part 2 originally appeared on Fool.com.

The Motley Fool owns shares of F.W. Thorpe. Motley Fool newsletter serviceshave recommended buying shares of F.W. Thorpe. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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