3 AIM Shares With Good Corporate Governance: Part 1


This is the first 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 , (ISE: BARC.L) , and (ISE: TNI.L) . 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 second 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: This is Money Talk, the weekly investing podcast from The Motley Fool. I am David Kuo, and if you haven't noticed, shareholders have suddenly become quite vociferous. Perhaps it's because shareholders are fed up with being treated like second-class citizens at a time of austerity, while company bosses are rewarding themselves with hefty pay increases and bonuses. It probably started after the financial crisis, when banks were being bailed out by taxpayers, but bank bosses were still getting rewarded. Shareholders got nothing, but bankers got the lot. Now, one man who has been fighting for the rights of shareholders is David Stredder, otherwise known as Carmensfella on our discussion boards. David is a director at ShareSoc, whose aim is to support private investors. Welcome to The Motley Fool, and welcome to Money Talk, David.

David Stredder: Good afternoon, David.

David K: OK, now one thing that has always puzzled me is your name -- Carmensfella. Where does that come from?

David S: I was going to say it puzzles me, too, but obviously I created it, so I must know all about it. Well, Carmen is my wife, so I suppose that's a good start, and in the North, where I herald from, a fella is, in friendly terms, is obviously someone's boyfriend, other half, partner, and it struck me at the time it would be a nice little blend for a name to put on The Motley Fool.

David K: Mystery solved, then?

David S: Yeah, I mean online everybody wonders who somebody is, but I suppose it sounded like a nice, softer name.

David K: OK, and is your wife a member of The Motley Fool discussion boards?

David S: Do you know, that's a good question. She probably is, to see what I'm up to! To be honest, she's not at all interested in all the online things that go on -- she's very much more sort of behind the scenes with my family, really.

David K: OK, maybe I should trawl through the discussion boards to see if there's somebody called "David'sbitofstuff," yeah?

David S: Why not? Yeah, that'd be interesting.

David K: OK, now then -- tell me a little bit about ShareSoc.

David S: Well, ShareSoc was effectively founded about 18 months ago, in fact started on Valentine's Day, of all times, in 2011. It was created really because a group of us felt that there was nothing out there for investors to attach themselves to, when something was going wrong, when there was regulations that needed changing, or something, it seemed like it was wrong within a company and there were issues, that we needed an action group setting up, and we needed something that actually helped investors, and we felt that something was needed online as well, something that was fast and efficient and effective, so we set up ShareSoc.

David K: So how many people are involved in ShareSoc altogether?

David S: There are seven directors. There are other people who help us a little bit behind the scenes as well, but I mean, it really is a non-profit organisation, so funding is very ...

David K: I don't understand that word.

David S: I know, well...let's just say it's not set up for any profit, unlike most companies in the country. We're just an organisation, really there to try and help, and keep the cost down. We're effectively a free-for-all organisation, so somebody can join, and it's free. We do have members who pay, but we tend to try and encourage people to join for free, get involved. If they like it, and they want a full membership, then they have to pay, but it's only a very minimal annual fee.

David K: OK, so how do you go about helping private investors, then?

David S: Our intention really is to focus on regulations, things that are needed to be changed, action groups where there are problems in companies that need to be solved, generally being a voice for the private investor, the individual private investor, so that anyone who really thinks that there should be something that they need to know about, and we'll be able to understand, even educational areas we're looking at, to try and provide courses. We're really behind anything that the private investor would want to know about.

David K: OK, now the thing is, on your website, you point out the long-term decline in the U.K. of direct holdings of shares by private shareholders, and instead these days many investors now turn to collective investments. So what can private investors do to wrestle that power away from the big fund managers?

David S: I think the fund managers are probably doing a pretty good job themselves of pushing them away. I mean, the performance, to be honest, of many funds, I don't have any figures with me, but I'm sure most I've seen over the last few years, most funds have underperformed, I would say, even set against a benchmark of the FTSE or trackers. So do you really want to pay out for something that actually is underperforming? A difficult decision maybe, but I think the fund managers themselves are not always doing a good job.

David K: But the thing is, when you talk about the underperformance of fund managers, the general consensus is that 85% of fund managers underperform the market, and yet people still flock to fund managers, don't they? Why do you think that is?

David S: Well, it's probably because it's almost all they know to try and invest. If they think that the markets really ought to be going up from here, and we've had a few bad years, so maybe they think there's a chance that companies are now lowly valued. Do they have the time to spend to research everything for themselves, or do they just put their money with their fund? Unfortunately, most people go for the soft option of maybe putting money with a fund. Our view, I guess, would be that some should try really to do a little bit for themselves, and see how it compares with the funds that they would have invested elsewhere.

David K: But the problem is, the private investor feels that they only have an insignificant amount of investment in a particular company, and that it is the fund managers that are holding the bulk of it. So therefore, if the fund managers decide to do something with that company, then they can do so, and the private investor has absolutely no chance whatsoever.

David S: Unfortunately, I see the reverse. I see quite often the fund managers not actually doing anything, and they're very passive, and not active with the investments. But in the main, we have to look at all the different sizes of companies we have on the market, and in the very large companies, you'll always see the big names, like certain institutional investors. But when you go further down, and when you go into the smaller pond, and you go into the smaller companies, quite often private investors hold a significant amount of a smaller company, but it will be spread among maybe a few hundred or a thousand investors, and there are a limited number of institutional investors these days in the smaller companies, that many of them are not wanting to go into the smaller companies these days. So private investors are a significant part of the smaller caps.

David K: So are you saying, David, that the big companies, the large caps, the ones in the FTSE 100 (UKX), it isn't worth the while of the private investor to try and influence anything that is going on in these companies?

David S: Well, you can try and influence. I did my own little bit, attending the Barclays' AGM, and that got filmed, as you know, but in the main, the directors are not likely to listen to the small man on the street. They are only going to meet with the larger institutions, and listen to what they have to say. But we can group together, which is what ShareSoc hopes, and if there's something that really is wrong, group shareholders together form an action group, and we really can change things.

David K: What exactly did you achieve at Barclays? I'm not saying you didn't achieve anything, but what did we, as private investors, achieve at Barclays? Bob Diamond is still going to be getting his 15, 18, or 20 million pound remuneration package, so we haven't done anything, and if we have a look at some of the other companies -- Aviva, AstraZeneca, Trinity Mirror, WPP (ISE: WPP.L) , William Hill -- we haven't actually changed anything in those companies.

David S: I think you're a little bit out there.

David K: Well, we got rid of Sly Bailey at the Mirror Group, but we haven't actually sort of changed anything, have we? Because the company will just carry on, they'll appoint another chief executive, and then things will just carry on as they were. It's a Pyrrhic victory.

David S: I have to disagree, probably because I'm at the sharp end, and I do know things that are going on in some of these smaller companies, and when we say Trinity Mirror, they used to be a very big company. They're no longer a very big company, and of course they really are quite small. So investors can make a difference at the smaller companies, I can assure you. But three of the companies that you mentioned there have all had changes of the directors, so that is a difference. The minute you get changes at director level, you've shaken things up. The majority of investments that I've had over the years, where I've really seen a difference in the value of my holdings, is where there's been a significant change in management, and things have changed for the better. So let's see what happens at some of those companies, but it's the shockwave effect. You see these changes -- it's not just what happens at those individual companies, it's the effect that you see behind it, where all the other companies are watching and thinking, we don't want to get into this situation -- what do we do now to make sure that we don't have this?

David K: But what has happened at WPP? Sir Martin Sorrell managed to survive the revolt by shareholders, and he just simply waved people away and said, thanks very much for expressing your concerns about how much I'm going to be getting paid -- that's it, I'm still going to get paid.

David S: OK, I wasn't at the AGM of WPP, and I'm not invested in WPP, and I don't know the exact detail of the things that are still being agreed, negotiated or whatever's happening there. But what I can tell you is, in the majority of situations that hit the press, where they become big issues, and everybody on the outside sees them, it creates a real problem for the companies involved if there aren't changes, because it all gets flagged up now, and everyone tweets information, everybody sends messages around, saying, have you seen how much he's paid? It's highlighted it, because people didn't know in the past.

David K: But he can still ignore it, though? That's the thing.

David S: Well, at his peril, is my only suggestion.

David K: Fighting talk!

David S: Well, I've got nothing personally against that situation.

David K: Nor have I.

David S: But there is a lot going on behind the scenes, and there are groups forming together who are looking to try and -- not take advantage, is the wrong word -- but they're trying to watch situations where they don't change, and what they can do against the companies. I can only suggest that, if you have pay that is ridiculously out of line, and employees obviously further down the line start to feel uncomfortable because of this, because it all gets highlighted, eventually you'll also have customers that will become disengaged, and start to think, actually -- do we really want to do business with a company that is so out of line, and taking all our money for profit, and putting it into their own salaries? So I think eventually you'll start to see business going away from some of these companies, if they don't change, which will be even worse for them. So who knows where the next wave comes? You tend to find, with these things, they start with a little bit of adverse publicity, and the wave builds and builds, and before you know it, you have major change that's forced on them.

David K: So is that the mechanics that you use for influencing the way that companies behave? Is that how you actually go about doing it?

David S: ShareSoc doesn't automatically create anything. We try and give guidance to our members, if there's something that they can be involved in. So if we have a small company, for example, where it's blatantly obvious that the pay is completely out of kilter, we're obviously going to connect with all the shareholders that we have there, and if you have 15 or 20 smaller shareholders all getting together and creating a big noise, institutions can't ignore it, because it becomes very difficult for them to be out of line with the wider shareholder base. So that's how it builds in a smaller company. In the larger companies, it's fairly obvious that the larger shareholders, the institutions, are now starting to all fall in line, and work out that they've got to do something now before it gets worse.

David K: I mean, we can all remember, many years ago, that woman who stood up at a Marks & Spencers' (ISE: MKS.L) AGM, waving a bra, and indicating that this was not the kind of merchandise that she expected to see at Marks & Spencers. She got a lot of coverage, a lot of column inches, over what she actually did. Is that the kind of shareholder activism we want to see? People waving their underwear?

David S: I haven't seen it myself at an AGM, I must admit, and if she was waving her bra, she probably needed some alternative coverage. But we've got to be sensible in these situations. Really, if the boards themselves, with all the publicity that's gone on over the last six months to a year, where things are really starting to blow up, if they can't act before they're pushed, then it's a bit of a worry anyway. So I think all we're doing now is really tidying everything up for the future, making sure regulation comes in to make it very straightforward, and to make sure that this isn't a one-off, where everybody does something for the short term, and then relaxes off and thinks, they've gone away now -- let's get back to normal, because we want change that means that we can't see this happening again. I mean, the fact that salaries over the last 10 years multiplied for directors sevenfold, and yet the average shareholder return for anybody who was invested in all these companies was only slightly ahead of inflation, just says everything really. I've attended AGMS, and asked questions about the pay, and I've had the most ridiculous replies in the past. Last year I had one remuneration head tell me that it wasn't the remuneration committee to blame for the 16% increase in the salaries, and this company hadn't had any increase in profits. He said, no -- blame the Chancellor. I said, the Chancellor? Has he become a shareholder, or is he on the board? He said, no -- the Chancellor increase the higher rate tax to 50%, so the directors came to us and said they needed this 16 ... I said, well hold on -- how many employees do the same? It's just ridiculous, and these are the things that go on.

David K: OK, so what are some examples of companies that you have had success with, in terms of changing the way they either behave, or the way they think?

David S: Well, I'd love to give you a huge long list, but I mean, most of them have been successes only because you actually physically see the change from something that was originally intended, and then we've created either a situation where they've not gone ahead with it, or we've managed to get them to agree to do something to change it for the future. We've had companies, there was Pharaoh Petroleum, where they had a very significant long-term incentive plan that was very good for the directors, but not good for the shareholders, and they've managed to get them to change that. We've had companies where the directors were hoping to quietly disappear off the market -- we've managed to, along with shareholders, gather together to make sure that they can't just automatically delist, and go off and take away the company. But most of the things I would still say are still in the background, where the fact that you have, it's a bit like a union -- if you have a stronger group, it's like a shareholders' union. If they're there, we're probably stopping a lot of things happening that you just never get to hear about, because people are thinking, we'll never get that through now, and that's as important.

That was the first 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 second part of the transcript, David Stredder reveals three AIM-traded companies with good corporate governance. 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 for 2012" -- while it's still free!

The article 3 AIM Shares With Good Corporate Governance: Part 1 originally appeared on Fool.com.

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