REFILE-Shareholders flex muscles as companies slow to change

Thu May 22, 2014 1:06pm EDT

(Clarifies attribution of ISS data in paragraph 5)

* Several shareholders oppose resolutions at top UK firms

* Kentz becomes first UK firm to have pay plan rejected

* UK, EU politicians encourage shareholder engagement

* New breed of funds focus more on governance issues

By Jemima Kelly and Simon Jessop

LONDON, May 22 (Reuters) - Encouraged by politicians, shareholders are starting to flex their muscles again, frustrated with the slow pace of reform within companies on everything from executive pay to appointing more women directors.

After the "shareholder spring" of 2012, when a number of investors abandoned their traditional back-seat position on the management of companies, last year's round of annual shareholder meetings was a much more subdued affair.

But the signs this year point to the return of a more active stance, with several shareholders rejecting resolutions at blue-chip firms including Barclays, AstraZeneca , National Express and Standard Chartered .

The proportion of "oppose" votes recommended by investor advisory firm Institutional Shareholder Services (ISS) against companies listed in Britain's FTSE All-Share index is up 17 percent for annual general meetings (AGM) up to May 6.

According to ISS Corporate Services, the advisory firm has issued 27 such recommendations out of a total of 198, versus 50 from 414 for the whole of the previous AGM season.

"Last year was a year of consolidation after the shareholder spring, but this year you've quite clearly seen a reaction from shareholders that the corporate world isn't moving fast enough on these issues," Alan MacDougall, managing director at fellow shareholder voting advisory firm PIRC, told Reuters.

"Barclays is the tip of the iceberg," he added, referring to the British bank's AGM on April 24, when more than a third of shareholders declined to back its pay plan.

PIRC is either calling for a "no" vote, or supporting shareholder resolutions, against, oil firm Afren security firm G4S, advertising group WPP and financial group HSBC among others at upcoming AGMs.

POLITICAL SUPPORT

Executive pay has long been a controversial topic, with the public, politicians and investors growing angry over the rise in boardroom riches, irrespective of wider economic conditions.

Between 1998 and 2010, average pay for Britain's chief executives rose 13 percent a year, despite no overall increase in the FTSE 100 blue-chip share index.

Politicians are encouraging investors to hold companies to account more and have given them new powers, with shareholder votes on pay made binding in Britain in October 2013.

While most investors prefer to work behind the scenes with firms and avoid public disagreements, there are signs they are prepared to go public when they think change is too slow.

Insurer Standard Life, Barclays' sixth-biggest investor, took the rare decision of announcing it had voted against the bank's pay plan, which increased bonuses for investment bankers last year despite a one-third drop in profit.

For the first time ever for a London-listed company, shareholders also voted down the remuneration policy of engineering firm Kentz on Friday.

IT'S NOT JUST PAY

Pay is not the only topic galvanising shareholders.

At its AGM on Tuesday, 10 percent of miner Glencore Xstrata's shareholders did not back the appointment of ex-BP CEO Tony Hayward as chairman after criticism of the firm's failure to appoint any female board members.

A 2011 government review said all of Britain's blue-chip FTSE 100 companies should aim for at least a quarter of their boards to be comprised of women by 2015.

While progress has been made, with women now making up 20.4 percent of board seats in FTSE 100 firms, up from 12.5 percent when the review was conducted, there are still laggards, and the proportion of board seats occupied by women in the next tier of 250 UK listed firms is just 15.1 percent.

Glencore Xstrata, appearing to feel the pressure, promised to appoint a woman to its board this year.

A EUROPEAN PUSH

Investors are being encouraged to get more hands-on with companies elsewhere.

Michel Barnier, the European Union's financial services chief, has proposed changes to the EU's shareholder rights directive that would give investors across the 28-country bloc a "say on pay".

The EU is also planning legislation to make all companies report non-financial data, such as their environmental record, which would make it easier for shareholders to hold businesses to account over a broader range of issues.

For now, however, the centre of shareholder activism seems likely to remain in the UK because of the relatively high level of institutional investor ownership in its companies.

"Where there is low insider ownership you are less likely to have a blocking family or insider stake that is going to have a significant sway over any voting," said Raj Hindocha, managing director for research at Deutsche Bank.

"So you are more likely to be able to have an influence and liaise with a board that is receptive to ideas and change."

MAKING MONEY

Ensuring businesses have good corporate governance appears to make good business sense for investors.

A January report by fund manager Hermes found well-run firms on the MSCI World equity index outperformed poorly governed ones by an average 30 basis points a month from 2008 to 2013.

Such data has encouraged the rise of investment funds that focus on companies with strong track records in environmental, social and governance (ESG) matters.

Total global assets under management at ESG funds amounted to at least $13.6 trillion at the end of 2011, with Europe accounting for 49 percent, according to the Global Sustainable Investment Alliance.

Many of these funds see it as in their interests to take a tougher line on corporate governance.

"We're not here to be warm and fuzzy. We're here to make money," said Lewis Grant, a portfolio manager who works on the Hermes global equity ESG fund, which it launched on May 1.

($1 = 0.5935 British Pounds)

($1 = 0.7302 Euros) (Editing by Alexander Smith and Mark Potter)

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