Why company chairmen face an increasing level of investor scrutiny

THE 2011 AGM season is already delivering some stinging blows for company boards.

Recent meetings at the UK’s biggest companies have seen shareholder ire directed at remuneration reports and occasionally directors. But chairmen have also taken flak for their company’s direction and performance over the past year.

Prudential shareholders rapped Harvey McGrath last week for his stewardship of its failed $35.5bn (£21.9bn) bid to buy Asian insurer AIA last year, with 27 per cent failing to support his re-election.

BP chair Carl-Henric Svanberg also received a seven per cent protest vote against his next term in office.

While the Pru played down the shock result – McGrath said he believed he had a “pretty good mandate” to continue – it is the largest such rejection in a FTSE 100 firm this year, and third-biggest revolt against a chair in three years (see table).

Why does this matter? For shareholders, particularly long-standing institutional investors, targeting the chairman in a personal attack is taken immensely seriously.

“It is a rare occurrence for us to vote against a chairman. It is a signal of some depth of concern about either the company leadership or the board – and it is something we certainly don’t do lightly,” one fund manager told City A.M.

A big “no” vote directed at a chairman can mean several things, though. The AGM is shareholders’ single annual opportunity to formally protest at decisions made throughout that year. Opposition to Svanberg, for instance, was viewed as a protest against BP’s Gulf of Mexico spill.

But it can also be a judgement on a chairman’s future. And while the Pru was keen to stress opposition to McGrath was the former, one shareholder told City A.M. he believed it meant more.

“It was more than just a protest vote, it was questioning the leadership of the board,” he said. “The vote reflected concerns over the leadership of the board in the context of how an extremely important decision was handled with shareholders. It would have transformed the company in an extremely profound way and we were concerned about the representation to shareholders of how regulators and other shareholders viewed this.”

More than 20 per cent opposition is rare but often repeats itself. Without a majority revolt a chairman is not bound to step down – so some have shrugged off dissent for several years.

Reckitt Benckiser chairman Adrian Bellamy remains in post despite sizeable votes against him in 2008, 2009 and 2010 at the vast salaries paid to former chief executive Bart Brecht as well as the board.

The most-opposed chairman in recent history is former Xstrata chair Willy Strothotte, who faced protest votes from 2005 to 2010 due to outrage at executive pay and extras. He stepped down this year rather than face re-election again.

One institutional investor said this was not unusual: “You would never see when a chairman goes because of shareholder opposition,” he said, adding that a chair would retire once it became clear investors would not support his re-election.

The alternative is for company and chairman to use the months after a vote to rebuild bridges with investors.

The Pru may feel defensive for a while yet though, one institutional investor said. “In a couple of months they will come out again and probably take soundings from investors to see if anger is still there. If there is, there is a good chance he will stand down,” he said.

Investors are clear that less than 95 per cent support in an AGM vote should make a chairman review his role. As the institutional investor said of McGrath: “It means he has a mandate – but he has work to do.”