By Raji Menon and Joel Dimmock
The death of Rio Tinto's tie-up with Chinalco is the latest in a recent string of revolts by institutional shareholders who on Friday took a concerted step to arm themselves for a new era of activism.
Rio's climbdown to meet investor demands for a rights issue and a BHP tie-up, follows a huge revolt over bonuses at oil giant Royal Dutch Shell while Lloyds has been publicly berated over its deal with HBOS.
Fund managers had faced stinging criticism from politicians and regulators in the wake of the credit crisis for allowing a culture of acquiescence to prevail in all but the very worst cases of corporate failure.
The Institutional Shareholders Committee (ISC) — which itself faced criticism over its low-key approach — on Friday published new recommendations which urge fund managers to be forceful and collaborative in taking on company Boards.
The guidelines effectively make it an obligation for institutional shareholders to pile pressure on companies where boards have been reluctant to address investor concerns.
The Investment Management Association caught the mood late last month when it called on fund managers to put a "body on the street" by voting down company resolutions.
"Many boards will not listen to us unless they believe there will be consequences for not doing so. And they will not believe there will be consequences until they have seen there can be," Robert Jenkins, IMA chairman, said.
PRE-EMPTION
Rio's concession to investors, meanwhile, is likely to have a particular impact on capital raisings, making UK companies keen to avoid the fury which greeted Rio's bid to sideline its major investors by ignoring so-called pre-emption rights.
This informal arrangement is supposed to give existing investors the right of first refusal on any capital raising. Rio's decision to sidestep them made the Chinalco deal a poster child for a campaign to protect shareholder rights.
A Rio spokesman conceded that the strength of feeling among investors had helped pushed the Chinalco deal over the cliff.
"Yes of course we did listen to shareholders, they were clearly a factor," he said. "There was a strong feeling for sure ."
Peter Montagnon, Director of Investment Affairs at the Association of British Insurers (ABI), told Reuters: "You can't conclude that nobody would ever try this again, but what it is is a very significant example to follow."
"This should send a message to other companies on the importance that shareholders place on pre-emption."
Legal & General Investment Management, the largest holder of Rio's UK stock behind Chinalco, said in a statement: "It is important that companies of significant standing choose to honour shareholder rights."
ACTIVISM
The question remains, though, of whether recent successes will coalesce into a tangible shift in the balance of power at British companies.
The revolt at Shell, for all the publicity it generated, was an "advisory" vote which is very unlikely to result in the bonuses which sparked the row being repaid. And Rio's climbdown only came after moves in financial markets since February made the rights issue a more viable option. The ISC report, however, does offer some fundamental changes which would make shareholder activism more common and more influential. It wants investors to combine forces collectively to drive change on major corporate governance issues.
To make boards more accountable, the ISC's new proposals could see company chairmen face an annual vote for re-election if support for key committee chairmen dropped below 75 percent.
The ISC also urged regulators to clarify rules on acting in concert and the treatment of inside information to enable that to happen.
"We need to develop good practices which see us through (this) cycle in a consistent way. This is about achieving outcomes and governance which are of value to the beneficiaries for whom we are all acting," said Montagnon.
