Preservation of wealth is one of the pillars of Foord’s investment philosophy. Two proposals are often raised at company AGMs that appear innocuous but, in our estimation, erode shareholder returns. We are active participants in protecting shareholder interests and have consistently voted against these (and other dilutive) proposals:
1. Placing shares under the control of management
Many corporates annually seek blanket approval from shareholders authorising management to issue up to 10% of their shares in issue. Usually this approval is sought so that management can raise cash at short notice for corporate activities such as acquisitions. However, such shares are often only issued to selected shareholders to the exclusion of the others. To compound the inequity, such share issues may occur at a discount to the prevailing market price. This results in a dilution in the value of shares to non-participating shareholders. We believe that if a potential acquisition is attractive, the company should prioritise the use of cash and/or debt. If such facilities are inadequate, companies should approach shareholders to approve the transaction and then participate on an equitable basis.
2. Share incentive schemes
As shareholders, we endorse management being significant shareholders in their own companies and we support competent management teams being well rewarded. However, we believe management should use their cash remuneration to acquire those shares on the market on the same terms as all other shareholders. This is because share incentive schemes usually lead to dilution in the value of shares of other shareholders. There have been too many examples of share incentive schemes simply providing management with a free call option on price appreciation unrelated to their contribution to the business. Over the short to medium term share price movements can also be driven by factors outside of management’s control. Why then should they gain from price appreciation that may have little to do with good management but bear no downside risks for price depreciation? Furthermore, it is amazing how often incentive schemes are priced at market lows or re-priced downwards when market conditions move against them. The dilutive costs of an option scheme are often not fully reflected in the income statement or are deferred to future years. We therefore prefer remuneration to be based on cash awards that have a direct, visible cost in the year that it was incurred.
At Foord we take our voting rights seriously, with contentious issues debated by the full investment team. Through voting appropriately we try to ensure that our investors benefit fully from their underlying investments and not allow their interests to be diluted in any way.