Thomas Cook: terminal turnout

Where were the Thomas Cook shareholders? This is a question that we think deserves further exploration following the liquidation of the travel firm, which leaves thousands of workers facing redundancy. Because one of the odd things to emerge from the company’s failure is that the deeper it got into trouble, the less likely shareholders were to use their legal rights to intervene.
If we look back at the company’s February 2017 AGM the proportion of the issued share capital that was voted was just under 84%. At the February 2018 AGM it dropped back to 82%. By this February’s AGM that number fell further to 70.6%, and at Thomas Cook’s final meeting, the EGM at the end of April, the turnout was down to 63%.
It’s not like there weren’t issues to challenge the company over. The High Pay Centre has criticised the 30m paid out to executives between 2014 and 2018. For our part we had recommended that shareholders oppose the remuneration report at this February’s AGM because of the lack of alignment between pay and performance over the previous few years. But apparently many investors didn’t think it was worth voting, let alone voting against. Why that might be is an important question.
This year saw a surge in short positions in Thomas Cook. Shorting requires stock-lending, so it’s possible that the drop in turnout is partly driven by investors lending shares out and not choosing to recall them to vote. Given that borrowing demand for Thomas Cooks shares was likely to have been high, lenders may have picked up a few extra crumbs by not recalling. It’s also possible that some shareholders decided that it was no longer worth voting the stock, given the company’s predicament. And perhaps changes in the share register had an effect, if institutional shareholders were replaced by retail investors (who are/might be less likely to vote) this could be another factor at play.
But the cold facts are that the closer that Thomas Cook came to failing the lower the proportion of shareholders that bothered to vote. Whatever the reason, the fall in turnout is of real concern. Whilst voting is only part of shareholders’ stewardship activity it is an integral feature. And Thomas Cook is not alone in seeing this sharp fall in turnout at its terminal AGM.
Look at Debenhams. Turnout at its January 2018 AGM was 80%, at its final AGM in January 2019 this fell to 67%. Again the company was heavily shorted prior to its demise. Or look at Interserve, another company where the shorts were active. Turnout at its May 2016 AGM was 67%, by May 2017 it was 50%, and at its final AGM last May turnout had fallen off a cliff to just 29%. Carillion saw a much milder drop but the 52% turnout for its final AGM in 2017 (compared to 57% in 2016) was the lowest for five years, and turnout had been at 65% in 2013.
We can’t infer much from such a small sample of companies. However the drop in turnout in each of these cases is surprising and we believe merits further scrutiny. The ability of shareholders to affect the direction of the company, and hold directors accountable, is inevitably reduced if voting rights are not utilised. And if the shares are out on loan this means that, for that period, the lender does not own them. Therefore investors can’t credibly engage with the company either if their shareholding is (temporarily) much reduced or even non-existent. For this to occur at a critical time for this group of companies raises deep questions about the effectiveness of stewardship when it really matters.
For us this points to the need for more attention to be devoted to the practice of stewardship at failing companies in future. It also suggests that policies relating to stock-lending and voting and engagement ought to be covered in asset managers’ Stewardship Code statements. If managers are missing in action as they can’t vote or engage because they’ve lent their stock out then both their clients and regulators need to be made aware of this. It’s a point PIRC will be making in its submission to the BEIS committee inquiry into the Thomas Cook collapse.

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