Historically, the results of voting at listed company AGMs often appeared to be little more than a rubber-stamping exercise, with most resolutions garnering over 90% of votes – many of them more than 98%. But as most South Africans know, what happens in the public eye is not necessarily the whole truth.
A key attraction of the JSE globally has long been that South African companies tend to have far superior governance than those in most other emerging markets. Unfortunately, the actions of a few bad apples over the past year or so have tarnished that reputation – and this has encouraged markedly higher levels of shareholder visibility and activism.
Most market followers are aware that resolutions to be voted on at a company AGM are forwarded to shareholders ahead of the meeting. What many don’t know, however, is that large institutional shareholders often engage with management and the board ahead of the AGM to discuss the proposed resolutions, which may then be withdrawn or altered in response to issues emerging from these talks. This not only helps avoid embarrassment, but ensures changes are made timeously so shareholders don’t need to wait a full year before voting on the revised resolutions.
An example is the recent Steinhoff AGM, where resolutions in favour of additional payments to board members were withdrawn in advance due to shareholder engagement before the event.
GOVERNANCE LANDSCAPE CHANGING
Increased shareholder activism has resulted in numerous subtle changes to the South African corporate governance landscape over the past few years. Some examples include:
- Shares under control of directors. Most large companies request general authority to issue shares, which gives them a degree of flexibility to both fund potential mergers and acquisitions, and issue shares for incentive schemes. A few years ago, most companies sought to issue up to 10% additional shares, but sustained engagement and behind-the-scenes activism has led to companies now only asking for 5%. This limits what management can do without shareholder approval – it becomes particularly relevant when one considers that Naspers has diluted shareholders by more than 10% per year over the past decade.
- The non-binding vote on remuneration policy. This serves as a ‘catch-all’ relating to remuneration, and shareholders tend to vote against this even if they disagree only with a single part of the remuneration policy. In so doing, they ensure that all pieces of the remuneration framework are in place and appropriate.
- Acknowledgement of the King III principles by larger companies. One of these principles is that independent directors who’ve been on the board for more than nine years, and whose independence may thus be questionable, need to be re-elected each year. This helps prevent a ‘club’ atmosphere on boards where directors might simply agree with the strongest personality.
In general, the level of disclosure around governance issues is improving, particularly the reasons behind proposed resolutions.
While recent corporate scandals and other events at companies like Steinhoff, EOH and Resilient are disappointing, the silver lining for investors is that shareholder activism may go some way towards preventing a repeat of such situations.
With more active shareholders across the market, even companies that have ‘done nothing wrong’ have improved their disclosure to avoid being tarred with the same brush as those with questionable governance. While of course some doors will continue to be closed only after the horse has bolted, at least the rest of the doors in the stable are now also being checked more thoroughly.
