The importance of shareholder activism as part of responsible investing

^{By: Theo Terblanche, executive head of investment management and Piet van der Merwe, ESG analyst at Momentum Investments}

Dramatic media headlines are the reason most of the public are aware of proxy voting. These often occur after some financial scandal, following which, the public rightfully asks: “How could shareholders (investment managers) have allowed this?” or “voted for that?”.

The backlash is usually in reference to seemingly generous executive director remuneration packages, the reappointment of the same company auditors, year after year, or the appointment of independent non-executive directors after having been part of a board for many years. 

At Momentum Investments, we take our fiduciary duty seriously and use our influence as one of the large investment management businesses in South Africa to help maintain a well-governed corporate South Africa. We have a well-thought-through shareholder activism program and vote at all shareholder meetings where our mandates allow us (see our policy on proxy voting and engagement here). But while exercising proxy votes starts with the aim to enforce and enhance ethical standards in South African companies, there are also practical considerations that need to be considered.

The South African investment universe is much smaller than those in more developed countries. It is therefore impractical, from a portfolio management perspective, to exclude shares within portfolios from that universe. Proxy voting allows investors to have their say, influence and improve areas such as the quality of management, remuneration policies and other governance issues, while still allowing these shares in portfolios, over time.  

This provides an excellent platform to upgrade the quality of company management in general and provides an additional layer of investor protection for our clients by holding management to account and attempting to force them to stay within the rules.

This addresses the governance factor of environmental, social and governance (ESG) investing. But a trend has developed in the past couple of years where concerns over the environmental aspect has increasingly found its way into resolutions at shareholder meetings.

It started with shareholders exercising their rights in accordance with the Companies Act to put resolutions on shareholder meeting agendas addressing the financing of carbon-intensive projects. Although some of these resolutions were unrealistic and failed to gain traction among shareholders, many were approved and had a positive impact. 

Financial institutions and resource companies took note and started publishing climate change policies, guiding their climate risk mitigation activities, and publicly setting climate change targets.

With the issue of climate change, the idea of a so-called just transition has also come of age. In short, the transition to a zero-carbon based economy has to take the societal impact of such a move into consideration. This is especially true in countries such as South Africa, where this transition has to be managed against an economic and societal backdrop of that are communities dependent on carbon-based industries.

Mobilising shareholders around these climate related resolutions has proved to be more effective than only using the media. It should be noted however, that media articles laid the groundwork for climate change resolutions to start flourishing and to change the behaviour of company management teams.

Another practical consideration and potentially one of the largest barriers to shareholder democracy (‘one share, one vote’), is differential share structures. This allows for different classes of shares in a company having different voting rights. For example, some have a thousand votes per share while other have only one vote per share. 

These are usually established by a founder of a company in an attempt to maintain control and guard against hostile takeovers after listing on an exchange, with the family controlling shares with a high number of votes per share. In practice, these founders or families can own 1% of the company but exercise 50% or more of the voting rights.

The problem associated with these structures is that often the holders of the shares can afford to repeatedly ignore proposals by other shareholders and choose to ignore the chance to engage meaningfully with other shareholders.

The attitude seems to be that if shareholders do not agree on how the company is managed, they are free to sell their shares. That might be true in a market where investors have a large universe of counters to choose from, but when the company has a meaningful market capitalisation in a relatively small market like South Africa, such an attitude may be problematic.

Taking the longer view, it is clear that proxy voting, which was a stepchild a decade or two ago, has come of age. It is now very much part of any investment manager’s investment view and process, and part of an investment team’s fiduciary duty to their clients.

At Momentum Investments, we take that duty seriously and engage with companies that we invest in, on behalf of our clients, to keep those companies accountable. That is how we make it personal. Because with us, investing is personal.

Proxy voting is part of our responsible investing processes, which forms part of our core belief. Sustainable and responsible investment practices are a material factor underpinning our long-term success, as well as the success of our clients. Find out more by visiting our responsible investing page. Click on the button below:

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406)