Edition: Dec 2014 - Feb 2015
The need for shareholder activism and why you should encourage it.*
I recently came across a joke, or perhaps not much of a joke, that was popular during the depth of the 2008 financial crisis. Karl Marx, it was said, was wrong on communism but right on capitalism.
Well, I’d suggest that he was wrong on capitalism too. Or at least on capitalism as it has evolved over the last century, from the robber barons’ dominance of the large corporations to the public ownership of listed entities.
Marx and Engels wanted “the people” to own the “commanding heights” of the economy, such as the banks and mining houses. Similarly, the Freedom Charter urged the nationalisation of “monopoly industry”. All of this has been overtaken because the nature of ownership has changed so radically.
What we now have is capitalistic socialism or socialistic capitalism. It makes no difference what we call it because the passing of corporate ownership to the millions of people who’re members of pension funds and other collective investment schemes is irreversible.
Equally immutable is the obligation of the financial institutions to act as their fiduciaries; in other words, to assert rights of ownership that best serve the interests not of managements but of beneficiaries. That, simply, is what’s meant by shareholder activism.
Yet the SA political discourse remains trapped in an “us versus them” time warp. Debate continues to be influenced by ideological clichés, where Marx resonates, rather than modern-day concepts of where ownership resides.
Grist to the mill of the wealth-redistribution lobbyists, which SA has in abundance, is the 700-page tome ‘Capitalism in the 21st Century’ by French economist Thomas Piketty. It’s an international bestseller that now pervades discussion on inequality.
Piketty has thrust to the fore the relationship between practices of modern capitalism and trajectories of income inequalities. Not that SA needed the thrust. For a new phrase of sound and fury has entered the lexicon of the ANC government.
This is ‘radical economic transformation’. Try to impute positive spin. Take it that the term is intended to encapsulate the intended transformation of the SA economy from less divisive to more inclusive under the Constitution. No problem with that, surely.
It’s self-evident that inclusiveness be significantly extended by participation in economic activity and responsibility for its outcomes. Better than government trying to conceive grand plans and further interventions is for it to encourage the use of existing levers.
One of the most powerful levers, immediately available, is through pension and provident funds. This is because SA retirement funds can exercise huge clout as shareholders. And they’re also the major, often the only, repositories of black workers’ savings.
The trick is to enhance bottom-up awareness. In Kenya, for one, retirement funds disseminate to individual members monthly updates on their accrued savings. This is done by smartphone. SA should move along with something similar, to include within the annual benefit statement a disclosure of the major investments held by the particular fund for its members.
Then, when there’s talk of nationalisation, it’s rendered nonsensical by retirement funds’ predominant ownership of SA corporates. When workers go on strike, they’ll know whether they’re striking against the companies where their funds are invested.
Assume that there are roughly eight million members of SA retirement funds, the majority of whom are black. Assuming six million black members, each with four dependents, some 24 million black South Africans receive benefits that depend on the performance of these funds.
Or relate this number to the value of shares indirectly held by black South Africans. Independent research found that at end-2011 the value was almost 30% of available shares (not owned by foreigners) in SA’s top 100 companies. Most were held through “mandated investments”, particularly retirement funds. The value is currently estimated at closer to 40%.
Thus, it is argued, shareholder activism – provided it is used by retirement funds – can be a lighting rod to accelerate economic transformation. Not only do fund trustees have a legal right and fiduciary duty to use this power, for the benefit of their funds’ members, but they also have a moral obligation to use it for the benefit of SA society as a whole.
Shareholder activism is not limited to voting at meetings of company shareholders. It extends to engagement with the boards of those companies; a notable example being on matters of executives’ and workers’ remuneration. This is potentially more potent than strike activity because it shifts the action from monologue in streets to dialogue in boardrooms. The shareholders’ ultimate weapon is their vote.
Importantly, trustees of retirement funds are responsible to their respective funds. Similarly, directors of companies are responsible to their companies. The activism process is therefore reciprocal, between parties respectively responsible, making it the vehicle to build consensus. The more that companies flourish, and their prosperity is shared, the better for beneficiaries of retirement funds.
It then becomes insufficient for the shareholder simply to vote “no” without first having attempted to reach agreement on policies likely to ensure the company’s sustainability i.e. to grow in ways that will optimise the funds’ long-term investment returns.
Clearly, these factors include environmental, social and governance (ESG) criteria. Available levers are Regulation 28 (on the good governance of pension funds); the Code for Responsible Investment (to which all major SA asset managers are signatories); King III (endorsed by the Institute of Directors); the JSE (by having King III as a listings requirement), and the Companies Act (which sets out shareholder rights on the election and remuneration of directors).
The levers can be strengthened by bringing the Companies Act more into line with King III. Certain specifics:
First, the Act speaks only of directors’ remuneration for their services as directors, not as executives. There’s inconsistency, which invites rectification, between the Act’s silence and the King III requirement for shareholder approval of remuneration policies implicitly affecting all employees.
Second, King III’s recommendation is limited to shareholders annually exercising a non-binding advisory vote on executive pay. SA would not be alone in making a case for the vote to be binding under specified conditions.
Third, it should be made clear in law that institutional investors are exempt from charges of collusion in their activism. Assertions of ownership must remain distinct from bids for control.
Put bluntly, retirement funds are the owners of capital and the owners of companies. Where they don’t act as owners, they abrogate a duty to protect the millions of members who comprise the most representative cross-section of SA’s demographic.
The interests of all South Africans are inextricably tied to the interests of their retirement funds, in turn reflecting corporate performance and the outcomes of government economic policy. This linkage represents a virtuous circle on the high road to economic inclusion and transformation.
Through activism, which means assertive behaviour in a shareholder democracy, the funds will perform another invaluable function. They can help to catalyse a social compact -- between government, business and labour -- for which the National Development Plan explicitly pleads and relies for success.
* Shortened version of the talk by TT editorial director Allan Greenblo to ‘The Premier Corporate Governance Conference', organised by Chartered Secretaries Southern Africa, 17 Sept 2014.