Shareholder responsibility and activism in South Africa
Healthy dose of scepticism is required!
Corporate scandals have exposed the serious shortcomings of South Africa's corporate governance and left critics mulling over the question: are shareholders in South Africa generally passive?
Although there has been a slew of laws and regulation introduced in recent years to curb any financial misconduct, recent corporate scandals indicates that there are still numerous loopholes in the system.
"The real onus remains on shareholders to educate themselves and act on their rights. With the great shareholder of today being the financial institutions, which are merely conduits for all the persons in the street, the question being asked today when there is a corporate failure should be 'where were the shareholders?' Instead of the familiar question of where were the directors?', says Jayne Mammatt, senior manager, Governance & Sustainability at Ernst & Young.
Mammatt says that the public must realise that they are shareholders in one way or the other and should hold the institutions who invest their money accountable for whatever decision they make. "Companies can report, or not report anything they want if there is no one questioning, demanding more clarity, challenging director's decisions and policies, and taking specific action in response to what they hear," she says.
There is growing (albeit at a slow rate) trend by South African shareholders to question and challenge boards demonstrating that they are becoming aware of their rights and take more responsibility.
Recent examples of activism have resulted in negative media for some organisations after shareholders challenge the composition of boards. The organisations were forced to change or defend their decisions.
"The misconception by executives that shareholders are only kept happy by a good bottom line will have some reputation consequences as there are shareholders interested in other matters such as transformation and the environment instead of monetary reward," she adds.
Shareholder activism, Mammatt explains, can take many forms that include, but are not necessarily limited to: attendance at and participation in the AGM by shareholders, both individuals and institutional. Disclosures and policies should be questioned and resolutions debated. "Institutional investors should report back to their constituents as to how they voted at companies in which they have large investments".
Mammatt states that although King II helped the level of disclosure by allowing the public to have an inside peek into what companies got up to behind closed doors, King III will have a greater impetus.
"King II stipulates that each main governance committee should report on its activities in the company's annual report and should include in terms of reference, its membership details, the number of meeting held, major decisions taken and recommendations by the board. These committees should have a member preferably the chairperson available at the AGM to answer questions. The draft Companies Bill is proposing to provide access to minutes and records to shareholders and to legalise the common law duties of directors. This may potentially result in increased liability," she adds.
Mammatt concludes: "shareholder protection is high on the agenda of many regulators and organisations with various initiatives such as the Principles of Responsible Investment a United Nations guideline into responsible investment. Those who sign up to this initiative have to adhere to certain stipulated guidelines. This will increase shareholder confidence in the way institutions invest our money because of the various checks and balances implemented".
