Vocal shareholders needed, but are not always a benefit

Allan Gray’s latent shareholder activism is as noteworthy for its effect — the overhaul this week of Group Five’s entire board — as its rarity.

For almost two decades, the only truly activist shareholder in SA has been Theo Botha. Adrian Saville, a lecturer at the Gordon Institute of Business Science, describes local investors as “mute”.

“Shareholders are quiet on many important things,” says Saville, who believes much of it is due to SA’s legacy of crossshareholding and the apartheidschooled old boys club.

“There is a long-established history of shared ownership, which negated shareholder activism. If shareholders were active, it came with an elevated risk because of fear of some type of retaliation.

“You’ve got concentration of ownership, and where shareholders are active [it’s] essentially at the fringe. So that then leaves you with the default position that what you do doesn’t matter.”

Investors’ reluctance to cause a public ruckus may be explained by the likely damage to a company’s share price — witness Allan Gray’s initial rectitude in berating closely held Net1 over the social grant payments debacle.

Botha, who cuts a lonely figure at most annual general meetings he attends, cautions that activism is by no means always to a company’s benefit.

“We need shareholders to be a little more vocal. Having said that, you have to ask yourself the question: is it good that Allan Gray went along to Group Five and kicked the tyres? What do you actually have at the end of the day?” he asks.

“You’ve got a set of … directors (nominated by Allan Gray) and directors appointed by the [Public Investment Corporation] … they’ve created this polarisation on the board. How will they undo that?”

Activist asset managers, under pressure from their clients for higher returns, can also feed into a frenzy of “quarteritis” — companies’ obsession with short-term quarterly gains to their longterm strategic detriment.

Fortunately, says Saville, “because of our reporting structures we are somewhat saved from that three-monthly pressure. But when shareholders become meddling and intervening, you lose the effect and power of what strategy is about.

“Elevated shareholder activism can certainly lead to that and in its most grotesque form, it comes in the shape of asset stripping … where … shareholders have been very active in underhanded ways to raid companies.”

He believes it is not possible to compel shareholders to act in certain ways, by writing their responsibilities into law or other measures. “You can oblige them to do things — like vote on all resolutions. That might be a step in the direction of activism but it can [also] amount to little more than box ticking,” he says.

Botha says “there’s no exact science but what I would like to see is asset owners being a little more responsible in terms of corporate governance issues and remuneration. They need to look at the global picture and ask whether these key performance indicators [KPIs] are going to create value.”

Botha and Saville argue that remuneration policies are an area where shareholders have fallen short, to the detriment of minority investors and sometimes the companies themselves.

“That’s something every asset owner and asset manager should be looking at in detail: how the guys are rewarding themselves. And what you often find is, when the company is really shooting the lights out in terms of financials, the KPIs will be weighted towards financials,” says Botha.

“And then as soon as, say, commodity prices drop or they’re not doing well in terms of profit, they’ll look at KPIs in terms of personnel and cash retainment, so … the guys [at executive level] are still doing well.

“Naspers is a prime example: there’s nothing there. They’re rewarding Naspers shares in a long-term scheme and the shares are only going up because of Tencent. Why do we keep on rewarding a CEO a bonus based on something that is clearly out of his hands?”

Saville is equally censorious of the soft approach to local executives’ pay packets.

“SA displays one of the most skewed remuneration patterns and in a country reeling under the effects of unemployment and inequality. The fact that shareholders are so quiet on this … I’m not sure I can say I find it surprising because it’s in their nature … but it is a critical issue,” he says.