AGM not enough for shareholders to engage with firms

Investment guru Warren Buffett once said: “If every company were well managed, there would be no reason for activists. The truth is, at some companies managers forget who they are working for.”

A cursory review of news headlines confirms Buffett’s claim that board decisions often leave shareholders concerned and frustrated. For example, when the 167-yearold Swiss bank Credit Suisse collapsed in 2023 shareholders told the media they felt “failed” and “cheated”.

While most shareholder activists historically engaged with investee companies to improve financial performance, there is a sharp rise in environmental, social and governance (ESG) issues activism. For example, a coalition of shareholders is calling on Nestlé to reduce its reliance on food products with high salt, sugar and fat content.

While dissatisfied shareholders of JSE-listed companies mostly raise their concerns with management behind closed doors, public expressions of discontent are on the rise. Not only do shareholders cast more “no” votes, particularly on remuneration resolutions they also ask more probing questions at shareholder meetings and in the media.

Local shareholder activists such as Just Share have been critical of the progress JSElisted companies have made to combat climate change and reduce inequality.

Some JSE-listed companies have responded to rising public activism by silencing shareholders who attended meetings virtually. Companies that force online attendees to SMS their questions to the company secretary for screening risk noncompliance with the Companies Act. The act stipulates that participants in a shareholder meeting should be able to communicate concurrently without an intermediary and should be able to participate reasonably effectively. By adhering to legislation, maintaining transparency and promoting shareholder engagement, companies can build stronger relationships with shareholders of all sizes.

We believe shareholders should be better informed of their rights and able to engage with investee companies through the year, not only at AGMs. Companies should consider the creation of forums on their websites and other social media platforms to enhance the flow of information, both in terms of quantity and regularity. These forums could enable shareholders and other stakeholders to ask questions and raise concerns directly and timeously. Better insight into what scholars refer to as “shareholder intelligence” could assist boards in preparing for shareholder meetings, whether these take place in private or public. Collaborative engagements might even lead to more innovative solutions to burning financial and ESG issues.

Despite calls for proactive engagement and the equal treatment of shareholders in King IV, individual (retail) investors seem to be low on the priority list for investor relations executives in SA, perhaps because they contribute to less than 10% of trade volumes on the JSE. Compared with larger, more influential institutional shareholders, individual shareholders are often disadvantaged when trying to access information. The use of technology-driven communication channels such as X and corporate websites may improve communication with all shareholders, and costeffectively. As these channels also reach a wide audience, they may turn adversaries into partners in the pursuit of sustainable value creation.

Despite empirical evidence supporting the value of using such communication channels, they are not fully used, specifically by smaller JSE-listed companies. As smaller companies are often followed by fewer analysts and attract less media attention than larger ones, the role of investor relations is arguably more important for such companies. But a study shows that only half of smaller JSE-listed companies (53%) responded to an email request from an unknown retail investor seeking information about investing in the company. That was in line with international studies. Lack of resources and the outsourcing of investor relations function may explain poor communication with retail investors, companies should realise that this group of investors is becoming more demanding. Their effect on a company’s reputation could be detrimental.

A tarnished reputation may adversely affect customer loyalty, profitability and the company’s ability to raise capital at competitive rates in future. By professionalising investor relations, JSE-listed companies could enhance transparency, communication and stakeholder relationships. They will be in a better position to anticipate and deal with potentially damaging public shareholder activism. But much work remains to be done to elevate this function to the level of its counterparts in countries such as the US, UK and Australia.