Now this deserves support

The uptick in minority shareholder activism — while institutional shareholders fail to exercise oversight — is nothing short of heroic

Accountability Now director Paul Hoffman makes an interesting case for seeking costs from politicians and public servants where they’re deemed responsible for spending money on “baseless and unmeritorious defences” in pointless litigation. The SABC’s Hlaudi Motsoeneng is an obvious target for such a move.

Hoffman’s idea is so good it should be taken up by the private sector or at least that segment of the private sector that competes with the public sector in terms of poor accountability.

Despite all manner of corporate governance initiatives, we’ve never quite got to grips with the agency problem at listed companies. But as listed companies get substantially bigger, so does the problem.

The shareholder capitalism system relies on shareholders being engaged in running companies — not in the day-to-day running, but in their oversight. The day-to-day running is left to a management team, which acts as the agent of the shareholders. The problems arise when large institutional investors don’t play their oversight role effectively.

This usually happens because that role clashes with their primary role, which is to generate returns. Sometimes this primary role is best served by consistent engagement with management, sometimes it’s best served by dumping the shares and rushing for the exit.

An extreme case would look something like Coronation’s investment in African Bank. After a period of not wanting to rock the African Bank management boat, Coronation dramatically offloaded its shares — ensuring that the boat capsized.

When the owners don’t play their oversight role adequately there’s a high risk that management will go feral. This isn’t inevitably a bad thing; it might cultivate the sort of Keynesian animal spirits that help promote economic activity.

But often it is a bad thing. Then it falls to resilient minority shareholders to rein them back in. It is not easy. Everything in the listed company environment (the laws, the rules, the codes) is designed to protect the establishment. The notion of independent directors is far-fetched in an environment that rewards allegiance. Even institutions such as the JSE, the Takeover Panel and the Companies & Intellectual Properties Commission operate to support the entrenched management and to ward off challengers.

All of this support looks reasonable, given the usually hostile setting in which management is expected to eke out profits.

However, it becomes unreasonable when you consider the obstacles and potential costs it creates for minority shareholders wanting to challenge wrongdoing by management. When this happens, management and the board are not only sheltered from any cost but have access to the company’s resources to protect their position.

While these insiders claim they are acting in the interests of the company, that claim will sound as hollow to the minority challenger as Motsoeneng’s arguments sound to taxpayers.

The recent uptick in minority shareholder activism is nothing short of heroic in this context. Sovereign minority shareholder Albie Cilliers should not have faced potentially huge legal bills to secure his rights from an executive team that faced no personal risk. Thanks to the support of its institutional shareholders, Sovereign is faced with hefty legal bills for a scheme the high court ruled unjust, unfair, unreasonable and oppressive.

And what of David Woollam’s herculean challenge of the Lewis board? This is not a vindictive or pointless challenge. Enough has happened at Lewis to warrant close, rigorous and independent scrutiny. Woollam is at huge personal risk; he faces an army of lawyers paid to protect the entrenched directors.

Perhaps an ombud could be created, accountable not to executives or the board but to stakeholders. It would rule on executives’ use of corporate resources to pay for all manner of stuff such as legal bills and executive remuneration.