Ann Crotty
A Company that does not provide for the re-election of its executive directors in its memorandum of incorporation (MoI), as recommended by the Institute of Directors (IoD) and the JSE, faces the prospect of shareholders voting against the adoption of the MoI, particularly where the company has a large international shareholder.
Listed companies must get shareholder approval for their MoIs, created in terms of the new Companies Act, by May.
Institutional shareholders in South Africa criticised last week’s joint statement by the IoD and the JSE, which opposed shareholder votes on executive directors, saying it would result in South Africa moving counter to the global trend and good corporate governance.
Old Mutual Investment Group South Africa head of sustainability research and engagement Jon Duncan said it supported the re-election of executive directors and that many fund managers, particularly non-South African fund managers, had said they would not support an MoI that did not allow for the re-election of directors.
Duncan said the IoD and JSE concerns appeared to be based on an assumption that shareholders behaved recklessly.
“Voting an executive director off is really a last resort and would only happen if more productive forms of engagement were unsuccessful.”
Such a vote needs support from half of the shareholders.
David Couldridge of Element Investment Managers pointed out that in the UK all the firms in the FTSE 350 had to put all of their directors to a vote each year. The FTSE 350 includes a number of companies, such as SABMiller and Anglo American, that are also listed on the JSE. Other London-listed companies must put all their directors forward for re-election on a three-year rotational basis.
Couldridge said this was why foreign investors would oppose the IoD/JSE recommendation.
“We are investing client money and require access to all investment ‘tools’ that reduce risk and add value,“ he said.
“We will always engage with a board first and this is normally sufficient to ensure remedial action. But where value is being destroyed and no board action is taken it is important for clients and fund beneficiaries that investors can vote against executive directors,” Couldridge said.
Phil Armstrong, the head of the Washington-based Global Corporate Governance Forum, said it would not be “good logic that non-executives have to retire by rotation but not executives”. He said a director was a director regardless of if he was executive or non-executive.
However, the Public Investment Corporation’s Deon Botha agreed with the IoD/JSE position and their view on the re-election of executive directors. “Should shareholders have no confidence in executive directors the matter should be taken up with the chairman of the board,” he said.
Last week’s joint statement recommended that companies do not provide in their MoIs for the re-election of executive directors. For the past several years listed companies have been putting forward all of their directors for re-election on a three-year rotational basis.
This is not a legal or regulatory requirement in South Africa but it has been widely adopted in line with global corporate governance trends.
The joint statement clarified that the Companies Act did not provide for, nor require, retirement of directors by rotation.
“Staggered rotation of directors is recommended as a good corporate governance practice,” it said.
The IoD and JSE argued that although there was no legal difference between an executive and non-executive director, “there are differences in the respective functions/roles from a governance perspective”.
They noted that while shareholders had a right to set a company’s objectives and appoint directors, “shareholders do not have a right to be involved in the day-to-day business of the company” such as executive appointments.
The IoD and JSE argued that if an executive director was voted off the board he or she was likely to resign as an executive. This effectively meant that shareholders had a say in the appointment of a company’s executive. It raised the prospect, they argued, that a company could lose a key employee at short notice.
The IoD and JSE said companies might avoid the adverse consequences of executive directors not being re-elected by not putting a member of management on the board.