Ann Crotty

In the final three months of last year Element Investment Managers (EIM) voted against remuneration-related resolutions at 13 different annual general meetings (AGMs).

There are two exceptional aspects to that statement. One is that EIM voted against the resolutions; the second and more significant fact is that it is possible for the public to find out precisely how EIM voted on remuneration – and everything else – at AGMs. EIM also explains why it voted against a particular resolution.

For those who believe that disclosure is vital if you want to hold people to account and who also believe that executive remuneration will be one of the major corporate governance issues of 2012, EIM’s approach is the only acceptable way to go.

The very good news is that with effect from Wednesday all institutional investors and service providers will be under pressure to disclose their voting records.

The Code for Responsible Investing in SA (Crisa) comes into effect on that day; essentially the code’s objective is to ensure that the powerful institutional investors are doing their bit – a very big bit – to see that good corporate governance is implemented at the companies in which they invest.

Without Crisa the recommendations in the King 3 Code are almost pointless. Disclosing voting records is a key aspect of Crisa’s effectiveness.

Currently EIM is one of the very few asset managers that does disclose its voting record on its website. Regarding Capital Management (RE:CM) also provides details of its voting record online and, as with EIM, it gives an extremely useful explanation of its reasons for voting against a particular resolution.

The Public Investment Corporation (PIC), which manages R1 trillion worth of investment funds belonging to the Government Employees Pension Fund, also publishes its voting record and reasons for voting against resolutions.

As with EIM and RE:CM, the PIC has been giving full disclosure for a number of years; unfortunately for a few years its implementation of this policy was allowed to lapse. However, the situation has recently been rectified and the PIC website now reveals how it voted at AGMs up to the third quarter of last year.

Investec Asset Management is a relatively recent convert to the disclosure system. But although it provides details of how it has voted, it does not provide reasons where it has voted against a resolution.

The remarkable thing about disclosing voting records is that there is no legal obligation on institutional investors or financial service providers to do so.

Crisa has no legal backing and only “gives guidance on how the institutional investor should execute investment analysis and investment activities, and exercise rights so as to promote sound governance”.

The highly competitive nature of the industry and the fact that the most powerful player in it, namely the PIC and Government Employees Pension Fund, was an enthusiastic force behind the code is expected to ensure a reasonable degree of compliance.

There is the additional factor that all of the major players in the industry were represented on the committee that drove the process.

Although it does not have any legal force the code represents a dramatic improvement on the situation as it prevails up to tomorrow, January 31.

It attempts to ensure that the ultimate beneficiary, in whose interests all this investment activity is undertaken, is able to determine what policies its institutional investor or service provider uses in its decisions to invest and in its engagement with companies in which it invests.

While disclosure of such policies has been commonplace, without the disclosure of voting records it has been impossible for the ultimate beneficiaries to establish whether such policies have been actually adhered to or were merely wish lists used for marketing purposes.

There are two outstanding reasons why it is exceedingly important to be able to hold investors to account for more than just short-term returns.

The first is the realisation that determining value solely by short-term returns is no longer appropriate and is in fact likely to result in longer-term value destruction.

The preamble to Crisa states: “It is no longer appropriate for institutional investors to focus on only monetary benefit to the ultimate beneficiaries of investments to the exclusion of factors that impact on long-term sustainability.”

Boards are now required to consider environmental, social and governance issues that affect the long-term value of companies. Increasingly, failure to consider these issues not only risks reputational damage but also carries financial penalties.

As David Couldridge of EIM notes: “These issues are no longer mere ‘nice-to-haves’, they are critical for a company.”

Secondly, it is important that the ultimate beneficiaries are able to hold institutional investors and service providers to account as this industry is riddled with potential conflicts of interest. In the past engagements with investee companies have tended to be done in the friendly manner appropriate to a closed club.

The result of the “behind closed doors”, non-confrontational nature of engagement was that in the past it was almost unheard of for an institutional investor to vote against a resolution at an AGM.

The industry was replete with rumours of corporate executives threatening to withdraw their companies’ investment or pension and provident funds from a particular institution if they voted against a resolution.

The openness of the disclosure system encouraged by Crisa means that institutional investors will be able to state that they have no option but to vote against certain resolutions.

To date resolutions relating to executive remuneration, as well as those that give the board general authority over unissued shares and the general authority to issue shares for cash, are those that have been most often opposed by active institutional shareholders.

The opposition is in line with good corporate governance practice and in the case of remuneration highlights that this is a key issue influencing corporate decision-making.

For EIM, the decisions to vote against remuneration-related resolutions in the last quarter of 2011 were based on poor or no disclosure of performance criteria, too much discretion given to the remuneration committee, or because directors’ fees were not approved by shareholders before they were paid. In the case of Digicore, EIM voted against the remuneration scheme because the share plan provides access to dividends before the end of the performance period.

While EIM and RE:CM provide excellent examples for other institutional investors and service providers to follow, the sad reality is that some of the other players might be too nervous of the effect of all that disclosure on their old habits.

To the extent that they do not embrace the Crisa recommendations fully, the ultimate beneficiaries should start demanding an explanation from their trustees.