This article was first published in the second-quarter 2013 edition of Personal Finance magazine.
In a country plagued by high levels of unemployment, crime, violence, corruption and unethical behaviour at all levels and in all spheres of activity, it is imperative that people take a stand and try to stop the rot. Shareholder activism and corporate responsibility have a part to play in countering the worst instincts of South African society.
Shareholder democracy is nothing new; it has been around for as long as there have been public and private companies owned by shareholders. That is hundreds of years, and although it is still far from perfect – like the rest of the democratic model – it has matured and developed with the passage of time.
Unlike political democracy, shareholder democracy is not a system of one person, one-vote; shareholders are awarded votes in proportion to the percentage of the company they own. It is therefore possible that five shareholders with 51 percent can out-vote 1 000 shareholders with the remaining 49 percent. This may not seem fair, but it is the nature of ownership.
The scope of this column will be restricted to democracy in public companies listed on a regulated stock exchange.
Shareholder democracy, by the very nature of the operation of companies, is generally confined to annual general meetings (AGMs) and special general meetings at which shareholders have the opportunity of addressing issues and concerns with those who are accountable to them for the operation of the company: the management and directors. The directors are elected by the shareholders and entrusted with the management of the company until the next AGM. There is never any realistic expectation that the shareholders will attend to the day-to-day running of the company, but it is conceivable – albeit unlikely – that if they group together, they can influence the direction of business.
In the early stages of British (and, for that matter, Cape Colonial) democracy, voting took place by way of an open ballot – a system that left shareholders vulnerable to abuse and intimidation. In South Africa, for a long time, AGMs were held behind closed doors and attended only by shareholders and management, with ballots on many issues conducted by a show of hands. Nowadays, some AGMs are open to the press, as well as shareholders, and the events are reported in all the various forms of media available to us today.
On the surface, the issue of democracy seems to many observers to be an open and shut case, calling for total transparency. Delving more deeply into the issue raises some interesting complexities, however.
In the first instance, interest in the way that shareholders vote depends largely upon the nature of the shareholders. In the world today, the votes of individuals who own a tiny percentage of a company are irrelevant, because they have no meaningful impact on the outcome. The really important votes are those of the large financial institutions that own significant amounts of the company.
Here is where things begin to get tricky, because the question of ownership can be confusing. A large financial institution may own shares in a listed company in a proprietary capacity (that is, in its own right), but it may also hold shares in the same company in a custodial capacity, on behalf of other underlying beneficiaries (that is, unit trusts, life annuities or living annuities, exchange traded funds and/or other investment products). In such cases, there is obviously the potential for the proprietary interest to vote one way and for some or all of the other interests to vote another, although the shareholder is the same financial institution.
Interest in the way financial institutions vote has come under the spotlight in recent years as a result of catastrophic collapses, such as Enron in 2001, and then the terrifying financial crisis of 2007/8, which affected the banking sector across the world. The outrage at the enormous remuneration packages those with their snouts nearest the trough awarded themselves, even as the savings of millions of people were placed in jeopardy and thousands of employees faced redundancy, stirred normally complacent shareholders into action.
Naturally, it was not just shareholders who were stirred into action. Governments, state agencies and regulators all had to take action to ensure that sufficient regulation was in place to protect stakeholders from greed, unethical behaviour, bad business practices, corruption and all the other “evils” that had become associated with the business world.
So, attention became focused on how large shareholders were voting on issues such as executive remuneration, directors’ powers to issue shares without reference to shareholders, all matters related to the appointment of directors and moves to restrict or increase directors’ powers, as well as the important issues of the environment, ethics and good business practice.
It is difficult to argue that disclosure of shareholder voting, on its own, is a critical issue; yes, it is a “nice to know”, but only in a properly regulated environment, in which business practices are ethical and honest, does it have any real value.
Shareholders do have rights. They are entitled to scrutinise the records of the company, vote for directors, approve or reject resolutions, expect ethical behaviour and good practices, and participate in the profitability of the business. They are, after all, the providers of capital, and as such, they are at risk. However, shareholders have equal rights in relation to each other, and this is not determined by how many shares they own. It might well be their right to decide whether or not to disclose their voting record.
One has to allow that at times there may be a justifiable reason for a financial institution to keep its ballot secret; I am hard-pressed to think of one, but it is possible. As it is, one can always obtain the number of votes for and against a proposal from the company itself, as it is a matter of public record, but this will usually just be the totals, without names attached.
Personally, I believe it is much more important to know that the financial institutions are voting, rather than which way they are voting, because this shows that they are applying their minds to the issues and carrying out their duties on behalf of the underlying shareholders (beneficiaries). And their responsibilities do not end there; they have a duty to all stakeholders, which include the general public.
Companies are in business to make money, and if they fail, they cease to be in business, but it is imperative that their business operations are conducted ethically and, as far as possible, to the benefit of all.
WHEN SHAREHOLDERS MATTER
Shareholders played their part in these contentious cases:
Barclays and Absa
In May 2005, Barclays plc, a British bank, acquired 62.3 percent of the Absa Group. This transaction required, and obtained, the necessary shareholders’ approval (and other regulatory approvals, because it was an acquisition by a foreign controlling shareholder). It was an issue of national importance, because there was concern that profits generated in South Africa would be repatriated abroad at the expense of our economy. The acquisition was widely debated in the press and investment circles at the time, and required the approval of the South African Reserve Bank.
Massmart and Wal-Mart
In January 2011, approval was required from the shareholders of Massmart Holdings to allow Wal-Mart to acquire 51 percent of Massmart. Again, this was an issue of national importance, because it had implications for employment, affirmative action and foreign ownership. The shareholders approved the US$2.4-billion acquisition, but things didn’t end there. The deal went before the anti-trust regulator, the Competition Tribunal, which approved it, and then both government and the South African Commercial, Catering and Allied Workers Union launched separate appeals to the Competition Appeal Court, which upheld the tribunal’s decision, subject to certain conditions.
African and Overseas Enterprises
Shareholders defeated special resolutions tabled at the annual general meeting of African and Overseas Enterprises (the holding company for fashion manufacturer and retailer Rex Trueform) in November 2012. Opposition to special resolutions is not uncommon, but it is very rare to see special resolutions defeated. The resolutions concerned directors’ fees, financial assistance, share buy-backs and a new memorandum of incorporation. The resolutions received approval from 62 percent of shareholders, falling short of the 75-percent legal requirement for adoption. All the ordinary resolutions were approved. The control structure of Rex Trueform, one of the few companies on the JSE still using the low-voting N share structure, allowed the special resolutions to be approved at the operating level, because this structure diluted the no vote to just fewer than 20 percent.
* David Sylvester is a stockbroker with Investec Wealth and Investment.