Shareholder activism is effective in reducing excessive pay packages, study shows
Researchers at Stellenbosch University determined the effect of public shareholder activism on executive remuneration policies and practices of JSE-listed companies and state-owned enterprises
The US business magnate Ross Perot once said that “the activist is not the man who says the river is dirty. The activist is the man who cleans up the river.”
As shareholder activism grows in scope and intensity, an increasing number of studies have been done internationally to determine its effectiveness. Specific attention has been given to the ability of shareholders to bring about changes in companies’ executive remuneration policies and practices by voicing their concerns in public.
Research in the US, UK and Australia has yielded contradictory results. Whereas some “just-vote-no” and “say-on-pay” shareholder campaigns have resulted in companies reducing executive compensation, other studies show no post-engagement impact.
As this topic has never been explored locally, we set out to determine the effect of public shareholder activism on executive remuneration policies and practices of JSE-listed companies and state-owned enterprises. Entities and executives who were targeted by shareholder activists on pay-related topics were identified from newspaper articles from January 1 2010 to December 31 2017.
Most activists’ apprehensions centred on the disclosure of performance-based incentives and justifications provided for bonuses in light of poor financial performance.
The most vocal individual shareholder activists over this period were Theo Botha, Chris Logan, Roy McAlpine and Albie Cilliers. Reference was often only made to minority shareholders without providing names. Asset managers that raised their concerns in the media included the Public Investment Corporation, Mergence Investment Managers, Allan Gray, Element Investment Managers, Aeon Investment Management, Old Mutual and Prudential Investment Managers.
Unsurprisingly, a number of trade unions and federations, notably the National Union of Mineworkers and Cosatu, publicly expressed their discontent regarding certain executives’ remuneration packages.
Most of the targeted executives worked at state-owned entities and companies in the financial and mining industries. We identified 106 unique cases over the research period at 46 entities. Twenty-two executive emolument themes were captured, the most important being concerns regarding total pay and bonuses.
Most activists’ apprehensions centred on the disclosure of performance-based incentives and justifications provided for bonuses in light of poor financial performance. Others wanted answers on the unequal treatment of executives, the link between pay and performance, noncompliance with King III, the growing wage gap, retirement benefits, vesting periods of stock options and the lack of executive pay-related transparency in general.
Words such as “shockingly high”, “hefty”, “preposterous”, “exorbitant” and “excessive” featured regularly in the newspaper articles that we analysed.
We found that executives’ total pay decreased significantly in the year after they were publicly targeted. The same applies to cash bonuses and performance incentives. The decline in total pay was significantly larger for CEOs than for non-CEOs. Although the use of stock options increased over the research period, there wasn’t enough to test whether negative media coverage had any effect on this executive remuneration component.
To gain further insight into the effectiveness of such shareholder activism endeavours, interviews were conducted with Theo Botha and Tiso Blackstar Group writer Ann Crotty. Both agreed that public engagements offer distinct advantages over private discussions between shareholders and investee companies. By raising their concerns in public, shareholders are able to place executives in the spotlight.
As a result, company owners not only create greater awareness of important issues, but also get better-quality answers. Botha stressed the key role that the press has played in the success of his shareholder activism endeavours over the years. He also said journalists ensure the questions posed at annual general meetings are sufficiently reported on to the wider investing public.
Through this pioneering study, we show that public shareholder activists have not only stimulated debate on the important topic of executive remuneration in SA, but they have also had a direct impact on reducing seemingly excessive pay packages. The empirical evidence suggests local activists’ voices are being heard and that speaking out in public can help address the growing wage gap in the country.
We hope our findings encourage shareholders of all sizes to take their responsibilities as company owners more seriously. It is clearly within their reach to promote a more just society.
• Kallis and McKenzie are postgraduate students in the business management department at Stellenbosch University. Viviers and Mans-Kemp are academics in the same department.