Picture: REUTERS
Picture: REUTERS

Growing numbers of institutional investors across the world are actively integrating environmental, social and corporate governance (ESG) considerations into their investment analyses and ownership practices. Different mechanisms are available to activist investors to hold boards of investee companies accountable for their actions.

Public voice mechanisms include filing shareholder resolutions, voting and raising concerns in public via traditional and/or social media. Most investors in SA, however, prefer to engage investee companies in private. As private engagements are generally confidential, very little academic research has been undertaken to determine its effectiveness in transforming selected corporate policies and practices.

Early in 2018, a large SA-based asset manager asked us to evaluate their private engagements over the period January 1 2014 to June 30 2018. The analysis covered 283 private engagements with 69 JSE-listed companies on a range of ESG matters. Most of the asset manager’s engagements took place with companies operating in three sectors: financials, real estate/property; and materials. Almost half of the targeted companies (47.54%) were constituents of the FTSE/JSE top 40 index. The asset manager, however, also engaged with smaller companies when material ESG red flags were detected.

The majority of the asset manager’s private engagements centred on corporate governance concerns (81.63%), notably executive remuneration policies, practices and reporting. This finding was expected given the country’s high level of pay inequality and King IV’s focus on fair and responsible remuneration. Other governance matters frequently raised include director independence, tenure, meeting attendance and board diversity. Private discussions on audit quality, the disclosure of audit fees and environmental considerations began to feature more frequently towards the end of the research period.

Close to two thirds of the considered engagements (60.42%) were classified as successful. These engagements included instances where the targeted company answered the asset manager’s question(s) satisfactorily and/or implemented the requested change(s). In the remainder of cases, companies committed to address their concern(s) and/or had to undertake further actions to appease the ESG engagement team.

A statistically significant positive relationship was uncovered between engagement success and the targeted company’s wage gap in the year prior to being targeted. This finding comes as no surprise given the large and widening wage gap in SA.

The researchers attributed the asset manager’s engagement success to a number of factors, size being an important one. Other factors included the quality of the ESG engagement team and their practice of conducting in-depth research prior to engaging. The fact that the asset manager has access to key executive and non-executive decision-makers at the targeted companies further contributed to their success as shareholder activists. In the majority of cases, the engagement team only had to engage once on a topic with the same company to achieve the desired outcome.

The findings of this study are in line with international research, which shows that private shareholder activism can be very effective in holding managers accountable, bringing about greater transparency and improving selected ESG policies and practices. Successful ESG engagements not only have the potential to unlock value for shareholders, but also result in positive outcomes for society and the natural environment.

• Viviers and Mans-Kemp are academics in the business management department of Stellenbosch University; Coetzee was a post-graduate student in the same department in 2018.