KHAYA GOBODO: Why and how passive investors become active owners
Investors have the right to evaluate an investee company to see if its operations and strategies align with their values and goals
The ever-widening gap between corporate leaders and their employees, citizens and their governments is of increasing concern. Much of SA’s economic growth depends on ethical leaders serving the interests of ordinary people, advancing high levels of governance and quelling corruption. This is where responsible investors have a critical role to play.
Whenever governance failures are exposed leadership is often found wanting and investors are left vulnerable. However, what is important to remember is that investors also have agency they can use to enhance accountability and promote better leadership.
In today’s world many investors have realised that they want their capital to do more. For many, living and working alongside abject poverty, inequality and stunted growth can no longer be a case of the bottom line at any and all costs. It is becoming all too clear that our collective rise and one’s individual prosperity are intertwined and some investors are now redefining their investment goals to be more far-reaching, sustainable and impactful in a broader sense.
Institutional investors — whether it’s a pension fund, asset manager or insurance company — now have beneficiaries who are more mindful of how and where their savings are used. It is now about more than just market-beating returns. These investors can take up a broad range of activities and goals, from requests for engagement to proxy voting, to effect change. The form this active ownership takes often depends on the type of investor, the issue and the objective.
Active ownership can include anything from a full-blown proxy contest that seeks to replace the entire board, to shareholder proposals asking for policy changes or disclosure on a material issue.
Active owners can also employ a variety of more offensive tactics to force changes. For example, they might make strategic use of public platforms such as the media to publicise their demands and prompt greater pressure from other shareholders. However, when institutional investors have concerns they often start by engaging one-on-one with the company.
Driving the meetings
In prior years, engagement was mostly between the portfolio manager and the company’s investor relations team or members of management, and focused largely on company performance. Today, investors’ corporate governance teams are often driving the meetings in combination with the portfolio managers. They may have identified issues in the company’s executive compensation plans, its governance policies or practices, or its strategic plan.
At other times, shareholders are looking to lay the foundation of an open dialogue with the directors, so when issues arise in future they already have an existing relationship on which to build.
Institutional investors are normally long-term shareholders. Many hold their shares in index funds (which are popular for their low fees) and so cannot just sell a position if they think a stock is underperforming or if they believe the company’s governance practices hinder its long-term value. Ultimately, an index investor is a true, long-term investor.
This is a perfect motivator to encourage governance changes, and the like. So, though they may be referred to as passive investors, they become active owners that bring attention to material governance concerns and drive the change they believe will create long-term value.
In 2019 we are going to increasingly find that investors won’t just ask, “What did the board know, and when did they know it?” when a scandal hits, but rather “What are my rights?” — before a scandal occurs. As an investor, we have every right to evaluate an investee company to see if its operations and strategies align with our values and goals. Should there be a mismatch we have avenues available to influence the company's behaviour by exercising our rights as a shareholder.
• Gobodo is MD of Old Mutual Investment Group.