EDITORIAL: Time for open-doors investor engagement

Has the time come to ditch the behind-closed-doors engagement strategy preferred by institutional shareholders in SA? A few recent dramatic corporate events suggest it is.

It is important to remember these institutional shareholders are not investing on behalf of a relative handful of super-wealthy individuals; they invest for millions of middle-class workers and retirees. The distinction is significant: super-wealthy investors have easy access to super-wealthy individuals running our companies. Middle-class savers and pensioners do not.

A listed company’s annual general meeting is an ideal time for the generally disempowered middle class to get insight into what is going on in companies in which their savings and pensions are invested. Insights from an annual general meeting go far beyond details of a company’s performance. An annual general meeting provides beneficial shareholders with an opportunity to see how the company’s top executives and nonexecutives respond in situations not entirely under their control.

In large part it is down to the institutional fund managers to decide whether the once-in-a-year engagement opportunity is taken. The sad reality is that by and large they do not bother.

They justify this lack of public engagement by reference to private behind-closed-doors meetings with the executives of their investee companies, arguing that this is a much more effective way of exerting pressure. It seems, by their own telling, that when an investor goes public with a difficult issue the executives respond by refusing further engagement. So much for accountability or the notion that shareholders own a company.

To those who think the threat of retaliation for public criticism is wholly implausible, recall how promptly Investec apologised to Tongaat when one of its analysts suggested in 2018 that long-serving CEO Peter Staude should step down. By 2019, the writing was on the Tongaat wall. And yet Investec, which had long punted the share, felt it was appropriate to apologise for any embarrassment suffered by Staude. Is this what passes for stewardship?

In this context it is important to note that a common theme in the recent major corporate crises — Steinhoff, Tongaat and Sasol — was the role played by deference in the breakdown of oversight systems designed to guard against “financial mismanagement”. The institutions’ willingness to shelter executives from any imagined embarrassment suggests they are part of this systemic “deference” problem.

Some institutions also say they fear an “acting-in-concert” charge if they raise issues publicly at the same time as other investors. That’s even though this tired old canard was laid to rest all the way back in 2004 when the regulators ruled decisively on the Comparex case.

To its credit, Old Mutual Investment Group broke with the tradition of silence last month when it led five other investment managers — Sanlam Investment Managers, ABAX, Coronation, AEON Investment Management and Mergence Investment Managers — in a public bid to persuade Sasol to improve its disclosure on long-term greenhouse gas emissions.

However, it is generally down to a handful of individuals or activist investors to ensure the annual general meeting opportunity is grasped. Just Share and Active Shareholder were key to ensuring Sasol’s last two annual general meetings were the sort of lengthy engagements a large, heavily polluting company should have once a year with its owners. The latter activist was probably also responsible for ensuring the JSE formally clarified the obligation for a shareholder vote on auditors.

Aeon ensured the critical issue of executive remuneration got an airing at the recent Woolworths annual general meeting, which would otherwise have been devoid of any shareholder engagement.

And it took two activists, Opportune Investments’ Chris Logan and Shane Watkins of All Weather Capital, to prod the Remgro bear into engagement and ensure that last week’s annual general meeting was an entertaining and informative occasion.

Without questioning from Logan and Watkins, Remgro chair Johann Rupert would not have shared many useful insights with investors who had travelled to Somerset West for the meeting. Weeks earlier, Watkins  lobbed the corporate equivalent of a grenade into the Shoprite annual general meeting when he nominated an outsider to the board.

Is it possible that our large institutional investors are so out of touch, or so blinded by deference, they do not realise how the mood has changed? Members of the public want to see evidence of vigorous engagement. With every new corporate scandal, they are less inclined to trust the benefits of behind-closed-doors engagement.