The launch of the Code for Responsible Investing in South Africa (CRISA) in 2011 put a spotlight on the shareholder engagement activities of local institutional investors. Despite a slow uptake, anecdotal evidence suggests that investment managers are beginning to take these activities more seriously. Investment managers are starting to realise that these activities not only hold benefits for investors, but also for the performance of their funds. As in other common law countries, most investment managers in South Africa prefer private negotiations with investee companies to public forms of engagement, such as proxy voting.
Investment managers who participated in a Grayswan survey in 2014, all viewed shareholder engagement as a key element of responsible investing. Whereas some investment managers equated proxy voting to shareholder engagement, others (correctly) pointed out that proxy voting is only the tip of the engagement iceberg. These diverse views sparked a more in-depth study to determine the role and effectiveness of proxy voting as a shareholder activist tool in South Africa.
As an initial step, we gathered publicly available proxy voting data for 2013 from 17 of the largest investment managers in the country. Wherever data was not publicly available, it was requested directly from investment managers. After completing the quantitative analysis, we conducted interviews with all 17 investment managers to gain more insight into their engagement activities.
Our analysis of the 24 510 proxy votes, revealed that only 6.6% of votes were against management resolutions (91.1% were ‘for’ and 2.3% were ‘abstain’). Investment managers attributed the low percentage of ‘against’ votes to private negotiations that took place with investee companies before their annual general meetings (AGMs) in 2013. Respondents claimed that most of their concerns were adequately addressed and stated that some resolutions were even retracted by management when it became apparent that institutional investors would not support the resolution at their AGM. The low percentage of ‘against’ votes should therefore not be interpreted as inactivity among local institutional investors, but should rather be seen as “the last link in the engagement chain”. The majority of ‘against’ votes were made by smaller investment managers. Since these managers do not always have access to management, they are forced to voice their concerns publicly via proxy votes.
Only three resolutions attracted more than 10% ‘against’ votes in 2013. These included approving the company’s remuneration policy (14.3%), re-electing directors (11.7%) and placing authorised, but unissued ordinary shares under the control of the directors (11.2%). Other corporate governance–related resolutions, which attracted opposition in 2013, involved approving non-executive directors’ remuneration (6%), appointing audit committee members (4.8%) and electing new directors (3.9%).
Follow-up interviews with investment managers revealed that there is no single proxy voting process in South Africa. Some investment managers leave the responsibility of voting proxies with their analyst(s), whilst others have central teams responsible for all private negotiations and proxy voting activities. The physical activity of voting also ranges from capturing votes online, to electronically submitting votes to custodians, to paper-based votes that are scanned or faxed to custodians. Custodians confirmed that quite a large portion of votes are still paper-based. The latter is very inefficient and slow and begs the question whether these votes are monitored by investment managers at all. Ideally, all industry participants should move to an electronic voting process.
Although all 17 of the investment managers included in the study have proxy voting policies, just over half of these policies (53%) are available in the public domain. These policies range from a few basic pages to detailed documents in excess of 40 pages. Many investment managers still state that proxy voting policies and results are available on request. Although there is a growing willingness among investment managers to make information available to the public, more needs to be done in the spirit of CRISA.
Investment managers regarded themselves to be in the best position to conduct the proxy votes. They welcomed the idea that trustees should become more involved in proxy voting, and suggested that boards of trustees invite them to discuss their engagement activities on a regular basis. Not only will trustees become more active, but investment managers will also be allowed to illustrate how they are adding value through their engagement activities. By requiring investment managers to report their engagement activities, boards of trustees can also monitor and assess whether more should be done using public forms of engagement.
We concluded that proxy voting should not be viewed in isolation, but rather as part of the bigger shareholder engagement process. Despite some progress on the processes and disclosure of shareholder engagement activities, much remains to be done in South Africa. At present, only around 40% of proxy voting results are available online to the public. Proxy voting procedures are also inefficient with many investment managers still conducting paper-based voting. As trustees begin to take a more active interest in engagement activities, it is envisioned that processes and disclosure will improve. This will not only enhance transparency and accountability, but will also lead to better value creation for investors.
Given the large and growing wage gap in South Africa, we also strongly recommended that the regulator investigate some alternatives to the non-binding vote on remuneration. The status quo implies that remuneration committees do not have to change their policy even if more than 50% of shareholders vote against it. The non-binding vote on remuneration could be changed to a binding vote as is the case in the United Kingdom (UK). As from October 2013, UK companies are not only required to publish details on their remuneration policies, but should also indicate how the policy was implemented in the preceding year. These companies should put their remuneration policies to vote at least every three years.
The regulator could also consider a ‘two-strikes’ rule, similar to the one applied in Australia. The ‘first strike’ occurs when a company’s remuneration report receives an ‘against’ vote of 25% or more by at the company’s AGM. The ‘second strike’ occurs when the company’s remuneration report also receives an ‘against’ vote of 25% or more at the next AGM. When the ‘second strike’ occurs, the shareholders will vote at the same AGM to determine whether all the directors will need to stand for re-election. If this resolution passes with 50% or more of eligible votes cast, then a ‘spill meeting’ has to take place within 90 days of the AGM. At the spill meeting, those individuals who were directors when the remuneration report was deemed unsatisfactory will be required to stand for re-election (other than the managing director, who is permitted to continue to run the company).
*Karlien de Bruin is a senior investment analyst at Grayswan Investments. Suzette Viviers is a professor in the Department of Business Management at Stellenbosch University and a member of Grayswan’s responsible investment committee.