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Shareholder activism in SA – a shuffle rather than a shift
This article, written by our executive director Tracey Davies, first appeared in INCE|Connect on 2 August 2018.
There has been much optimistic reaction in the local media to a recently released PwC report on executive director remuneration. The report shows that the Public Investment Corporation, Old Mutual, Allan Gray and Coronation voted against a significant number of remuneration policies at JSE-listed companies between September 2017 and May 2018 (44,9%, 37%, 28,6% and 20,9% respectively).
The results have been hailed as reflecting a major shift in shareholder activism by local asset managers. But this level of optimism about votes against remuneration policies reflects how low the bar is set for shareholder activism in South Africa.
In the US and Europe, shareholder activists, including progressive institutional investors, are increasingly focusing on a range of “environmental, social and governance”, or ESG issues. These include board diversity, gender pay gaps, living wage, human rights, climate change, animal welfare, antibiotics, pesticides, deforestation, water, weapons and waste.
As at February 2018, at least 429 shareholder resolutions on environmental, social and sustainability issues had been filed for the US “proxy season”, when most American companies hold their AGMs. By the end of June, nine environmental and social proposals had received majority votes, and eighteen others – “on topics ranging from climate change to workplace diversity, student loans, health issues and political activities” received around 40% of shareholder votes.
South African investment managers do not file shareholder resolutions, and indications so far are that they are unlikely to support them even if they are filed by less influential shareholder activists. Their preferred mode of engagement is “behind closed doors”, with the actual details of that engagement seldom reaching the ears of ordinary shareholders.
Company management is comfortable with this approach, because it avoids the prospect of having to face potentially embarrassing shareholder votes, and the attendant publicity, on issues like management’s approach to diversity and transformation, or climate change, or political influence, or tax evasion.
This cosy relationship, without escalation to bring public pressure to bear when necessary, does not serve the broader interests of South African society, or protect the long-term financial interests of pension fund beneficiaries.
This is now particularly relevant in the case of climate risk, which poses potentially serious financial risk to investors via their holdings in fossil fuel companies. The sustainability and resilience of these companies is threatened by a host of factors, including physical damage, lawsuits, and the risks posed to their business models by the transition to a low carbon economy. It is already unlikely, on our current emissions trajectory, that South Africa will be able to meet its Paris Agreement commitments: relying only on a slow, accommodating approach to engagement on climate risk is simply not going to result in adequate emissions reductions.
There is a large body of economic analysis which shows that companies which take sustainability seriously, and manage their ESG risks responsibly, are better investment bets. One example, a 2015 meta-study of over 190 academic studies, industry reports, newspaper articles and books, found that there is “a remarkable correlation between diligent sustainability business practices and economic performance”. The vast majority of material covered by the study found that sustainability standards “lower the cost of capital of companies”, that good ESG practices “result in better operational performance of firms” and that share prices are “positively influenced by good sustainability practices.” In other words, it doesn’t have to be a choice between “profitability and sustainability”.
In South Africa, in theory, pension fund trustees have no option but to ensure that the companies they invest in are managing ESG risks responsibly. Regulation 28 of the Pension Funds Act places a clear legal obligation on them to do so, but there is very little evidence that this responsibility is being taken seriously, either by the trustees, or by their asset managers.
While it is certainly progress to see large asset managers standing up to management on executive pay, we have a long way to go before we can confidently say that there has been any meaningful shift in the way that investors hold companies to account in South Africa.
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