A LEADER IN US ALL: MOBILISE INVESTOR CAPITAL FOR CHANGE
The ever-widening gap between corporate leaders and their employees, citizens and
governments is concerning. Much of South Africa’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 going forward.
A NEW WAY OF BEING
In today’s world, many investors have realised that they want their capital to do more. Living and working among abject poverty, inequality and stunted growth, for many it can no longer be a case of the bottom line at any and all costs. It is 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 that are more mindful of how and where their savings are used. It is now
about more than just market-beating returns.
WE ARE ENGAGED
Institutional investors can take up a broad range of activities and goals, from requests for engagement to proxy voting, in order 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 offensive tactics to force changes. For example, they might make strategic use of media channels in order to publicise their demands and prompt greater pressure from other shareholders. However, when institutional investors have concerns, they often start by engaging one-onone with the company. 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. Other times, shareholders are looking to lay the
foundation of an open dialogue with the directors. So when issues do arise in the future, they have an existing relationship upon 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. This is a perfect motivator to encourage governance changes, and otherwise. And 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 that they believe will create long-term value.
THE BOTTOM LINE
In 2019, we anticipate investors won’t just ask, “What did the board know, and when did they know it?” but will rather start asking “What are my rights?” before a scandal hits. As an investor, you have every right to evaluate an investee company to see if its operations and strategies align with your values and goals. Should there be a mismatch, you have avenues available to you to influence the company's behaviour by exercising your rights as a shareholder.