OPINION | How investment managers are really voting at shareholder meetings
FIN24 / 09 MAY 2020 - 13:01 / SUZETTE VIVIERS & EON SMIT
In line with their international counterparts, more South African asset owners, investment managers and service providers are becoming signatories of the United Nations-backed Principles for Responsible Investment (PRI).
Signatories publicly acknowledge that they have a duty to act in the best long-term interests of their beneficiaries and undertake to integrate environmental, social and corporate governance (ESG) considerations into investment decisions and ownership practices.
Anecdotal evidence suggests that institutional investors in South Africa and across the globe are starting to take their ownership rights more seriously.
Shareholder activists can raise their concerns with investee companies in private, file shareholder resolutions, ask questions at shareholder meetings, cast opposing votes, and stimulate public debate on issues of concern in the media. Heightened interest in private and public shareholder activist mechanisms can be attributed to new regulations and a growing responsible investment movement.
Most asset owners, such as pension funds, trade unions and insurance companies, delegate voting activities to investment managers. As such, we did an exploratory investigation into the votes cast by local investment managers over the period 2012 to 2019.
Given that standardised public information on voting outcomes is difficult to obtain, we sourced some data from the London-based Proxy Insight. The sample not only included large investment managers such as the Public Investment Corporation (PIC), Old Mutual and Sanlam, but also smaller entities such as Element Investment Managers and Mergence Investment Managers.
It should be noted that the sample was obtained by means of accessibility, rather than using a probabilistic approach. One of the consequences of this approach is that it is difficult to demonstrate that the sample is representative of some predefined population. Hence the exploratory nature of this study.
Apart from voting-related data, which centred on the total number of votes cast and the nature of these votes (for, against, split, abstain or withdrawn), data were also captured on the respective investment managers’ assets under management at year-end (AuM), PRI signatory status and Broad-Based Black Economic Empowerment (B-BBEE) contribution level. We sourced this data from the annual Alexander Forbes Manager Watch™ Surveys of Retirement Fund Investment Managers.
The number of investment managers who kept electronic voting records increased from 12 to 17 over the research period. The average AuM, excluding the PIC, remained relatively constant in the last five years. More than a third of the sampled investment managers were PRI signatories and the vast majority were B-BBEE accredited. The average percentage opposing votes cast rose from a low of 7.86 percent in 2014 to 13.7 percent in 2019.
It is often argued in academic literature that larger investment managers are more likely to cast against-votes compared to their smaller counterparts, the rationale being that they have more resources to conduct research prior to voting.
Our statistical analysis, however, revealed quite the opposite. This might be due to smaller investment managers trying to position themselves as responsible investment/ESG specialists and/or larger investment managers placing more emphasis on private engagements. Several local and international studies have shown that larger investment managers are in a better position to access investee companies’ boardrooms.
We noted a positive relationship between the percentage against-votes cast and PRI signatory status. This suggests that the sampled investment managers who were PRI signatories cast more opposing votes than those local investment managers who have not publicly committed to being engaged investors.
Although the percentage of B-BBEE accredited investment managers stayed relatively constant over the research period, closer inspection revealed that several improved their contribution levels over time.
In 2019, half of the B-BBEE accredited investment managers were Level 2 contributors, with another fifth being Level 3 contributors. This observation is encouraging and is in line with the B-BBEE Commission’s 2019 National Status and Trends report which shows that the majority of JSE-listed companies in the Financial sector were Level 2 contributors.
Companies in this sector not only have the ability to direct investments to targeted sectors of the economy (as per the Financial Sector Code), but they can also promote transformation and sustainability by becoming more active stewards of the capital they manage. A low negative association existed between the percentage opposing votes cast and having a B-BBEE accreditation.
We also found that the number of meetings at which investors included in the Proxy Insight database voted at globally, grew steadily. The average percentage of against-votes cast at companies from 201 countries, however, remained fairly stable.
The average percentage of opposing votes cast at shareholder meetings of JSE Top 40 companies was consistently lower than the global average. The lowest level opposition at JSE Top 40 companies over the analysis period was 6.8 percent, compared to 16.1 percent globally. The difference was slightly smaller when comparing the highest level of voting discontent: 12.4 percent at JSE Top 40 companies versus 17.8 percent globally.
This might be attributed to local institutional investors’ preference to engage investee companies behind closed doors rather than in public. Whereas the majority of against-votes globally (41.03%) were cast on environmental and social resolutions, most of the opposition at JSE Top 40 companies centered on remuneration (12.34%).
The latter comes as no surprise given the large and growing wage gap in the country and King IV’s emphasis on fair and responsible remuneration. General governance also featured prominently on the global agenda with 21.76 percent of all opposing votes, whereas board-related matters drew the second highest level of opposition (11.93%) at JSE Top 40 companies.
Our analysis of the data indicates that there is some factual basis for the anecdotal belief that local institutional investors, on average, are taking their ownership rights more seriously – some more so than others, while in a limited number of cases this trend has been reversed.
When the prevalence of contrarian votes is related to being a signatory to the PRI, a positive relationship emerges, while being B-BBEE accredited appears to be unrelated to casting opposing votes. Large investment managers also appear to be less inclined to cast votes of disapproval, possibly because investee companies have already been approached in private.
As there is some degree of reputational risk associated with being targeted in public, locally listed companies are encouraged to anticipate shareholder discontent, especially on issues pertaining to remuneration and board composition. Particular attention should be paid to performance-based incentives (especially in the wake of the Covid-19 crisis), director independence and board diversity.
*Suzette Viviers is a Professor in the Department of Business Management at Stellenbosch University. Eon Smit is an Emeritus Professor at the Stellenbosch University Business School. Views expressed are their own.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER