Shareholder activism key to good corporate governance


The acting Minister of Finance, Walter Chidhakwa

Allen Choruma

IN ZIMBABWE there has been concern that shareholders (i.e. government, institutional or individual shareholders) are not taking an active role in enhancing good corporate governance in organisations they are invested in. Instead some shareholders, especially government and institutional investors, have opted to watch from the sidelines while organisations they are invested in (on behalf of beneficiaries) are rocked in corporate scandals, face huge viability challenges or are teetering on the brink of collapse.
Shareholders by virtue of being owners of an organisation (i.e. company, parastatal, State enterprise, public institution etc, which will now be referred to collectively as “company”), have a legal right and legitimate interest, respectively in the affairs and performance of the company they are invested in. Poor performance of companies does not only impact negatively on shareholders (who legitimately expect a good return on their investment), but also on the performance of the national economy.
Institutional Investors
Institutional investors (government included), as trustees, strategically invest in companies on behalf of beneficiaries (individual citizens, workers, policy holders, pensioners etc). Through constructive engagement shareholders can enhance good corporate governance in a company thus ensuring its success for the benefit of all stakeholders that are invested in it.
It has been proven, through empirical evidence, that the best governed companies perform better and also attract investment (capital inflows). This drives the growth of these companies and in turn the national economy. In the preamble to the King 111 Report, the importance of good corporate governance in companies is noted as follows: “South African companies are regarded by foreign institutional investors as being the best governed in the world’s emerging economies… South Africa has benefitted enormously from its listed companies following good governance principles and practices, as evidenced by the significant capital inflows into South Africa…”.
Government tone
The acting Minister of Finance, Walter Chidhakwa, has taken the right approach on shareholder activism. Speaking at a recent workshop for parastatal heads organised by his Ministry, Chidhakwa pointed out that parastatals and State enterprises were “grappling with high overheads, inter parastatal debts, maladministration, under capitalisation, corruption and lack of good corporate governance, which have impacted on their performance”. He called on boards of directors, as representatives of the shareholder (government), not to behave like politicians, but instead to have a vision for public institutions they head to ensure that they are transformed from being perennial dependants on “fiscal hand-outs” to viable entities.
Chidhakwa has set the right tone for shareholder activism and has put pressure on State enterprises and parastatal boards of directors to transform these organisations into viable entities for the benefit of the shareholder (government) or risk being fired.
Institutional investors (i.e. National Social Security Authority, Zimbabwe Manpower Development Fund, Old Mutual, First Mutual, Zimnat, Fidelity Life, banks, pension funds etc) should learn the stance taken by Chidhakwa.
It is common cause that most institutional investors do not show up at annual general meetings (AGM)s, but merely send proxies to represent them. Where they attend AGMs, they are noted to be passive or to take “politically correct” positions by patronising boards of directors instead of taking them to task. AGMs are important shareholder forums and should be taken as platforms for enhancing good corporate governance in companies and should not be trivialised. In Zimbabwe, AGMs for most companies are “ceremonial” and are not serving the purpose for which they are intended. The agenda for most AGMs is now trite and the procedure thereof rehearsed (choreographed). There is a standard template that is used by company secretaries and is repeated year by year.
A typical listed company AGM agenda reads: To receive, adopt audited financial statements, to elect and re-appoint the following directors…, to approve auditors and directors fees, to re-elect auditors for the ensuing year etc.
Shareholders should know that corporate governance is evolving. Corporate governance trends have changed and it’s no longer business as usual at AGMs.
We expect that shareholders should demand accountability and performance from directors. AGMs should be more productive in form and substance. AGM agendas should include more items such as: Evaluation of director performance, integrated sustainability reporting, review of corporate governance frameworks, remuneration policy (directors and executives), risk management and so on.
Shareholder activism
We are calling for shareholders, especially institutional investors, to be proactive in promoting corporate governance best practices in companies they are invested in. Institutional investors in Zimbabwe have been labelled as “passive shareholders” and lack of shareholder activism has been attributed to some corporate failures.
Regulators such as the (Insurance and Pension Commission, Securities and Exchange Commission of Zimbabwe, Zimbabwe Stock Exchange etc) should ensure that all players in the investment chain (institutional and individual investors) are aware of their rights and should take an active role in participating in major decisions in companies they are invested in and that the interests of minority shareholders (often dwarfed) are safeguarded. Regulators should have “robust investor education programmes” to ensure that all investors, including individual investors, are made aware of their rights and obligations.
Regulators should also ensure that there are appropriate governance frameworks in companies that allow shareholders to engage actively in the affairs of companies they are invested in. Market failures (example banking failures in 2003/2004), were as a result of poor corporate governance attributed (in part) to the absence of active institutional investors.
Formation of shareholder associations (that allow shareholders to consult with each other regularly) is one area that should be encouraged by regulators. These associations stimulate shareholder activism and prevent abuse of shareholder rights through corporate actions such as mergers, takeovers, change in shareholder structures, disposal of material assets etc.
Constructive engagement
We are not advocating that shareholders should micro-manage, interfere or unduly influence the running of companies they are invested in. We are advocating for constructive engagement i.e. that shareholders should take an active role in the governance of the companies they are invested in to ensure that they perform better and yield fair returns for their investments. Additionally, we are advocating that shareholders should also take an active role in ensuring that companies they are invested in comply with laws/regulations, act as responsible corporate citizens and operate in a sustainable manner (meeting existing needs without compromising ability of future generations to meet their needs).

Allen Choruma is an independent researcher and writer on corporate governance.

Follow us on Twitter on @FingazLive and on Facebook – The Financial Gazette