The role of shareholder activism in influencing the actions taken by the board and the need for integrated reporting by the company to provide shareholders with appropriate information on the company. Your answer should include references to relevant regulation and reporting frameworks.
According to Kabi (2015) shareholder activism has become a dominant force in corporate activities today, and is a contentious topic in many boardrooms. A notable increase in the level of shareholder activism can be recognized, with examples like Old Mutual shareholders activism on the previous shareholders meeting that focused on the remuneration of executive directors, as well as the multichoice shareholders’ activism that rejected the remuneration of the executive directors.
In addition to these cases, Lerche (2016) stated that recent shareholder votes against executive remuneration at the annual general meetings (AGMs) of companies such as Naspers, MTN, and PSG are indicative of the rise of shareholder activism in corporate South Africa. Importantly, instead of trying to side-step such challenges from the floor, companies are responding by taking action to improve their corporate governance (Lerche: 2016). This essay will further explain and discuss the concept of shareholder activism and how it affects the decision of the board, and also expand on the benefits that might arise from shareholder activism that can be financial or non-financial.
Shareholder activism is a relatively young and vibrant field and is uniquely positioned to address issues that include solving modern social challenges. Goranova and Ryan (2013) suggested that shareholder activism refers to the actions of the shareholders aimed at influencing policies in corporations and not by seeking ownership of the corporation. Low (2004) stipulated that shareholders’ activism is the best enabling tool that shareholders can use when they are enforcing and enhancing their value, and that heard by the directors of companies. There seems to be no exact definition for shareholder activism however main theme of shareholder activism is to effect change main on the decision which the board of directors are or will be taking.
Research conducted by Greve (2014) illustrated that shareholder activism in South African corporate governance started with an increasing internationalized shareholder base in the country. Kabi (2015) postulated other examples of shareholder activism in South Africa, for example, the last-minute counter-offer by Bidvest to frustrate Adcock Ingram’s proposed R13 billion merger with CFR, a Chilean registered pharmaceuticals manufacturing and distribution company.
Crotty (2015) proposed that South African companies started to give attention to shareholders’ activism, which emanates from companies noticing voicing of shareholders concerns and opinion through voting during the annual general meeting, for instance in areas like excessive pay awarded to top executives and company remuneration policies. Crotty (2015) went and said that shareholders in South Africa have started turning up the heat on companies’ leadership on other issues, including corruption claims and Black Economic Empowerment (BEE).
Le Codeur (2014) argued that a group of Woolworth Limited shareholders publicly spoke against the buying of food items from Israel by the retail, and instructed the retailer to stop the relationship with the Israel supply chain, because of human rights abuse. As stated by Kabi (2015) the activist went on to seek support on boycotting the retailer’s stores as a way of showing displeasure towards how the retailer conducts its business.
Kabi (2015) mentioned that the recent legislative and regulatory changes in regard to the Companies Act as well as an increase in the adaptation and adherence to the codes of governance, have accelerated the idea and concept of shareholder activism in South Africa and will actually increase in the future. According to Kabi (2015) the introduction of minorities’ shareholder’s rights in the Companies Act of 2008, is a good example of how legislation is and will be playing a role in increasing and improving shareholder activism in the country. To illustrate this we look into the following sections of the Companies Act of 2008.
- In terms of section 61 of the Act, shareholders holding as little as 10% of shares in issue can call for a general meeting,
- The Act allows shareholders to call for director’s accountability and can go as far as instituting legal action against directors and prescribed officers in the organization in the event the shareholders suffer financial loss.
- Under section 156 of the Act, the Companies Act does provide additional avenues to minority shareholders to resolve the matter with directors, through alternative dispute resolution, rather than taking legal action against directors or the company.
- Section 159 of the companies Act, afford protection of whistleblowers, more important when the minority shareholders disclosure some serious malpractice, fraud, and other misconduct that will be taking place within the organization.
- Section 162 of the Companies Act, provides shareholders with the right to declare a director delinquent, and call for the removal of the director from the office,
In his article, South African companies feeling the force of shareholder activism, Lerche (2016) argued that the South African corporate governance landscape is changing due to increased shareholder activism over the previous years. Areas, where shareholders activism had taken toe, include the following three are,
- Shares under control of directors – shareholder approval towards the issue of share by the board are among notable issues under the radar of shareholders activism in South Africa. According to Lerche (2016), this limits what management can do without shareholder approval – it becomes particularly relevant when one considers that Naspers has diluted shareholders by more than 10% per year over the past decade.
- The non–binding vote on remuneration policy – through shareholder activism, there is now a need for a non-binding vote towards the remuneration of the director, and this was mentioned in the passages above and examples were provided.
- Acknowledgment of code of governance like King IV Report – many issues and recommendation emanates from codes of governance, for instance, the desire towards integrated reporting as a way of communicating with shareholders on the performance of the company as well as the rest of other stakeholders of the company. As result, the following paragraphs will try to elaborate on how integrated is linked to shareholder activism.
Integrated Reporting a concept from King Reports
Integrated reporting is narrative disclosure of the performance of the company, that is in contrast to the numerical financial statement, and does explain how the company operations are, and the future profitability of the organization, taking into consideration of the various risks and opportunities presented to the organization. It is important to take note that, it is compulsory for all listed companies on the JSE board to prepare an integrated report. The report is very important to institutional investors, for the integrated report gives the institutional investors the strategic direction of the company, how directors reward themselves, role and contribution of the company towards the environment and community. According to Atkins & Maron (2014) integrating reporting is a report that provides a comprehensive disclosure that to a larger extent enhances investors’ confidence and other stakeholders of the company. Regulation 28 of the Pension Fund Act, in South Africa, was mandated and introduced to take account of investment decision-making, and to a larger extent, the Pension fund companies are the institutional investors.