Shareholder activism from socially responsible investors has evolved rapidly in recent years from a relatively fringe phenomenon to one that increasingly defines the engagement between mainstream institutional investors and publicly traded companies.
In fact, the providers of capital are constantly finding new ways of holding corporates – and their investors – accountable.
Environmental, social and governance issues (ESG) is shorthand for the plethora of issues that responsible investors are focused on as they search for the creation of shared value. This catch-all term can include predatory lending, environmental damage, gender disparity or practices that accelerate climate change, and many other things besides.
At the root of this movement is a genuine desire on the part of shareholders to have a greater say in how corporates address some of society’s most pressing challenges.
In among this plethora of issues is a new frontier where shareholder activists are beginning to direct their attention: new ways in which we can build a more inclusive economy.
This is not something unique to South Africa, though it is more pressing here than in most other developed capital markets. Long-term social cohesion for our country can only be achieved once a cross section of our population is part of a growing, mainstream economy. But owing to our past, most black people still remain on the margins of the economy.
That fact alone should place economic exclusion as the top priority for corporates and shareholder activists alike.
Scales still skewed
While some black economic empowerment schemes sought to address this issue, we are yet to tilt the scales and effect meaningful economic transformation for the majority of our people. Although some of the initial BEE deals were notable successes in empowering individuals and groups to build on their initials gains, others were structured in such a way that resulted in little real transfer of value taking place. More could also have been done to provide these new, minority investors with a seat at the decision-making table.
Economic inclusion is a social issue of our time -- one we cannot afford to ignore because globally there is momentum behind the focus on social issues. A new report from consulting firm Deloitte entitled "Taking the long-term view" examines how boards of directors can inject long-term thinking into their oversight role in an age of disruption and uncertainty.
The report identifies board responsibilities and focus areas that benefit from the application of a long-term lens. The requirement for greater transparency in ESG reporting is one of the focus areas.
Whatever solution we put on the table, we must put our long-range thinking cap on. In looking at the spectrum of BEE deals done over almost two decades, we have a wide sample group from which to learn and improve – especially those that yielded sub-par outcomes. There are those founded on building a broad base of black shareholders, but did not provide the structure to allow these groups to properly interrogate the complexities of the business in which they had a stake.
In addition, black people are part of the pension funds that invest in our listed companies – but are there mechanisms that allow them a voice in the nature of the investments or the companies they hold stakes in?
These are complex issues, and it’s unlikely that anyone has definite solutions. But in starting a meaningful discussion around how we tackle these challenges over the long term, we must be creative about the modality of increasing direct ownership and in diluting oppressive concentration in some key sectors in order to create space for disruptors and new entrants. Only then will we be able to drive the economic transformation necessary to building a more inclusive economy.
These challenges confront many different stakeholders:
- The JSE itself, which should continue its search for ways to drive a transformative agenda when it comes to meaningful black ownership.
- The listed companies represented on the JSE, which should join with institutional investors in finding new ways of building an engaged and voting black shareholder base. It is also important that pension funds also take into account the empowerment aspirations of black people in their investment decision.
- The PIC – South Africa’s largest single investor in the JSE – which should use its financial and public leverage to empowers black South Africans in a way that feeds innovation, drives ownership change and creates value over its members of the long term.
- The private institutional investment funds, which ensure that economic inclusion is a key element of how the companies in which they investment, deliver financial returns.
- Institutions such as organised business, political parties and civil society groupings that champion the idea of economic transformation but sometimes seem at a loss in the practicalities of bringing economic inclusion into effect.
About the PIC
The PIC in particular has enormous potential clout in the boardroom and in the market, which gives it the ability to influence ownership and to speed up the transfer of ownership to black South Africans.
It would be able to give expression to the aspirations of the hundreds of thousands of pensioners on whose behalf it is investing, and in doing so ensure that transformation and the creation of long-term growth and value creation, are inextricably linked.
A more activist PIC, under leadership with unimpeachable ethical credentials, would also be able to drive the clean-up of South African businesses in both the private and public sector. Imagine, for example, if the PIC took a principled stand similar to the one taken by Futuregrowth in voting against corruption in state-owned companies? Imagine if the PIC applied such a principled position in all the entities – public and private – in which it has a financial interest?
Imagine, then, the impact of a group of principled investors or equity funds that insisted on an investment "menu" that included:
- Addressing economic exclusion.
- An end to corruption.
- A commitment to integrity and ethical leadership.
- A posture that takes societal impact as seriously as financial impact.
Sure, the remuneration of directors is an important issue that shareholders must continue to focus on.
But ultimately, the sort of shareholder activism we need right now is one that drives fundamental change in the body politic of South African corporates and SOCs, and results in a more responsive and accountable business community that South Africans can be proud of.