Often fund managers don’t want to be drawn into public squabbles and prefer to remain below the radar. But climate change, gender inequality and transformation matter. If these issues were water-cooler topics five years ago during analyst lunches, we’d be further ahead in ESG goals, says Nolwandle Mthombeni.
In the good old days, the economy was growing and companies were more profitable. Shareholders were generating superior returns from being invested in the stock market. During this period, proxy voting was seen as more of a procedural act than the exercising of your voice as a shareholder. But long gone are those days, and institutional shareholders need to start taking their fiduciary responsibilities more seriously.
It’s no secret that environmental, social and governance (ESG) issues have always been secondary to the actual financial performance of a company. When it comes to attendance, companies' results presentations and calls are much better attended compared with AGMs.
Intuitively, this makes sense because financial performance is more important, as investment decisions are based on the financial health of the company. This is probably why analysts and investors alike can tell you how much earnings grew in the most recent results, but have no idea who the lead independent non-executive director is.
The Government Employees' Pension Fund (GEPF), through the Public Investment Corporation (PIC), along with institutional fund managers, hold the majority share ownership on our bourse. As such, they influence voting outcomes for resolutions presented at AGMs.
They also have the most access to the company management's schmoozing. This is to be expected, because if they were to liquidate their holdings it would send the share price spiralling downwards. You want to keep major shareholders happy.
But the problem is that for a long time, keeping the shareholders happy was easy. In many instances, these shareholders rarely asked tough questions about gender parity and transformation within the organisation. Many still don’t. So, if the custodians of our pension funds don’t adequately question these issues at an executive level, how do we expect them to take them seriously at a board level?
Over the last few years, we have seen an emergence of activism in our equity market. Sadly, this rarely comes from any of our large managers. It’s as if managing assets and taking a stand on issues affecting society are mutually exclusive events.
Often fund managers don’t want to be drawn into public squabbles and prefer to remain below the radar and that’s okay. Heck, even I don’t want the spotlight on me, but climate change, gender inequality and transformation matter. If these issues were water-cooler topics five years ago during analyst lunches, I reckon we’d be further ahead in ESG goals.
Having looked at the proxy voting guidance policies of some of our large managers that publicly disclose them, the policies vary from five to 20 pages. Going through the former, it failed to address at least five resolutions that can emerge during the AGM.
The resolutions tabled at AGMs can range from financial assistance to directors to share repurchases. Five pages will hardly suffice in providing a policy guiding all possible resolutions. It may be quite possible that I read the condensed version, however, the version on the website left much to be desired.
Each manager should have a voting policy in place and it should be reviewed regularly to cater for emerging issues in society. Issues such as transformation should be a topic that comes up at every AGM and results presentation, not just when boards are scrambling to find black executives.
The companies themselves can also do more. What I have been very pleased to see over the years, is the incorporation of ESG issues into results presentations. Even if it’s only two slides, corporates need to show that these issues are top of mind and equally deserve a platform as much as the financial performance. However, the number of companies touching on ESG during results are but a few. This needs to change.
A final point to make is the work that needs to be done by those managing our money on what our listed companies should be disclosing. Our JSE-listed companies are required to be King IV compliant.
This means that the disclosure provided by companies in annual reports should meet the basic requirements as per the code. Yet, astoundingly, not many analysts will be able to tell you about what companies are required to disclose with regards to the remuneration policy.
How can you vote on a remuneration policy if you don’t know what King IV says about it? A simple example is that companies are required to state any contractual financial obligation that may arise from parting with an executive. Yes, as shareholders, we are entitled to know about any golden parachute. Yet, not all companies disclose this, and they get away with it.
As an investment community, we need to take proxy voting more seriously as history has repeatedly shown us the importance of good governance and addressing social issues. And indeed, the world is becoming more burdensome and bureaucratic with the many causes; however, these are meant to make society a better place. So even if it’s once a year, we should all make the effort to put ESG at the forefront.
Nolwandle Mthombeni is senior banks analyst at Intellidex. Views expressed are her own.