Historically, voters have expressed their loudest voice on resolutions pertaining to executive and non-executive directors’ remuneration.
Executive pay and a remuneration policy that fails to align company management with shareholder interest are the areas receiving greater pushback from stakeholders. The re-election of directors is also receiving heightened attention, as the King Codes on Corporate Governance encourage investors to assess more critically the skills and independence of non-executive directors. Recent governance failures in SA have also highlighted the risk of “over-boarding”, where certain individuals are sitting on too many boards to be able to satisfactorily perform their oversight duties.
In this article we explore how the Nedgroup Investments Best of Breed funds have voted during 2019 and the first quarter of 2020. Proxy voting is a cornerstone of our annual responsible investment review, and we place great emphasis on how our partners vote on our, and our clients’ behalf at company AGMs. We strive to improve transparency; and believe that disclosure of voting records is central to that. We have made the past two years these available, and we encourage you to read these on the relevant fund pages on our website.
Say on pay
In the charts below we summarise our domestic Best of Breed™ funds’ voting records for the 2019 calendar year. During the twelve-month period our funds voted at 150 company AGMs. The total number of votes cast was 9 436 of which 883 (9%) were ‘against’ votes. It is the latter which offers interesting insights and not just because of the rationale behind them, but the working application of internal policies and guidelines that informed the decisions.
Most notable from the chart below right is the amount of remuneration-related pushbacks SA companies received during the year. Here, our funds voted against 295 resolutions regarding executive and non-executive directors’ pay. The majority of our fund managers have voiced their concern with placing control over unissued shares in the hands of directors, and here 285 ‘against’ votes were cast during 2019.
The first quarter of 2020 was very similar to our voting results from 2019, where our funds voted against 10% of AGM resolutions put to shareholders. Here we try to interrogate the ‘against’ votes a little more closely.
Again, remuneration-related votes received the greatest shareholder attention during the quarter. A notable example was Pepkor, where despite eventually passing the shareholder vote, our Nedgroup Investments funds voted against both the remuneration policy and the implementation thereof. At the time of the AGM, Pepkor was held in a number of funds, and the major concern with the policy was the lack of disclosure around composition and key hurdles, which led to inconsistencies between company performance and executive salaries.
Another company where a high number of resolutions were voted against was Tiger Brands. However, in this instance it was the fees paid to international directors on the board, which appeared excessive given the market capitalisation of the company, and when compared against their peer group. One of our managers also challenged the independence of one of Tiger Brands’ non-executive directors, having been on the board since 2007. The King Codes on Corporate Governance have historically alluded to 9 years as a key juncture for challenging an individual’s independence, and directors ought to be critically evaluated on a case-by-case basis when they meet this threshold.
Auditors’ reputational struggles persist
An interesting trend born from the governance failures of the likes of Steinhoff is the heightened attention paid to auditors, and whether they are being sufficiently rotated in South Africa. During the first quarter of 2020, there were 13 cases where our funds voted against the re-appointment of an auditor. Although all these resolutions eventually passed, our funds expressed concerns regarding the reputation of both KPMG, and Deloitte and Touche. Some notable resolutions that failed to pass during the quarter include Rebosis Property Fund’s and Arrowhead Properties’ remuneration policies, and the ability for directors of Phumelela Gaming and Leisure to issue and control shares.
Another noteworthy development to surface in South Africa recently is the role of civil society calling into question the environmental and social impacts of locally-listed companies. During the second quarter of 2019 we saw Standard Bank shareholders vote on climate-related resolutions, and the same occurred at FirstRand’s AGM in the fourth quarter. In the table below we outline the two resolutions at each AGM, and how our Nedgroup Investments Best of Breed™ funds voted accumulatively. Investors are becomingly increasingly aware of the risks that climate change poses from a banking perspective, as fossil fuels begin to lose popularity, whether reputationally or economically, the potential for stranded assets rises.
Sasol is by some way South Africa’s largest private sector emitter of greenhouse gases. The company’s 2019 AGM experienced shareholder and stakeholder pressure around emissions and air quality in the areas surrounding their operations at Secunda and Sasolburg. The firm has subsequently come out publicly and stated its renewed energy efficiency and CO2 targets. The trend in civil action and shareholder activism is evolving rapidly in South Africa and raises awareness around corporate accountability, with the hope of engendering more responsible behaviour and healthier outcomes.
As we begin to interrogate our Nedgroup Investments voting records for the second quarter, we are hopeful that our disclosure will encourage clients to ask questions of us and our partner fund managers. Nedbank has led the way with two climate-related resolutions that were passed unanimously at the recent AGM, and the culture that filters through the company encourages us to explore not just proxy voting, but every facet of what it means to be a responsible investor.