Institutional Determinants of Private Shareholder Engagement in Brazil and South Africa: The Role of Regulation

• Author: Jędrzej George Frynas,Camila Yamahaki
• Published date: 01 September 2016
• Date: 01 September 2016
• DOI: http://doi.org/10.1111/corg.12166

Institutional Determinants of Private Shareholder

Engagement in Brazil and South Africa: The Role

of Regulation

Camila Yamahaki*and Jędrzej George Frynas

ABSTRACT

Manuscript type: Empirical

Research Question/Issue: This study investigates to what extent regulation encourages private shareholder engagement

attitudes and behavior (including behind-the-scenes consultations, letters, meetings,and ongoing dialogues) of pension funds

and asset managers with listed investee companies on environmental, social, and corporate governance (ESG) issues in Brazil

and South Africa.

Research Findings/Insights: Drawing on 44 in-depth semi-structured interviews with pension fund representatives, asset

managers, and otherinvestment players, the findingssuggest that legislation provides limited directencouragement to private

engagement behavior. However, legislation encourages attitudes toward Responsible Investment by enhancing investor

understanding of Responsible Investment, increasing the interest of pension funds and asset consultants in the Responsible

Investmentpractices of asset managers, and reducing the fear of pensionfunds to violate their fiduciaryduties, thereby promot-

ing an enabling environment for ESG engagement.

Theoretical/Academic Implications: This article adds to the literature on comparative corporate governance and shareholder

engagement. To the best of our knowledge, this is first study that specifically analyzes how regulation affects private share-

holder engagement behavior in emerging markets, providing empirical support for the institutional perspective. The findings

also suggest that the sophistication of the legislation on ESG issues in Brazil and South Africa is more typical of developed

countries, indicating the need for a more fine-grained analysis of emerging markets in corporate governance studies.

Practitioner/Policy Implications: This study draws investors’attention to the importance of understanding the national legal

environment of the companies with which they engage and offers insights togovernments interested in fostering ESG engage-

ment practices.

Keywords: Corporate Governance, Emerging Markets, Institutional Theory, Responsible Investment, Shareholder

Engagement

INTRODUCTION

There has been a significant growth of ResponsibleInvest-

ment in emerging markets as institutional investors

increasingly take into consideration environmental, social,

and corporate governance (ESG) issues in their investment

decision making.In Asian emerging markets, assets adopting

Responsible Investment strategies amounted to around US

$45 billion in 2013 (ASrIA, 2014). In Sub-Saharan Africa,

an estimated US$125 billion were invested using Responsible

Investment principles in 2010 (IFC, Sinco, & Riscura, 2011)

and, in Brazil, an estimated US$40 billion employed a Respon-

sible Investment approach in 2009 (IFC & TERI, 2009). The

practice of shareholder engagement, a strategy for Responsibl e

Investment (Goodman, Louche, van Cranenburgh, & Arenas,

2014), has also gained prominence in these markets, as

shown by the advances promoted by the Emerging Markets

Disclosure Project, championing engagement with over 100

companies in Brazil, Indonesia, South Africa, and South

Korea for greater corporate transparency with the support

of 55 local and foreign investors (USSIF, 2012).

Shareholderengagement (or shareholder activism) is one of

the strategiesavailable to investors seekingto adopt a Respon-

sible Investment approach (for a recent review of the share-

holder engagement literature, see Goranova & Ryan, 2014).

Shareholder engagement is defined as “actions taken by share-

holders with the explicit intention of influencing corporations’

policies and practices”(Goranova & Ryan, 2014: 1232).

Shareholder engagement may be classified into routine and

*Address for correspondence: Jędrzej George Frynas, Middlesex University Business

School, TheBurroughs, London NW4 4BT,United Kingdom. Tel:(44) 20 8411 5437;Fax:

(44) 20 82038728; E-mail: frynasjg@gmail.com

Thisis an open access article under theterms of the Creative CommonsAttribution-Non-

Commercial-NoDerivs License,which permits useand distribution in any medium,pro-

videdthe original work isproperly cited, theuse is non-commercialand no modifications

or adaptationsare made.

© 2016The Authors. CorporateGovernance: An International ReviewPublished by JohnWiley & Sons Ltd

doi:10.1111/corg.12166

509

Corporate Governance: An International Review, 2016, 24(5):509–527

extraordinary engagement. While routine engagement includes

regular one-to-one meetings with corporate management and

the exercise of voting rights, extraordinary engagement may in-

clude letter writing to senior management, the submission of

shareholder resolutions, the request for extraordinary general

meetings (EGMs), and joint institutional investor engagement

(Martin, Casson, & Nisar, 2007). Shareholder engagement has

also recently been categorized according to pathways of owner

behavior (McNulty & Nordberg, 2016). Whilst path (a) relates

to shareholder engagement that is primarily self-interested,

may be financially or ideologically motivated, has short-term

objectives, and involves engagement forms that reach pub-

lic attention (e.g. voting or shareholder resolutions), path

(b) involves the accommodation of plural actors and active

engagement between shareholders and managers through

private dialogue often over a considerable period of time.

Most pertinentto this paper, shareholderengagement has typ-

ically been categorized according to the level of engagement

privacy, as investors canengage with companies using public

forms of engagement,such as the filing of shareholder resolu-

tions, the exercise of voting rights and media campaigns, or

adopting more private engagement strategies, including

private negotiations, behind-the-scenes consultations, letters,

phone calls, meetings,and ongoing dialogues (Clark & Hebb,

2004; Goranova & Ryan, 2014; Rehbein, Logsdon, & Van

Buren, 2013). Following this classification, private engage-

ments will be the focus of our investigation in this paper.

Our study specifically examines the influence of formal

institutions on private shareholder engagement in emerging

markets. Following North (1990), formal institutions include

constitutions, laws, policies, and formal agreements –as

opposed to informal rules like norms of behavior, conven-

tions, and self-imposed codes of conduct.A study of this topic

is important because formal institutional changes can report-

edly stimulate shareholder engagement (Anabtawi & Stout,

2008) and foster different engagement strategies (Mallin,

2001). Conversely, questioning from shareholders can encour-

age the regulator to change legislation related to shareholder

engagement (Dhir, 2006; Proffitt & Spicer, 2006). Nonetheless,

while there issome empirical and anecdotalevidence that leg-

islation influences shareholder engagement, the relationship

between formal institutions and private engagement remains

largely under-researched (anotable exception includes Chow,

2010); in particular, there are no studies that specifically

analyze the impact of regulations on private shareholder

engagement performed by institutional investors with listed

companies in emerging markets. On the one hand, some

scholars have pointed to the difficulty in obtaining data that

measures private engagement, as dialogue between investors

and companies takes place “behind-the-scenes”and without

public knowledge (e.g. Amalric, 2004; Gillan & Starks, 2003;

Rehbein et al., 2013).On the other hand, scholars have largely

portrayed formal institutions in emerging and developing

markets as underdeveloped in terms of the level of sophisti-

cation of relevant social and environmental regulation and

in terms of the lack of legal enforcement (Dentchev, van

Balen, & Haezendonck, 2015; Estrin & Prevezer, 2011; Tan,

2009), suggesting that formal institutions do not play an

important role as drivers of private shareholder engagement

in these markets (Sjöström & Welford, 2009). In sum, there is

a literature gap with regard to the influence of formal

institutions on private shareholder engagement in emerging

markets.

Hoping to fill this literature gap, this study investigates

whether andhow regulations affectthe attitudes and behavior

of institutional investors with regard to private shareholder

engagement. Brazil and South Africa were chosen for our en-

quiry given the growing interest in Responsible Investment

and shareholder engagement by institutional investors in

these countries. Brazil and South Africa feature the largest

number of emerging market signatories to the United

Nations-supported Principles for Responsible Investment

(PRI) (PRI, 2016) and they reported to have conducted the

largest number of extensive engagements among emerging

markets (PRI,2010). While institutional investors may include

pension funds, insurance companies, unit trusts, open-ended

investment companies, investment trusts in the UK and mu-

tual funds in the US, hedge funds, and private equity funds

(as defined by Martin et al., 2007), our paper focuses specifi-

cally on pension fundsand asset managers, as we concentrate

on investigating the main types of institutional investors

engaging with listed companies in these two markets (as the

characteristics of the institutional investors involved in the

Emerging Markets Disclosure Project demonstrate). There-

fore, the questionarises as to what drives shareholderengage-

ment behavior in countries such as South Africa and Brazil.

This study’sfindings suggest that legislation provides

limited directencouragement to privateengagement behavior

performed by pension funds and asset managers with listed

companies in thesetwo countries. However, there is evidence

that legislationpositively encourages ResponsibleInvestment

by enhancing investor understanding of Responsible Invest-

ment, increasing the interest of pension funds and asset

consultants with regard to the Responsible Investment

practices of asset managers, and reducing the fear of pension

funds to violate fiduciary duties, thus promoting an enabling

environment for ESG engagement.

This article adds to the stream of literature on comparative

corporate governance and, particularly, to the literature on

shareholder engagement which is focused on Anglo-Saxon

countries and lacks a more international perspective (Bauer,

Clark, & Viehs, 2013; Gifford, 2008; Sjöström, 2008). To our

knowledge, this is the first study to specifically analyze how

formal institutions affectthe attitudes and behaviorof pension

funds and asset managerswith respect to private engagement

with investee companies on ESG issues in the context of

emerging markets, providing empirical support for the insti-

tutional perspective. The findings alsosuggest that the sophis-

tication of the legislation on ESG issues in Brazil and South

Africa is more typical of developed countries, indicating the

need for a more fine-grained analysis of emerging markets

in corporate governance studies.

The structure of this paper is as follows. The first section

reviews the existing literature relating to private shareholder

engagement on ESG issues.We then discuss the role of formal

institutions with reference to encouraging responsible behav-

ior.Next, we briefly discuss the institutional contexts in Brazil

and South Africa. Following a discussion of the research

design and methods,we present and discuss theresults draw-

ing on 44 in-depth semi-structured interviews with pension

fund representatives, asset managers, and other investment

players. Finally, we conclude by considering the theoretical

510 CORPORATE GOVERNANCE: AN INTERNATIONAL REVIEW

© 2016The Authors. CorporateGovernance: An InternationalReview Publishedby John Wiley& Sons LtdVolume 24 Number 5 September 2016