Successful private investor activism in an emerging market

• DOI: https://doi.org/10.1108/CG-11-2019-0366
• Pages: 92-110
• Date: 05 November 2020
• Published date: 05 November 2020
• Subject Matter: Corporate governance,Strategy
• Author: Suzette Viviers,Nadia Mans-Kemp

Successful private investor activism

in an emerging market

Suzette Viviers and Nadia Mans-Kemp

Abstract

Purpose –Institutional investors in emerging markets are increasingly under pressure to integrate

environmental, social and corporate governance considerations into their investment analyses and

ownershippractices. Old Mutual Investment Group(OMIG) is a South African-based institutionalinvestor

that has long been regarded as a pioneer in responsible investing. The purpose of this study was to

examinethe nature and effectiveness of OMIG’s privateshareholder activism endeavours over theperiod

1 January2014 to 30 June 2018.

Design/methodology/approach –A unique databasewas constructed using proprietary, point-in-time

data for 69 listed companies covering 283 private engagements. Binary logistic regressions were

conductedto test the hypothesised relationships.

Findings –The majorityof the private engagements centred on executiveremuneration. This finding was

not unexpected given the large and growing wage gap in South Africa. Close to two-thirds of OMIG’s

private deliberations were successful. Engagement success was positively associated with a targeted

company’scapacity to change and desire to protectits reputation.

Research limitations/implications –This study only investigatedthe private shareholder engagement

actionsof a single, well-resourced institutionalinvestor.

Practical implications –The findings serve as an encouragement to other investors who are

contemplating a more active approach to change unethical and unsustainable corporate policies and

practices.

Originality/value –This unique analysis sheds light on the determinants and success of private

shareholderactivism in an emerging market.

Keywords South Africa, Corporate governance, Executive remuneration, Wage gap,

Active ownership, Private shareholder activism

Paper type Research paper

Introduction

“The activist is not the man who says the riveris dirty. The activist is the man who cleans up

the river” (Ross Perot quoted in Roush, 2009).

Although Perot referred to activism in general, his quote also applies to institutional

investors. Growing numbers of these investors are actively integrating environmental, social

and corporate governance (ESG) considerations into their investment analyses and

ownership practices (Principles for Responsible Investment, 2018). Corporate governance

concerns, in particular executive remuneration, are receiving more attention from

shareholder activists globally (Stathopoulos and Voulgaris, 2016) and in South Africa

(Viviers et al.,2019).

Activist investors can use exit or voice mechanisms to raise their concerns, hold boards of

investee companies accountable and transform selected corporate policies and practices

(Hoffmann et al.,2016). An exit strategy entails that a shareholder sellssome or all of his/her

shares in an investee company (Goodman et al.,2014). This mechanism is unlikely to result

Suzette Viviers and

Nadia Mans-Kemp are both

based at the Department of

Business Management,

Stellenbosch University,

Stellenbosch, South Africa.

Received 29 November 2019

Revised 11 July 2020

5 October 2020

Accepted 6 October 2020

The authors wish to extent a

special word of thanks to OMIG

for providing them with their

proprietary engagement data.

The study would not have been

possible without the assistance

of Messrs Robert Lewenson

and Jon Duncan. Our gratitude

is also extended to Ms Lizelle

Coetzee for collecting and

organising some of the data,

Prof Martin Kidd and Dr

Stefanie Ku

¨hn for their

assistance with the statistical

analysis and Prof Eon Smit for

acting as a critical reader. The

two anonymous reviewers are

also thanked for their valuable

inputs.

PAGE 92 jCORPORATE GOVERNANCE jVOL. 21 NO. 1 2021, pp. 92-110, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-11-2019-0366

in significant change unless thereis a mass exodus of shareholders. Exiting is impractical in

countries with small stock marketsand can result in diversification challenges. Alternatively,

activists can use private or public voice mechanisms. Research suggests that activists who

voice their concerns are more successful in transforming corporate policies and practices

compared to those who use an exit mechanism (McNulty and Nordberg, 2016).

In line with international trends, investor activism in South Africa has intensified in recent

years (Viviers and Theron, 2019;Harvett and Mhlongo, 2018;Yamahaki and Frynas, 2016).

Most activists in the country first seek answers to their questions and request change in

private. Only if these engagements are not successful, they resort to public voice

mechanisms such as asking questions at annual general meetings (AGMs), filing

shareholder resolutionsand voting (Viviers and Smit, 2015).

Engagement success can be measured in a number of ways and depends on the

mechanism(s) used. Previous scholars have investigated the market reaction to public

shareholder activism, including shareholder resolutions tabled (and withdrawn), patterns in

“against” votes and changes implemented by targeted companies (Goranova and Ryan,

2014). As private negotiations are typically confidential, researchers do not have access to

data to determine the effectivenessof this mechanism.

Some studies were conducted on the privateactivism endeavours of retirement funds in the

USA (English et al.,2004;Anson et al., 2003;Carleton et al.,1998) and an activist fund in

the UK (Becht et al.,2010). The name of the institutional investor or investor coalition whose

private engagements were analysed is often kept anonymous. Examples of such studies

include Semenova and Hassel (2019) in Norway, Dimson et al. (2015) in the USA and Barko

et al. (2017) in Europe.

As far as could be established, no research has focussed on the success of private

shareholder activism in an emerging market. To facilitate research on the topic, one of the

largest institutional investors in South Africa, the Old Mutual Investment Group (OMIG),

provided proprietary, point-in-time data on their private shareholder activism endeavours

over the period 1 January 2014 to 30 June 2018. OMIG has used its influence as one of the

country’s largest institutional investors to promote responsible investment and business

practices amongst peers, industry partners and JSE-listed companies over the past three

decades.

A unique database was constructed consisting of 283 private engagements at 69

companies listed on the Johannesburg Stock Exchange (JSE). Interviews were furthermore

conducted with Mr Robert Lewenson, OMIG’s Head of ESG Engagement. Mr Lewenson is

not only responsible for proxy voting andengagements on ESG matters but also represents

OMIG on various industry bodies and champions responsible investment within the Old

Mutual Group. In line with previous researchers, the authorsset out to describe the nature of

companies targeted by OMIG, the issues raised in private, engagement frequency and

success. Particular attention was given to a targeted company’s capacity to change and

reputational concerns in relationto engagement success.

A shareholder should own a fairly large equity stake to gain access to an investee

company’s key decision-makers (Admati and Pfleiderer, 2009). In practice, large asset

owners generally outsource ownership responsibilities to asset managers. As such, the

owners might not be aware of the engagement activities that take place between their

appointed asset managers and investee companies (Carleton et al.,1998). Unless

unequivocal evidence can be provided that private engagements are successful in an

emerging market such as South Africa, institutional investors are unlikely to allocate more

resources to activism endeavours. If detailsof successful private engagements are publicly

disseminated, more investors (bothinstitutional and retail) might be encouraged to become

active owners.

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