09 Sep

Clarity on collaborative shareholder engagement in South Africa required

Futuregrowth Asset Management’s decision to suspend additional loans to six state-owned enterprises (SOEs) over governance and transparency concerns has sparked wide debate. However, as Futuregrowth makes clear in its 31 August statement, responsible investors, including signatories of the Principles for Responsible Investment (PRI) and the Code for Responsible Investment in South Africa (CRISA) “have a duty to ensure the entities in which [they] invest have suitable governance and decision-making structures.” Futuregrowth has now said that it should have consulted with the SOEs before issuing a public statement, but its clear legal obligation to act on its concerns over governance is articulated in a 2011 update to Regulation 28 of the Pension Fund Act that states:

“A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.”

Futuregrowth’s stated intention to “engage proactively with [its] industry colleagues through ASISA [the Association for Savings and Investment South Africa] so that key concerns can be communicated to the SOEs in a joint manner by the investment industry” has also been questioned. In a statement, ASISA CEO Leon Campher argued that:

“Investment managers must make their own investment decisions. ASISA is an industry body mandated by its members to deal with industry issues, which include policy, regulatory and legislative matters. The Association cannot dictate where members invest and where not. That would be considered collusive behaviour, which is not only undesirable, but also illegal.”

Minister of Public Enterprises Lynne Brown, who is the shareholder representative of various SOEs, has noted ASISA’s position, which she argued cautioned Futuregrowth from “inviting other Fund Managers to support its decision, as doing so will be deemed collusive or restrictive behaviour in terms of the Competition Act”.

Commentary on this issue has ignored the advances that have been made in South Africa with regards to collaborative shareholder engagement. It is likely that Campher and Brown are referring to the “acting in concert” aspect of the Companies Act, which may in certain situations require concert parties with significant interests to make a mandatory bid for a company they are engaging with. “Acting in concert” is defined as “any action pursuant to an agreement between or among two or more persons, in terms of which any of them co-operate for the purpose of entering or proposing an affected transaction or offer.”

Some of the uncertainty regarding collaboration stems from the Comparex case in the early 2000s, in which a consortium of asset managers, which owned more than 35% of Comparex, were accused of “acting in concert” after they notified the Comparex board that they had agreed in principle to change the composition of the board. Non-executive directors of Comparex argued that by acting in concert, these asset managers were obliged to make an offer to Comparex’s minority shareholders. In its ruling on the matter, the Securities Regulation Panel held that there was no affected transaction, so there was no obligation to minority shareholders. However, this case has subsequently, and sometimes incorrectly, been used to restrict shareholder collaboration.

Given the importance of collaborative engagement as a strategy for effective active ownership – as contained in both the PRI and CRISA principles – the PRI South Africa Network Engagement Working Group engaged the Takeover Regulation Panel over several years to gain clarity over the regulatory rules on concert parties. The engagement included discussion on issues such as whether discussing investee company shareholder resolutions, developing engagement plans or discussing governance concerns at investee companies was restricted or required specific disclosures.

A March 2010 document on “Collaborative engagement”, which was reviewed by the Executive Director of the Takeover Regulation Panel in March 2012, noted that the “clear view” was that “a concert party is not created where institutional investors simply discuss matters of mutual interest or share their views as to concerns about particular companies. A concert party is only formed where shareholders agree a common plan under which to work together.”

However, it is clear from the Futuregrowth situation that this view is yet to be fully understood or implemented. A stronger articulation in support of collaborative engagement is required from South African regulators, such as the one issued by the European Securities and Markets Authority in 2013, which included a “White List” of activities that shareholders can engage on to drive good corporate governance. Without collaborative engagement as a possible strategy to effectively address environmental, social or corporate governance issues at companies, whether private, public or state-owned, the power of investment managers to act in the best interest of shareholders will be severely diminished.