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Economic value of shareholder activism

Shareholder and investor activism is rising to become a dynamic institutional force and contemporary instrument for driving good governance in the corporate world.

Rodney Ndamba

However, the rise of shareholder activism, has been received with a bit of resistance by many executives in Zimbabwe.

The corporate world has not yet embraced the culture of shareholder activism to a great extent despite the fact that it has largely contributed to the development of multinational corporations and capital markets in developed economies like USA, UK, France, South Korea, Germany, Australia, Japan and South Africa to name a few. For many local executives, facing up to shareholder activists is an emerging pain at an annual general meeting while some meetings get close to a fist fight.

To demystify perceptions and misunderstandings on shareholder activism, this article explores some of the potential benefits and impacts of shareholder activism on companies, the capital market and the national economy.

In Zimbabwe, over the past few years, there has been a rise in shareholders including minorities who have stood their ground in trying to bring management and executives to account for their corporate actions.

In developed countries, shareholder activism has been shaping the corporate world while passive shareholder activism in Zimbabwe has been largely behind the corporate collapses. Active shareholders should lead in the drive for good corporate practices and an active sustainable capital market.

In South Africa, shareholders were the driving force behind ensuring a code of corporate governance like King Code of Corporate Governance in South Africa exist and this has made businesses and their capital market competitive in the region.

However, shareholder activism is evolving to become more organised while other countries are legislating it to be part of a national corporate practice, where as in Zimbabwe it is still to find its feet, hence lack of competitiveness of local companies and capital market.

The downside to the current state is that many global and responsible investors tend to shy away from an environment where exercising your shareholder’s rights is not part of the corporate culture. However, it is crucial to understand that active shareholders play an important role to executives.

Many shareholder activists tend to be passionate and very smart people.

They tend to notice many things that the board and management often fail to notice. Most effective shareholder activists tend to bring varied skills sets that help company executives in building and unlocking value for all shareholders and stakeholders of the company.

As such, it is generally worth for executives to listen to active shareholders than dismissing or ignoring them. For many executives in Zimbabwe who are not so used to the culture of active shareholders and investors at AGMs, they always long to have the AGM done in ten 10 minutes, hence missing out on valuable insights and opportunities.

Active shareholders provide an opportunity for picking up any shortcoming in corporate governance systems. Shareholder activism helps executives to be disciplined by ensuring there are moments of transparency and accountability.

Active shareholders are not there to manage the executives but to ensure the company stays on track in creating value according to set principles of corporate governance and moral being. On the other hand, active shareholders try to ensure that they advance congruence on interests of shareholders, board and management.

In countries that have embraced shareholder activism, their capital markets tend to perform and sustain value over a long term period. The likes of the Johannesburg Stock Exchange (JSE) comes to mind in the SADC region.

Large shareholders like the Government Employees Pension Fund (GEPF) and the Public Investment Corporation in South Africa have played a critical role in being active shareholders in South Africa’s corporate world.

Individual shareholder activist like Theo Botha have also made huge impact in shaping the corporate world in South Africa. In Zimbabwe, shareholders like Old Mutual have played the role reservedly. While Old Mutual and the likes of the National Social Security Authority could use their capital muscle to raise a voice, what about the minorities?

In many cases, active and individual shareholders tend to be enemies of corporate executives in Zimbabwe and end up being perceived as having personal vendettas than just corporate issues. As a consequence of the latter culture has perceived the country as very unfriendly to investors because the business culture does not promote shareholders to fully exercise their rights.

For those who have braved themselves to come into the environment, they have consistently ensured that current executives are replaced by those responsive to both minority and major shareholders.

Shareholder activism is one of the key drivers of corporate governance.

Hypothetically, countries with a culture of passive shareholders tend to be associated with uncompetitiveness companies, high corporate collapses, and an unattractive capital market.

Observations have shown that countries with a strong culture of shareholder activism tend to be associated with existence of a code of corporate governance, competitive companies and capital markets benchmarked against international best practices.

The latter tend to attract more foreign and responsible investors. In those environments, shareholders and investors are not only concerned about how much profit has been made, but also how the executives have made that profit. Interestingly, most of these shareholders tend to be active in promoting efficiency and effectiveness in the capital market.

Effective shareholder activism is instrumental in underperforming public companies in identifying corporate actions that executives should take in building and unlocking value. For companies that respond positively, they tend to achieve market confidence.

Ultimately, this benefits management, board, shareholders and stakeholders, unlike in the case where executives are arrogant in taking constructive criticisms.

Observations have shown that companies that are receptive to shareholders activism tend to perform better and are competitive than companies that ring fence against active shareholders.

At the same time, capital markets that promote and encourage shareholder activism quite often benefit from constructive insights and skills that build and unlock values which attracts foreign investors and benefit local stakeholders.

Shareholder activism has evolved into various forms. A study by Yaron Nili (2014) noted that in South Korean, non-governmental organisations (NGOs) play a critical role in detecting companies that are slacking on corporate governance. NGOs in South Korea can file criminal complaints against companies and executives with poor or bad corporate practices for investigation.

NGOs play a critical role in protecting minority investors, hence promoting public participation in capital markets.

In our case in Zimbabwe, the capital markets are largely for those big monies who may have the muscle to raise a voice in the event of any corporate concerns. The model of NGOs as shareholder activists is used in Israel where the Movement for Quality Governance (MQG) monitors activities of public companies on issues of corporate governance, corruption and sustainable business practices.

In the US, UK, Germany, Australia, Brazil, South Africa and China, shareholders activism is largely institutionalised through the role of pension funds, institutional investors, trade unions, financial advisors and fund managers being part of the corporate governance system and use of voting power.

To build competitive companies and capital market in Zimbabwe, shareholder activism needs to be part of the corporate culture and values.

Shareholder activism has potential benefits for companies, executives, the capital market and the national economy. Local executives need to view shareholder activists as part of their company values system that contribute to value creation.

Lastly, at a national level there is need for a framework that encourages and protects shareholder activists to enable competitiveness of our economic and business environment.

These articles are coordinated by Lovemore Kadenge, President of the Zimbabwe Economics Society (ZES).email address;kadenge.zes@gmail.com cell +263 772 382 852

Rodney Ndamba is the Founding Head of the Institute for Sustainability Africa.

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