Stocks and Shares

Shareholders start setting the tone

Shareholder activism takes off in South Africa

Large South African shareholders are increasingly setting performance indicators for the boards of companies they invest in as shareholder activism takes off in South Africa.

Etienne Swanepoel, mergers and acquisitions partner at Webber Wentzel in Cape Town, said that it was a sign of the tough economic times that major shareholders wanted to protect and squeeze as much as possible out of their investments.

“We’ve noticed a surge of shareholders engaging with management to set down what they see as key performance metrics.

“This sort of activity has been sparse and largely under the radar in the last few years but now it is more and more prevalent. They’re no longer happy to sit back and let management get on with it.”

Swanepoel noted that in the same way as management typically set what are commonly called Key Performance Areas (or KPAs) for staff, large shareholders, which are often institutional shareholders, set performance metrics such as operating margins, sales growth targets and dividend policy.

He added that this was the start of what he expected to be even greater efforts to put the message across to boards about what they want and expect.

“It’s probably fair to say that shareholder activism in South Africa is about 20 years behind the leader in the field, the United Sates.

“But we are rapidly catching up as shareholders are increasingly more vocal and more proactive.

“This is likely to have a great influence on management decision makers and should be of benefit to all shareholders.”

Swanepoel added that it was likely institutional shareholders and those with strategic holdings in listed companies would adopt private equity metrics and performance objectives in an effort to drive value.

“It is well known that private equity investors are particularly adept at extracting performance and returns through a very demanding, tightly managed approach.”

If this became a norm amongst institutional and those with strategic holdings, this may of itself attract traditional private equity investors to take up strategic shareholdings in listed companies for the same reasons.

The relationship structures to be adopted by activist shareholders in the listed environment will be challenging in view of the level of transparency in that environment.

“It will be all important to structure that involvement appropriately taking account of the new Companies Act and King III.

“The key challenge is to structure those relationships outside the traditional approach of making board appointments mainly in view of the section 75 conflict issues in the new Companies Act.

“Some views have even been expressed about structuring the private equity type activist shareholder model in the listed environment on a joint investment or co-investment basis with the target company and to influence behaviour in that manner.”

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Issue 72