Can AGMs be saved from big shareholders?

After 30 or more years of comparatively vibrant AGMs it looked as though some corporate boards were pushing back, wanting a return to the old days when shareholders could be kept in their place.

Some surprising heavyweights, who you’d think should know better, latched on to the opportunity provided by Covid to provide virtual-only AGMs in an attempt to reclaim the former dominance enjoyed by boards at these meetings. Sasol, which had commendably provided hybrid AGM facilities as soon as possible after lockdown, decided to revert to the virtual-only option after it bungled its unruly November 2023 AGM. What a relief it must have been for Sasol’s board to be able to control their shareholders so effectively from a distance in January.

The virtual-only format allows for much greater control by the board. Ask almost any shareholder who attends, and you will be told how frequently questions get ignored, mangled, dropped or misinterpreted. It inevitably distorts the quality of engagement, even with the use of a recent Coronation invention — the air host. The air host’s role is apparently to help the board process shareholders’ questions. Presumably it is not a contravention of section 63(2)(b) of the Companies Act, which allows for virtual-only meetings, “as long as the electronic communication employed ordinarily enables all persons participating in that meeting to communicate concurrently with each other without an intermediary, and to participate reasonably effectively in the meeting”.

Though small shareholders and activists have kicked up a fuss about the lack of commitment to hybrid AGMs, where they can attend in person, powerful institutional shareholders seem not to care. That’s largely because they continue to enjoy a pre-1990s shareholder engagement model whereby they have private meetings with management throughout the year and rarely attend AGMs.

The problem, as explained by Tracey Davies, executive director of nonprofit shareholder activist organisation Just Share, is that institutional fund managers’ seeming indifference to AGMs makes these events significantly less effective. She also raises the danger of a two-tier system of communication being created where powerful institutions get preferential treatment over the smaller investors — just the sort of thing to discourage the much-needed retail investor from getting into the equity market.

Davies raised the issue during the reconvened Sasol AGM, held just days after the board had met with its largest shareholders in what was deemed a bid to persuade them to back the company’s controversial climate resolution. Vuyo Kahla, Sasol’s executive vice-president of strategy, sustainability and integrated services, assured the shareholders that all the information dealt with during that earlier private meeting was information that had already been disclosed. “We’re comfortable no information was shared unequally,” said Kahla.

Stepping back

In 1957 US legal academic Adolf Berle, considered the grandfather of modern corporate law, described the annual shareholder meeting “as a kind of ancient, meaningless ritual like some of the ceremonies that go with the mace in the House of Lords”.

It’s an apt description of South African AGMs up to the early 1990s. They were highly formal rituals that, on average, lasted all of five minutes. That was all the time needed for shareholders to vote on the resolutions and for those votes to be tallied. In most instances the votes had been submitted days in advance. There were no surprises and, invariably, no questions. All in all, deadly dull things. At the end of the three-minute affair shareholders were told “all the resolutions have been passed by the requisite majority” and headed off for tea and biscuits.

Remarkably, it was only in the early 2000s that companies were required to disclose the details of the voting.

About 30 years after Berle’s damning description, things had changed so significantly that South African legal academics Blackman, Jooste and Everingham, writing in Commentary on the Companies Act, could afford to be more upbeat about the role of the AGM. Its potential seemed unlimited: “[It] provides a significant safeguard to members as it is the one opportunity when they can be sure of meeting the directors and cross-examining them on the company’s accounts, their report and the prospects of the company.”

The willingness of the directors to be cross-examined was in part down to the fact that they retire and are up for re-election at the AGM, “so it is then that they (the shareholders) can exercise their real power over the board, namely, dismissal”, said the South Africans.

A lot had happened in the intervening years. Berle had been writing at a time when public company shareholders were regarded as dispossessed owners who were too widely dispersed to take collective action against inept management. And so in Berle’s world the regulators focused on protection of powerless shareholders.

But by the end of the century those shareholders were dominated by powerful institutions that did have the wherewithal to oversee corporate boards. The challenge over the past 30 years has been to ensure they made the most of legally backed opportunities to participate in the governance of public companies, in the hope that managers of listed companies would operate in the interests of the owners. It’s a challenge that has become even greater with the arrival of passive investment funds.

Inside track?

Veteran AGM-goer Anthony Clark, of SmallTalkDaily Research, probably does more than most investors to give voice to Blackman, Jooste and Everingham’s upbeat view of AGMs. “What I get from attending AGMs is incalculable,” Clark tells the FM. “You can weave together a much better picture than you get from the financial results or integrated reports.” But he hastens to point out that this “much better picture” does not involve anything like “insider information”. No, the valuable stuff is not “specific or precise”, which are the terms at the heart of the definition of insider information in the Financial Markets Act (FMA).

When it comes to any form of engagement between corporate executives and outsiders (shareholders, employees, stakeholders and the like) avoiding “inside information” territory is critical unless you want a small army of regulators on your case. The FMA defines inside information as “specific or precise information, which has not been made public and which is obtained or learned from an insider and, if it were made public, would be likely to have a material effect on the price or value of any security listed on a regulated market”. You would think you couldn’t get any more public than an AGM, which is open to all shareholders. But no. An AGM is not considered public.

As far as the JSE is concerned, the only acceptable way to make something public is to issue a Sens announcement. It’s why trading updates disclosed at the beginning of every AGM have already been released on Sens.

It’s also why at the recent Nampak AGM CEO Phil Roux was wary of making any comment that was not totally in line with what had been released in the update earlier that day. In addition, JSE regulations prohibit words such as “pleased” or “encouraged” which hint at a forecast.

What I get from attending AGMs is incalculable. You can weave together a much better picture than you get from the financial results or integrated reports

—  Anthony Clark

Anyone who knows Roux will hardly be surprised that he went ahead and used the P-word, presumably realising it wouldn’t have a material effect on the price of Nampak shares.

While it was a riveting event for shareholders, the company secretary seemed a bit tense. At the end of the meeting she told the FM her team would scrutinise a recording of the meeting to ensure there had been no unintended leaks.

Clark says it was the sort of meeting that justifies his enthusiasm for AGMs. “I got huge amounts of information about the group and its new board,” he says.

As for subsequently making a recording of the meeting available on the company website if there has been a leakage of insider information, Dawid de Villiers, partner at Webber Wentzel, tells the FM, “that might mitigate the exposure, but it doesn’t cure the problem”.

Of course, not all engagements are about discussing results and operational performance or about securing support for AGM resolutions. “Companies often need to engage with their major shareholders to establish the level of support for some or other significant initiative,” says De Villiers. He tells the FM that as soon as it’s apparent that inside information will be disclosed, then the FMA — in addition to requiring that disclosure must be absolutely necessary and for a legitimate purpose — requires that the recipient must be cautioned that the information disclosed may qualify as inside information. Having received information under these circumstances, the recipient will be precluded from trading in the shares.

Receiving the information, whether intentionally or by accident, is essentially only half of the offence; the killer half is trading on it. 

De Villiers cautions that, in general, the sharing of information with discrete audiences is risky. “In any interaction the parties have to be very circumspect about what information is shared, it’s a significant balancing act.” He adds that there is definitely a need for companies to communicate with their shareholders, but that must be in terms of the FMA. He stresses that in the absence of a “safe harbour” defence (for a legitimate business purpose and subject to disclosure) sharing inside information is an offence.

Unfortunately, as the JSE’s general manager of issuer regulations, Andre Visser, tells the FM, it is largely a self-policing system.

Gerhard van Deventer, head of enforcement at the Financial Sector Conduct Authority (FSCA), which is responsible for adherence to the FMA, tells the FM that if a CEO is caught accidentally disclosing price-sensitive information, the company must publish that information immediately on Sens. It is also likely sanctions will follow.

Quiet chat 

As for engagements between individual institutions and management, Van Deventer confirms that the FSCA relies on the parties involved to ensure there’s no insider information exchanged. But, he points out, “if there is a ‘leak’ at a meeting this will likely show up in share trading patterns and will be detected during the surveillance process”. And if that happens the parties involved will be embroiled in a long, tedious and intrusive investigation with the possibility of fines and public condemnation at the end of it. The prospect of that nightmare seems enough to ensure institutions and companies stay well within the FMA.

Allan Gray spokesperson Daniella Bergman tells the FM the fund manager expects its investee company executives to know that “we never wish to be made party to material, price-sensitive information without them formally inviting us to become party to such information and offering us the opportunity to either accept or decline their invitation”. 

The problem for the fund manager is that once “material, price-sensitive information” has been disclosed, the recipient of that information is prohibited from dealing in the share until the information has been made public.

It’s a similar story at Sanlam Investments, according to spokesperson Shey Nel. “These engagements play a crucial role in shaping the strategic direction of Sanlam Investments and we remain committed to upholding the highest standards of corporate governance,” says Nel. And it seems they take caution a few steps further. Anyone at Sanlam Investments who has or may receive non-public information, whether or not it is material, must immediately declare this to the compliance department and sign an affidavit.

As a publicly listed company and institutional fund manager, Coronation finds itself on both sides of this particular fence. Coronation spokesperson Fiona Kalk tells the FM the company is “fastidious” about ensuring no material non-public information is ever disclosed in meetings with investors. “Similarly, institutional investors in Coronation will likely have policies and procedures in place to mitigate the risk of them becoming insiders,” says Kalk.

We find AGMs work much better for us [than behind-the-scenes engagements], they’re in the public domain, lots more issues are raised and there are lots more perspectives

—  Asief Mohamed

Coronation also has policies to mitigate the risk of coming into possession of insider information that would force it to freeze trading in that company’s shares.

Judging by the paucity of censures and fines dished out by the FSCA, can we assume insider trading is no longer an issue? Last year the Financial Services Tribunal confirmed a R20m administrative penalty — reduced from R162m — imposed on former Steinhoff CEO Markus Jooste for insider trading in a case that seemed rock solid. It’s the only penalty imposed for insider trading since 2017. In the years before 2017 the very rare fine issued did not amount to significant sums of money.

Van Deventer acknowledges that there haven’t been many insider trading  penalties recently, though he says the FSCA is getting a lot of referrals of possible insider trading. He believes the situation is improving as a result of increased awareness and tighter regulations, but suspects things have become more sophisticated. “I’m not claiming we’ve stopped it, but if we’ve driven it underground we’d still detect it in the trading patterns.”

Indeed, it’s perhaps not as rare as the FSCA’s penalty rate would suggest. Occasionally the market gets wind of a leakage, such as in 2022 when Spar had a briefing with a select group of investors — all SBG Securities clients — where management shared some very useful information about the group’s recent trading performance. It certainly fell into the definition of “specific” and “precise”, but appears not to have had a material impact on the share price. It may have been this that saved Spar from FSCA censure.

Shortly after, TFG management held a private broker call with Rand Merchant Bank. The following day trade in TFG shares soared. If there was anything untoward, there were apparently no known repercussions.

A year earlier Distell CEO Richard Rushton was forced to make public what a wide range of “select investors” had seemingly known for a few years, namely that Heineken was keen to make a bid.

The FSCA does not publish its list of investigations, so it’s impossible to know if anything came of these incidents. What is known is that the FSCA has 11 open insider trading cases at present.

This could explain the general market cynicism. As one seasoned portfolio manager tells the FM: “Of course it [insider trading] happens, the market is made up of humans. Big institutions say they don’t have the resources to attend AGMs but are happy to pitch up to private engagements where they’re given no new information. That seems odd ... But it’s difficult to prove.”

Asief Mohamed, chief investment officer at Aeon Investment Management, describes behind-the-scenes engagements as “an absolute waste of time” and says the directors are less than forthcoming. He suspects bigger fund managers get something more useful. “We find AGMs work much better for us, they’re in the public domain, lots more issues are raised and there are lots more perspectives, which is always useful.”

Judging by Peter Surgey’s comments at the recent Nampak AGM, boards might also not be getting much out of the private engagements. During the tumultuous past 10 years the Nampak board’s meetings with its former major shareholders have provided no insight into what they wanted from the board. “Quite often we were feeling in the dark,” said Surgey. With private equity company A² Investment Partners as the driving shareholder, that has changed.

Avoiding embarrassment

The notion of select groups of attendees at private meetings is particularly troubling given the selection process involved. While most companies are adamant that they will meet with any shareholders that request a meeting, analysts tell the FM they are under pressure not to take too forceful a stance on a company for fear of missing out on an invitation to one of the “special” meetings. This appears to have been a tactic used to devastating effect by Markus Jooste of Steinhoff, Peter Staude of Tongaat Hulett and Leon Kirkinis of African Bank.

But perhaps the biggest threat to AGMs living up to the lofty role Blackman, Jooste and Everingham believed possible is the disturbing realisation that despite their vaunted status and rich remuneration, directors are pretty much like the rest of us in one crucial way: they don’t like being challenged in public. Recall how agitated Sasol became a few years ago when word got out of a “campaign” to vote against directors’ remuneration. And ahead of its latest AGM the board went on a full-scale offensive to ensure shareholders backed its controversial climate resolution after Old Mutual Investment Group disclosed its intention to vote against the advisory resolution.

Frequently when a board is challenged too robustly at an AGM the chair will attempt to shut down the conversation by suggesting to the engaged shareholder that the discussion be continued privately after the meeting. This is what happened to Des Mayers, an analyst at Afrifocus Securities, when he started asking tough questions at the Oceana AGM in 2022 — something the board should have been well prepared for given the torrid time the group had been through.

To his credit, Mayers refused to be shunted off the public stage, unlike many others who have acquiesced to similar requests.

But the really disturbing possibility is that Berle’s “meaningless ritual” is precisely what suits boards and the big fund managers. It means boards avoid public embarrassment and the big fund managers avoid upsetting a company that is a current or potential customer for their fund management services. Just the sort of cosy attitude that would destroy any hope of vibrant AGMs.

Chris Logan, who became a devoted fan of AGMs when he set up Opportune Investments, describes them as a potentially powerful facility for both the company and shareholder if both sides are well prepared. While he sees benefit in private engagements where executives are more relaxed, he believes AGMs have much more to offer. “An AGM gives you an opportunity to engage with all the directors; you can pick up a lot from a director’s behaviour.”

He regrets not making more use of AGMs during his time as an institutional shareholder. “It really is a useful tool for institutional shareholders, they could learn far more from physical attendance.”

Davies agrees that attendance by the big institutions would enhance the quality of AGMs, bringing clout and a different perspective. “But I’m not sure they’re interested in holding boards to account.”