Inside Naspers’s pointless AGM

The JSE need look no further than the recent Naspers AGM if it wants to get an idea of the challenges posed by the dual-class share structures it is considering allowing for new listings. It’s like those slightly old-fashioned cooking programmes where the chef says: “And here’s one we baked earlier.”

Naspers’s dual-class structure has been baked into the JSE since it listed in the early 1990s. Remarkably, until 2018, few investors realised just how much power the structure — hyped up after Jannie Mouton’s takeover attack — placed in the hands of the directors.  In particular those of Koos Bekker and Cobus Stofberg, who control most of the high-voting Naspers A shares.

It was only in 2018 that Naspers began providing a breakdown of voting, as required by the JSE. That year, and every year since (and no doubt before), 100% of the A shares voted in support of every resolution. There are currently 435.5-million N ordinary shares, each with one vote and 961,193 A shares, each with 1,000 votes.

And so, it matters not a jot that more than 66% of N shareholders regularly vote against the group’s remuneration, and that more than 75% generally vote against giving directors control of unissued shares. As Mike Martin of Active Shareholder, a not-for-profit company that advises shareholders, tells the FM:  “Essentially it means there’s no shareholder oversight at Naspers, the directors are only accountable to themselves.” And that’s not even to all the directors, just the two who hold A shares. Rather reminiscent of China or Russia’s political system.

Had it not been for this anti-democratic voting system, three ordinary resolutions would have failed at this year’s AGM; the same three that would have failed at last year’s. The remuneration policy got support from a tad over 40% of ordinary shareholders; the remuneration implementation policy secured support from only 37% and an astonishing 89% of ordinary shareholders voted against approval of general authority to place unissued shares under the control of directors.

In addition, two special resolutions, both dealing with the authority for the company to repurchase shares, would have failed.

The existence of Naspers A shares makes AGM voting pointless. In these circumstances the only function an AGM  serves is to allow virtue signalling by institutional shareholders who have in fact cosied up to the board. They vote in a system they know to be rigged but can claim to oppose certain board strategies.

The absence of engagement at the AGM reinforces suspicion that institutional shareholders actually do support Naspers’s authoritarian style. Aeon Investment Management’s chief investment officer Asief Mohamed, one of only two investors to pose questions at the AGM, tells the FM: “SA investors were missing in action.” He acknowledges the virtual AGM format means it’s impossible to know who is attending but says the lack of engagement indicates few shareholders logged into the single most important meeting of one of SA’s most valuable and controversial companies.

Naspers makes no secret of the power and intent of its dual-class shareholding. It says it has an obligation to maintain its control structure and that having controlling A shareholders and directors “significantly influences the outcome of any action requiring approval of shareholders”.

In its latest annual report, the board says the voting structure is designed to “ensure the continued independence of the group”. Naspers wants to assure foreign governments where it has acquired assets and⁄or secured a licence that it will not be “taken over by unknown entities with whom the country or regulator may be uncomfortable”.  

It also makes the valid point that “differentiated voting rights and control structures are commonly used in the media and internet sectors to secure independence and deter raids and efforts to seize control”.

Which is all good and well but where does that leave the essential relationship between the share price and managerial efficiency? The ever-lurking threat of takeover has long been regarded as useful for ensuring listed companies are in the hands of the most efficient managers. Few of Naspers’s ordinary shareholders believe theirs is the most efficient.

As one governance analyst says, the dual-class share structure being considered for approval by the JSE “fundamentally distorts the market for corporate control and generally has adverse consequences down the road”.

The analyst, who does not want to be named, says Naspers has been able to persuade shareholders that the structure is beneficial because it allowed the group to ignore pressure to sell Tencent, which turned out to be a winning strategy. But he believes Naspers has abused the facility and advises the JSE to impose much stricter oversight if it allows other dual-class structures.

Accommodating a truly exceptional founder CEO is one thing, but enabling a contrived legal structure doesn’t promote market efficiency

—  Governance analyst

“Accommodating a truly exceptional founder CEO is one thing, but enabling a contrived legal structure doesn’t promote market efficiency, especially if there is no time limit,” says the analyst, who described the 1,000 votes attached to each A share as “ridiculous”.

Martin agrees the Naspers structure could, under strict circumstances, be useful,  but asks why A shares are used to force through an unpopular remuneration policy.

And, he says,  the profile of the board doesn’t help to assuage governance concerns. “We’re not convinced by the board’s assessment of its own independence; only four of the 16 directors meet our assessment of independence,” says Martin, who believes the board is dominated by too many long-serving directors. Bekker and Stofberg each have 25 years; Steve Pacak 24 years, Mark Sorour 20 years, Debra Meyer 13 years and Rachel Jafta 19 years. Remarkably Jafta and Meyer are described as “independent”. Even more remarkable is that Pacak, a former CFO of the company, chairs the audit committee.

And so, as it contemplates a more relaxed approach to dual-class share structures, the JSE should take a close look at Naspers’s AGMs or, better still, get hold of Active Shareholder’s comprehensive proxy notes.