The responsible investment landscape in South Africa changed considerably over the last decade (2011 to 2020). The King IV report on corporate governance, Regulation 28 and CRISA had multiple implications for responsible investment policies and practices in the country (Viviers & Els 2017). A sound corporate governance framework is critical in attracting investors for economic growth and can substantially enhance investor confidence (Beekes & Brown 2006). The King report can be seen as a form of ‘soft law regulation’ to guide sustainable behaviour (Esser 2017). Compliance with the King guidelines is voluntary, but listed companies must comply with these guidelines as part of the Johannesburg Stock Exchange (JSE) listings requirements (JSE 2017).

The local stock exchange also launched the JSE Socially Responsible Investment (SRI) index (now called the FTSE/JSE Responsible Investment Index Series) in 2004 to identify listed companies that integrate triple bottom principles into their activities, and to facilitate investment in such companies (JSE 2015). The performance of locally listed companies is annually reviewed against a set of ESG considerations to determine constituency. Since then, the index series evolved considerably to further promote sustainable development (JSE 2015).

In addition to the publication of the pioneering King report, South Africa was the second country in the world to formally encourage institutional investors to consider ESG aspects when making investment decisions (Deloitte & Touche 2014). Regulation 28 of the Pension Funds Act (No. 24 of 1956) was revised in 2011 to ensure that retirement funds meet long-term obligations to their members by obliging institutional investors to account for ESG factors (Deloitte & Touche 2014).

Furthermore, CRISA was published in 2011 to guide the investor community to give effect to the King III report and the United Nations-supported Principles for Responsible Investment (UN PRI) initiative (Deloitte & Touche 2014; IoDSA 2011). This code postulates that organisations that exhibit sound corporate governance practices are expected to create value in a sustainable manner. The term ‘value’ does not only refer to financial aspects, but includes social and environmental aspects (IoDSA 2011). When CRISA was launched, the former South African Minister of Finance, Pravin Gordhan, remarked that the 2008 financial crisis emphasised the importance of a longer-term investment focus (Deloitte & Touche 2014). The process to revise CRISA commenced in 2020.

The UN PRI offers guidance to investors around the globe to invest in a responsible manner over the long run. The majority of the local signatories are investment managers and service providers (Tomlinson et al. 2017). Prominent asset owners such as the Government Employees Pension Fund perform an important role in developing scheme practices that smaller local pension schemes can adopt (Tomlinson et al. 2017). Ertimur et al. (2011) confirmed that institutional investors can leverage other (minority) shareholders’ support by setting an example.

Given their power, institutional investors can be a considerable driving force for improved performance (Ivanova 2017). Institutional investors are such influential stakeholders that the King IV report includes a specific principle to highlight their primary responsibilities (IoDSA 2016). King IV proposes that an institutional investor’s governing body should provide direction for responsible investment and approve policies in this regard. Institutional investors should furthermore disclose their code on responsible investing and details on the application thereof (IoDSA 2016). The guidance note published by the Financial Sector Conduct Authority (2019) sheds more light on sustainable investments and assets in the context of retirement funds’ investment policy statements.

Based on an extensive review of the changing ESG landscape in South Africa, Tomlinson et al. (2017) encouraged the Financial Sector Conduct Authority to cautiously review the mandates of investment managers to ensure that they reflect the expectations for investment practice as set out in Regulation 28. They indicated that CRISA could benefit from appointing a permanent secretariat to enhance its stewardship. Emphasis was placed on the inclusion of ESG aspects as part of trustee training. They furthermore suggested that investors should be educated on the application of different ESG approaches. Given that enhanced transparency aids informed decision-making, it is likely that the Financial Sector Conduct Authority and the JSE will place even more focus on the quality of disclosure on material ESG factors in future (Tomlinson et al. 2017).

Responsible investors can employ three main strategies, namely screening, impact investing and shareholder activism. In this study, focus is placed on shareholder activism, with pertinent reference to the South African context. As explained in the introduction, shareholder activists aim to influence the behaviour of investee companies by exercising their rights as owners. They can employ a range of private and public voice mechanisms to focus attention on financial and ESG considerations (Schueth 2003). As the name implies, private engagements occur behind the scenes, such as writing emails or arranging confidential negotiations with key decision-makers of investee companies. In contrast, public voice mechanisms include raising concerns at annual general meetings (AGMs), voting and filing shareholder resolutions. Shareholders can also engage in debate via traditional and social media. Proxy voting furthermore enables shareholders to delegate voting power to delegate voting power to a representative (Viviers & Smit 2015).

Alternatively, an investor can opt to exit from an investee company by selling their shares. If an institutional investor employs this mechanism, it signals dissatisfaction to other shareholders and could have a devastating impact on a targeted company’s share price (Levit 2019). When several shareholders divest concurrently, the investee company’s market capitalisation and cost of capital might be severely affected (Gillan & Starks 2003). Given the size of the South African share market, a limited number of local shareholders have utilised this mechanism (Viviers & Smit 2015). Some researchers deem the mere threat of exit sufficient to signal their discontent with an investee company’s actions, policies and practices, without having potential detrimental consequences for a range of stakeholders (Admati & Pfleiderer 2009; Levit 2019; McCahery et al. 2016).

The selection of a specific engagement mechanism depends to a large extent on the investor’s ability to gain access to the investee company’s management. Large institutional investors typically prefer private mechanisms. If private engagement is deemed unsuccessful, they consider (more hostile) public shareholder activism mechanisms (McCahery et al. 2016). A growing number of activist South African investors are voicing their concerns in public. For instance, several shareholders publicly opposed perceivably excessive executive compensation at multiple local companies in 2020 (Just Share 2020a). Despite the increase in emolument-related shareholder activism, only a few executives announced that they were willing to take a pay cut following the South African lockdown related to COVID-19. Likewise, only a limited number of institutional fund managers responsible for the pensions of millions of South Africans have made public commitments to cut their salaries and make donations to the so-called Solidarity Fund (Just Share 2020a).

Previous scholars assessed the effectiveness of public activism endeavours globally (Cai & Walkling 2011; Kimbro & Xu 2016) and locally (Viviers et al. 2019; Viviers & Smit 2015). Based on a review of 24 510 votes cast by 17 South African investment managers and interviews with selected investment managers, Viviers and Smit (2015) reported that proxy voting was deemed a last resort in the local context. Less than 7% ‘against’ votes were recorded, mainly pertaining to executive remuneration. They furthermore noted that companies that were excluded from the FTSE/JSE SRI index attracted more shareholder opposition than constituents (Viviers & Smit 2015). Bauer, Moers and Viehs (2015) assessed the determinants of withdrawal of shareholder proposals in the United States and reported that proposals filed by influential institutional investors were more likely to be withdrawn than those filed by private investors. There is a limited body of research on private engagements between institutional investors and investee companies, given the confidential nature thereof (Semenova & Hassel 2019). There is hence scope to assess institutional investors’ selection and application of specific activism mechanisms in South Africa.

The fourth industrial revolution and the COVID-19 pandemic have multiple implications for shareholder activism endeavours, as explained next.

Rapid technological developments have multiple implications for listed companies and their shareholders (Goldman Sachs 2019; Uldam 2018). COVID-19 furthermore forced companies to reconsider the way in which they engage with shareholders, inter alia, due to challenges associated with social distancing (Kennedy-Good & Chalwin-Milton 2020). Shareholder activists are increasingly moving from traditional media platforms such as newspapers to social media, including Twitter, to raise their concerns and enhance awareness of corporate issues (Uldam 2018). Although the usage of social media gives users unprecedented visibility, online security and the protection of personal information are prominent concerns (Uldam 2018). The long-lasting impact of negative comments raised in the media on companies’ reputations should also be considered (Chartered Governance Institute of Southern Africa 2020). The King IV report confirmed that the increased usage of social media platforms will radically enhance transparency. Governing bodies are hence urged to ensure sufficient oversight of technology and information management. Proactive monitoring will enable them to timeously respond to adverse social media events (IoDSA 2016).

Annual general meetings are essential corporate events that allow shareholders the opportunity to share their views and receive feedback from corporate leaders (Kennedy-Good & Chalwin-Milton 2020). Shareholders also cast their votes on tabled resolutions, either in person or via proxies. A surge was noted in proxy voting in 2009 following the 2008 global financial crisis (Gottfried & Donahue 2020). A similar trend is expected following the COVID-19 pandemic. Although technological developments associated with the fourth industrial revolution enabled companies to facilitate online meetings and voting for some time, local companies still opted for in-person meetings until March 2020. Social distancing as a result of COVID-19, however, brought about considerable challenges to facilitate in-person meetings and engagements. Local legislation allows for electronic AGMs if reasonable participation and simultaneous discussion among attendees are possible (Chartered Governance Institute of Southern Africa 2020; Kennedy-Good & Chalwin-Milton 2020). Electronic meetings are, however, not a possibility if a company’s memorandum of incorporation prohibits such events (Kennedy-Good & Chalwin-Milton 2020). As such, several local companies had to postpone their in-person AGMs during 2020 (Larkin 2020).

In response, the JSE (2020) in collaboration with The Meeting Specialist launched a platform that enables listed companies to hold virtual AGMs and conduct electronic voting. In addition to complying with a legal requirement to facilitate a mandatory yearly shareholder gathering, this pioneering initiative allows shareholders to participate in AGMs irrespective of their location, by using a range of technological devices at their disposal. Virtual meeting attendance is furthermore cost-effective, as shareholders and board members are not required to travel (JSE 2020). An executive director at Alexander Forbes, the first company that made use of The Meeting Specialist’s platform, remarked that in due course, virtual meetings will become a routine addition to conventional meetings (JSE 2020:1). Companies that plan to conduct virtual meetings should ensure that their online facilities are easily accessible and can deal with a large number of individuals concurrently attempting to log in (Kennedy-Good & Chalwin-Milton 2020).

The local non-profit shareholder activist organisation Just Share (2020b) recognised that virtual AGMs are reasonable, given restrictions imposed by the COVID-19 pandemic. Just Share, however, cautioned JSE-listed companies against infringing shareholder rights and non-compliance with the Companies Act (No. 71 of 2008) when opting for online meetings. They furthermore expressed concern that shareholders’ questions might be moderated before being submitted to directors. As such, Just Share urged listed companies to ensure meaningful, real-time shareholder participation in future.

Shareholder activists could arguably use the case of COVID-19 to illustrate why specific ESG-related changes are essential, in particular related to board composition and the perceived disconnect between executive pay and performance (Gottfried & Donahue 2020). Some shareholders might, however, question whether they should challenge companies that are already experiencing considerable financial hardship owing to share markets around the globe being under severe pressure (Orol 2020). Given that a stable macroeconomic environment is a prominent catalyst of shareholder activism, the ultimate impact of the COVID-19 pandemic on shareholder activism remains uncertain (Gottfried & Donahue 2020) and requires further investigation. This study was conducted to shed light on the way forward for shareholder activism in South Africa.

Ethical clearance was obtained to conduct this study from the Research Ethics Committee (REC) of Stellenbosch University. Project number: 6906.

Participants expressed contrasting views on whether responsible investor status should be publicised. Four participants stated that a public declaration in this regard is mostly ‘window dressing’. The other participants argued that a mere proclamation of responsibility is not sufficient; it should be visible in actions. Goh (2018) agreed that it is debatable whether a mere proclamation will truly result in improved behaviour. The difference between intent and actual corporate actions may tarnish a company’s reputation (Greyser 2009).

An interviewee remarked that ‘actions speak louder than words’. If investors fail to act in a responsible manner, it will become known regardless of whether or not they proclaim to be responsible investors. A counterpart added that such practices must be ‘imbedded in your culture and investment philosophy’. This view is supported by the King IV report (IoDSA 2016). A related opinion was raised by an interviewee: ‘transparency is really important for driving behaviour’. Sufficient information on financial and non-financial performance should hence be shared with stakeholders. By definition, responsible investors aim to incorporate financial and sustainability information when making investment decisions (Viviers et al. 2008). A participant, however, warned against undue pressure by clients to deliver superior investment performance. An excessive focus on financial considerations contradicts the responsible investment philosophy. The rapid spread of digital technology could considerably enhance transparency (Coulibaly 2020) which is of particular relevance during periods of crisis (Lang & Maffett 2011; Moon 2020).

The majority of the interviewees indicated that they prefer private engagements, as public activism is typically confrontational and hostile in nature. The view was raised that shareholders are not ‘active enough’ which makes interaction challenging. Yamahaki and Frynas (2016) and Viviers and Smit (2015) confirmed that shareholder activism typically occurs behind closed doors in the country, given the confidential nature of discussions. This tendency might also be partly ascribed to the country’s limited investment universe (Tomlinson et al. 2017) and the subsequent drive to protect relationships with investee companies (Viviers & Smit 2015). In an attempt to enhance transparency, several participants mentioned that they provide some information on engagements in reports that are made available on their websites. The shareholder activist Just Share (2020b) encourages other institutional investors to follow suit.

Ten participants (more than 75% of the sample) suggested that institutional activists should initially consider a private mechanism, such as engagement. If the investee company does not respond, or if the private engagement is not deemed successful, the institutional investor can consider employing public mechanisms. McCahery et al. (2016) shared this view. A possible reason for the preference for private engagements is that public activism could be rather costly (Admati & Pfleiderer 2009). Activist investors often only enjoy a fraction of the benefits negotiated by them. The related free-rider problem implies that all shareholders might benefit if one investor publicly raises concerns, although they do not bear any costs or engage themselves (Gillan & Starks 2000). Due to institutional investors’ large stakes in investee companies, they might be able to cover the associated costs when there is a possibility of significant returns as a result of their activism endeavours (Gillan & Starks 2000). Another possibility mentioned by an interviewee is ‘semi-private’ engagements in which stockbrokers invite portfolio managers to engage with a company’s management in a group meeting. Other participants deemed public activism endeavours more effective than private engagements, given that the responses ‘are there for the public to see’.

Participants concurred with Viviers and Theron (2019) that public shareholder activism might have considerable negative repercussions for institutional investors. The example of Futuregrowth Asset Management was mentioned by several participants. After publicly proclaiming that they would not issue new loans to state-owned enterprises (SOEs) given governance-related concerns, Futuregrowth withdrew their support pending review of the SOEs’ governance structures. Some of the SOEs’ credit ratings were subsequently downgraded (Viviers & Theron 2019). After several engagements, Futuregrowth announced that they would resume lending to specific SOEs. Their public shareholder activism approach was received in a negative and emotive light, since trust was compromised. This is a prime example of good intentions of an institutional investor being perceived incorrectly. Given the outcome of this case, asset managers might be encouraged to rather pursue private engagements (Viviers & Theron 2019).

Shareholder activism research suggests that it is beneficial to form coalitions with other stakeholders (Sjöström 2020). Participants, however, expressed concern about the implications of the acting in concert provision included in the Companies Act (No. 71 of 2008). To act in concert means:

Interviewees implied that this provision has a major implication for shareholder activism, as it makes it difficult for institutional investors to coordinate with other shareholders to initiate change.

In the light of rapid technological developments associated with the fourth industrial revolution, several participants mentioned that social media should be employed to create and enhance awareness of topical issues. Uldam (2018) confirm that social media is increasingly used by activists, often with devastating outcomes for corporate reputations (Chartered Governance Institute of Southern Africa 2020). Concerns were likewise raised by participants about expressing views on social media, especially Facebook and Twitter, that could be interpreted out of context. An interviewee argued that, as these platforms can ‘disrupt the control of the corporate narrative that the company may think it has’, they can be detrimental to an entity’s reputation and brand. The view was expressed that media statements are often blown out of proportion as stakeholders might ‘read their own personal bias into it’. This finding supports the King IV recommendation that social media should be proactively monitored (IoDSA 2016). A chief information officer can be appointed to assist in this regard (Maruca 2000). It is likely that more focus will be placed in future on the impact of brand trust on the relationships between a business and its stakeholders (Davis & Mulcahy 2018).

Eight participants (more than 60% of the sample) stated that the frequency of engagements varies due to the considerable number and nature of issues that require attention. Follow-up meetings with management of investee companies to reflect on the success of engagements were brought up by five interviewees. Semenova and Hassel (2019) likewise reported that Nordic institutional investors mentioned follow-up private engagements if an engagement case has not been closed within two months.

The interviewees indicated that engagements mainly centred on executive remuneration concerns. Engagements on board composition were also mentioned. An interviewee referred to voting on executive remuneration as ‘a good example of what you can achieve if you want shareholder activism to play a more prominent role’. A counterpart suggested that ‘roadshows’ could be held to facilitate robust discussions with large investors on executive remuneration. Literature confirms that shareholder activism in South Africa is primarily event-driven and focused on corporate governance issues such as emolument and board diversity (Davids & Kitcat 2019; Viviers, Mans-Kemp & Fawcett 2017; Viviers et al. 2019). This tendency could be partly ascribed to the introduction of say-on-pay guidelines and board diversity targets in King IV (IoDSA 2016). A participant ascribed the focus on the G-component of ESG to governance information being more accessible than data on social and environmental considerations. This participant stressed that more information is required to ensure meaningful engagement on sustainability topics in future. This call by participants is echoed by researchers (Eccles & Klimenko 2019).

An interviewee remarked that clients should pressurise companies to improve their engagement processes in future. It was suggested by this participant that contracts should be amended to offer more details on the expected behaviour of the institutional investor on behalf of the client. Although Viviers and Smit (2015) indicated that proxy voting seems to be the last resort for local shareholder activists, an interviewee expressed the view that proxy voting is expected to gain more traction in future: ‘it’s a two-way street; the institutional investors move on their own accord, but they will need the pressure from clients’. Gottfried and Donahue (2020) confirmed that it is likely that this shareholder activism mechanism will receive more attention following the disruption in markets caused by the COVID-19 pandemic.

The participants provided several recommendations on how to improve engagements in future, given rapid technological advancement. They deemed AGMs a prominent engagement platform, in addition to semi-annual and annual results presentations. The view was expressed by an interviewee that ‘companies can use technology a lot more through webcasts’. By presenting a company’s results and AGM via webcasts, more shareholders would be able to engage in discussions. Purcell (2008) suggested that electronic communication channels will not only result in more effective engagements and better representation at meetings, but shareholders will also have the opportunity to vote directly without going through a proxy. Despite such calls, the first platform to facilitate electronic AGMs in South Africa was only introduced by the JSE (2020) in March 2020 following the COVID-19 pandemic that brought about social distancing. The impact of technology on shareholders’ preference for specific activism mechanisms warrants further investigation.