Why firms should encourage investor activism at AGMs

By NURU MUGAMBI

The Kenya shilling strengthened on Friday, helped by dollar inflows from foreign investors buying government securities. PHOTO | FILE  

Annual general meetings (AGM) in Nairobi run like clockwork. Shareholders trickle in as prompt as two hours early, many having travelled to the city from the countryside.

At approximately 10 minutes to the start, the board is whisked in and head straight to the stage. The meeting commences with the formal proceedings and voting followed by brief remarks from the chief executive and chairperson.

After four minutes of shareholder feedback and questions, the meeting ends. Five minutes for handshakes. Exit CEO and chairperson. Lunch is served.  See you next year.

At face value this would pass as a well-run AGM.  The board is happy with the level of engagement.  On the other side, the minority shareholders, who seem to be the only investors with time to attend these meetings, are satisfied with the dividend announcement and free merchandise; and if either were unsatisfactory, well, there’s always next year.

This has been the narrative since company ownership diversified to include retail investors.

However, things are changing and AGMs are becoming more eventful. With increased lapses in governance that spark systemic risks; inefficiencies which cost investors income; lack of innovation and unsustainable remuneration structures all coming under increased scrutiny, companies should anticipate livelier shareholder meetings with company-shaping pushback.

As much as pacified shareholders are easier to deal with, shareholder activism isn’t entirely a bad thing. Even those who hold just one share worth of voting rights could unearth insights that management have failed to see on account of the proverbial trees. 

This is especially the case with airline, telecommunication, financial service, manufacturing and consumer products firms where the investor is also the employee, supplier and client.

Some local companies, in my view recognise the value of the non-celebrity-type of investors on their share register. But more could be done.

There are global best practices in investor engagement to learn from. I am particularly impressed with Warren Buffet’s approach at Berkshire Hathaway.

Besides being the star of an AGM that some have termed as a rock concert cum trade expo complete with candy stands and a newspaper tossing competition, Buffet over his 50-year tenure as chairman of Berkshire has earned the respect of his shareholders not only because of the company’s stellar financial performance but also because he keeps it real with his investors.

Unlike many companies that provide for the ceremonial four-minute question and answer session, Buffet and his vice chairman Charlie Munger can spend a couple of hours fielding questions from the AGM floor.

Moreover, the AGM doesn’t end when lunch is served. Buffet goes further by penning a letter days after -- to reflect on the meeting’s proceedings and investors’ feedback.

Even the “smallest” shareholders are recognised in Buffet’s widely-publicised letters.

Granted, when I say “small”, at Berkshire this means individuals who hold a vote worth Sh23 million ($220,000) or more. Nevertheless, it’s the principle of valuing all investors and leveraging the AGM to gain critical insight that counts.

Shareholder activism is not a new phenomenon. For decades high-net-worth individuals, hedge funds and even the Catholic Church have descended on the annual meeting to launch their campaigns.

And over time their priorities have diversified from a sole focus on financial performance to include governance and social and environmental issues.

Analysts such as Sullivan & Cromwell LLP and Ernst & Young say we are witnessing unprecedented levels of such activity.

From corporate proxy statements, special meetings with the board, AGM demonstrations, and campaigns via social media; to the most extreme cases of engaging regulators, lawsuits, and quiet buyouts aimed at unleashing a proxy war, the shareholder of today (and tomorrow) uses various levers to get their point across to the board.

Increasingly, shareholders are also more organised to enhance their effectiveness. The introduction of minority voter blocks, proxy advisory firms, activist funds, investor associations and alliances with labour unions are just some of the approaches that have destabilised companies, especially in the US.

In some cases it isn’t the huge activist funds that present the most challenge – individuals with the smallest equity stake have been most effective in rallying the majority to support proposals such as stock retention requirements which “bind” executives for longer periods and so as to influence decision making in favour of the sustainable growth of the firm.

Not to be left behind, US regulators and legislators are weighing-in with guidelines and requirements aimed at protecting minority shareholders.
As much as the US may have seen the most activity, the country is certainly not the exception.

The UK has a Stewardship Code which seeks to enhance transparency and guide long-term value creation. We see similar proactive policies emerging in Nigeria, South Africa, China and India, where stakeholders who include legislatures and sector regulators, work to enhance corporate governance and safeguard minority interests.

This longer-term view of a firm is also coming to the fore in Kenya.

Earlier this month, the Capital Markets (CMA) Authority published an exposure draft of its version of the Stewardship Code which seeks to “encourage deliberate and responsible management and oversight of assets.”

The CMA code applies to pension funds, insurance companies, and other institutional investors.

Additionally, CMA is working on a Corporate Governance Code that will guide boards of government and public entities, as well as companies listed on the Nairobi Securities Exchange, on best practices in corporate governance, including promoting board performance, board diversity and composition, and corporate sustainability.

Insightful questions

An apple a day keeps the doctor away. And so is the prescription for companies that wish to stave shareholder dissent and increase stakeholder credibility.

Some questions boards can ask to gauge the level at which their equity partners are sufficiently engaged are if media personalities ask more insightful questions than the shareholders during the AGM; and if investor sentiment is reviewed at any point during the financial year.

If the answers to these questions are yes and no, respectively, this is a clear signal to the board that the firm may have pacified their equity partners to a point of strategic disadvantage.

The best way for companies to respond in this case is to have a well-thought-out, broad-based shareholder engagement strategy.

By leveraging on technology to facilitate engagement with the board and executives, and to automate investor proposals, companies are able to enhance interaction and promote transparency, which helps to enhance strategic implementation and earn shareholder trust, thereby reinforcing market credibility.

There are lots of opportunities to ventilate issues throughout the year and well in advance of the AGM, such as employing e-voting platforms, convening focus groups, and hosting investor and analyst conference calls. 

Moreover, through an ongoing engagement strategy that taps the entire board and C-suite, proposals on governance, strategy and liquidity management would have time to be tested and accommodated during strategic planning periods.

In one of his letters to Berkshire shareholders, Warren Buffet said he is a “lucky fellow” to have them as his “partners”. 

I imagine after 50 years of being one of the most successful chairpersons and investors of our time, perhaps Warren learned a thing or two about engaging annual meetings and effective year-round investor relations.

Ms Mugambi is a director at Kenya Bankers Association and head of the Sustainable Finance Initiative.