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Shareholder code will improve governance
July 13, 2009
 By Ann Crotty
An Institutional shareholder code, which would encourage institutional shareholders to engage more actively with companies, would be launched with the King 3 report on corporate governance in September, Lindie Engelbrecht, the chief executive of the Institute of Directors, said on Friday.
Among other things, an institutional shareholder code is expected to recommend the publication of a policy underpinning each institution's voting strategy at company meetings and it would also recommend the public disclosure of each institution's voting record.
The decision to write a code that addresses the crucial role played by institutional shareholders in corporate governance is a response to criticisms levelled at the early drafts of the King 3 report.
A number of interested parties have pointed out that the report's good governance recommendations, which are based on an "apply or explain" approach, were pointless in an environment in which there was limited shareholder activism.
Peter Butler, the chief executive of UK-based international advisory company Governance for Owners, noted: "Principles such as the (UK's) Combined Code and King 3, which allow companies to explain their approach rather than requiring mindless application of rules, need thoughtful oversight by well informed investors who are willing to act where the explanation is not accepted.
"In our opinion, too little responsibility for the effectiveness of the voluntary governance framework is borne by the institutional investors at present."
Butler told the Institute of Directors that, until responsibility was more clearly set out, most institutions would free-ride the efforts of the active investors and only a few of the active investors would be able to justify the resources required to act as a responsible owner.
David Coulridge of Frater Asset Management said institutional shareholders had considerable power to encourage directors to act in the best interests of companies.
But he added: "Institutional investors need to be encouraged to vote and engage with companies. It will help to ensure that governance best practice principles are more consistently practiced."
Coulridge argued that the exclusion from King 3 of specific principles and practices for institutional shareholders considerably reduced the effectiveness of South Africa's overall system of corporate governance. He referred to a number of international corporate governance codes that attempted to address the issue of the crucial role played by institutional shareholders in corporate governance.
These include: the International Corporate Governance Network's code, the Organisation for Economic Co-operation and Development Principles of Corporate Governance and the UN's Principles for Responsible Investment. All of these codes recommended disclosure policies and records.
Although more than 20 institutional fund managers in this country have signed up to the UN's principles, which require disclosure of the voting policy and records to date, only Frater Asset Management and the Public Investment Corporation disclose these details.
Engelbrecht said when the Institute of Directors appointed committee was drafting the King 3 report, it realised the success of the code was dependent on shareholders being active.
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