TOWARDS ENHANCED INDEPENDENCE: INVESTIGATING SHAREHOLDER VOTING ON DIRECTOR ELECTION PROPOSALS
Date
2022-12
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Abstract
Several high-profile corporate scandals, globally and in South Africa, highlight the importance of corporate governance monitoring mechanisms in constraining managerial self-serving behaviour. Corporate governance frameworks, many of which are based on the agency theory, advocate for appointing a majority independent non-executive directors, an independent chairperson and a lead independent director to monitor managerial behaviour. Furthermore, there are various external monitoring mechanisms available to ensure that companies act as good corporate citizens. These include the market for corporate control, the legal system, cross-listings and external auditors. Ordinary shareholders occupy the important middle ground between internal and external monitoring mechanisms. Ordinary shareholders can monitor managerial behaviour by electing or re-electing directors to a company’s board of directors by casting their votes on such resolutions at shareholder meetings. This type of shareholder monitoring has largely been unexplored in South Africa.
This study was hence conducted to contribute to the body of knowledge. A comprehensive and unique dataset comprising of shareholder votes cast on director re/election resolutions at selected companies listed on the Johannesburg Stock Exchange was compiled over the period 2014 to 2020. Voting data were gathered from Proxy Insight, with additional board- and financial-related data collected from Bloomberg. Trends regarding the dependent, seven independent and three control variables were investigated over time. Given the nature of the period under investigation and the data, a mixed-model analysis of variance was conducted to test the hypothesised relationships.
Shareholder opposition to director re/election resolutions (the dependent variable) increased significantly over the research period. Yet, on average, less than four percent of shareholders opposed director re/election resolutions. This result confirms a previously identified preference among shareholders of locally listed companies to privately engage with representatives of investee companies. The low percentage against-votes cast on director re/election resolutions at the sampled companies may also indicate that shareholders place a great deal of trust in the nominated directors, or that shareholders are simply apathetic as far as monitoring is concerned. The percentage of INED representation on the sampled companies’ boards increased significantly, which may be a result of the shift from factual to perceptual independence proposed by King IV. Significant positive relationships were discovered between shareholder opposition and two independent variables, namely, board size and average directorate tenure. These relationships suggest that shareholders tend to vote against the re/election of directors when the board is quite large, and the average directorate tenure has been relatively long.
Based on the results, ordinary shareholders are encouraged to vote more actively on director re/elections as they have the power to enhance the independence of investee companies’ boards. Nomination committees should furthermore ensure that their director selection criteria are robust enough to nominate suitable candidates to ordinary shareholders. Recommendations are also made to the Institute of Directors South Africa and other private sector role players in the country.
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Keywords
Shareholder voting, shareholder opposition, director elections, independent directors, tenure, board size, South Africa