Time for real shareholder activism

The just ended reporting season has seen a flurry of impressive results for some Zimbabwe Stock Exchange listed companies. Four years after conversion to the multi currency system, local firms seem to have adapted very well to the changed environment.

While the high interest rates remains an issue for just about every company, a majority of the listed entities were able generate revenues that sufficiently covered for interest charges, taxes and other charges.

What has been rather disappointing is the shortage of dividend payouts to the most important stakeholders in this equation, the shareholders. A clear majority of companies did not pay dividends over the last two years.

 According to information gleaned from the recently launched website of the Zimbabwe Stock Exchange (ZSE) in 2011 17 companies declared and paid dividends, in 2012 14 companies did and this year so far only 8 have signaled they will pay.

This is out of a total of about 70 actively trading companies. Most of these companies pre empt the need to pay dividends by claiming that the liquidity crunch does not make it feasible for them to pay dividends. Others claim recapitalisation or new projects which require significant funding make it impossible to declare dividends.

However what is interesting is the fact that in most listed companies’ costs like interest payments, administration costs which often include staff and directors compensation seem to be growing and in some cases at faster rates than revenues.

While employees or suppliers are getting more revenues or incomes, the shareholders seem to be ever getting a raw deal-no dividends.

Management always seem to find it easier to sacrifice the shareholders by not declaring a dividend whenever they feel the need to yet they are not hesitant to ask shareholders to put more money in case the company needs urgent capitalisation.

That was the case in the last turbulent decade, shareholders were repeatedly asked to back rights offers as companies reeled from the effects of the hyper inflation environment.

 The economic environment has been stable in the last few years yet many companies are still electing not to pay dividends and this really calls into question moral correctness of such decisions.

However this sad scenario may also point to one element that has been lacking in the local corporate world- shareholder activism. Zimbabwean shareholders can be best described as very docile or apathetic when it comes to holding their managers to account.

The current scenario where management and company boards seem too powerful and beyond reproach has been exacerbated by the ignorant and passive shareholders.

Throughout the last decade we witnessed one spectacular corporate collapse after another and in most of the cases corporate governance standards were simply not enforced because the shareholders appeared ignorant of their mandate.

Directors and managers would award themselves hefty perks and insider loans choking the company in the process ultimately collapsing it and this was repeated particularly in banks over the last two decades.

Ignorant and passive shareholders also make the job of regulators even more difficult as they simply do not have the capacity to effectively monitor each and every company.

Zimbabwean shareholders need to be educated or reminded that they remain responsible for their investments even as they entrust management with the job of managing the investment.

Shareholders should be the ones attending Annual General Meetings (AGM) or Extraordinary General Meetings (EGM) and dictating proceedings at such meetings. Leaving the job to directors is not always effective as the long list of corporate failures will attest.

Auditors and media personnel currently dominate such meetings with most minority shareholders choosing to be absent from such critical events yet only shareholders can really legitimately take managers to task.

 Shareholders should know that no one else will do their job for them and that only extra effort on their part will result in better fortunes for them than is the current case.

Even with what may seem very little shareholding, history has shown that smaller shareholders can still influence decisions to their advantage.

 A case in point was the controversy and acrimony that surrounded the demerger of Meikles Africa and Kingdom Financial holdings between 2009 and 2010. Minority shareholders made a stand against what they thought was bullying in the demerging process and the issue took extraordinary turns before it was resolved to the satisfaction of all concerned.

What happened in that case really showed that minority shareholders can still hold the bigger shareholders, who often are the managers to account. In fact that has been the trend elsewhere in the world, minority shareholders take an active interest their companies and empirical evidence suggests that such activism actually helps in boosting shareholder value.

In fact even institutional investors who are often not too concerned about managerial decisions in companies they hold shares, their approach has changed in the wake of the financial collapse in the United Sates in 2008.

Fund managers, who suffered severely when their portfolios collapsed at the height of the financial crisis, are now demanding greater transparency from company executives.

 For instance a prominent activist investor Carl Icahn has opposed the plan to delist Dell Corporation in a $24.4 billion buyout led by founder Michael Dell saying is not in the best interests of Dell shareholders and substantially undervalues the company.

Icahn  became famously known as a corporate raider in financial circles due to his hard-line stance against powerful boards and his has had a string of success in his fights.

A similar case which has been brewing here pits the regulator Securities and Exchange Commission of Zimbabwe (SECZ) and Lifestyle Holdings formerly TN Holdings. In this case SECZ and not shareholders, is questioning the move to delist from ZSE and SECZ sites a number of irregularities in the way the transaction has been done.

 The matter has since spilled into the courts but the case really shows why the lack shareholder activism weakens the position of the regulator.

Safeguards alone without the vigilance of shareholders themselves will not protect them from the excesses of corrupt managers.