15 Jul, 2022
Shareholder Passivity is a Misnomer
There is a general misconception that shareholders are passive, and yet they have a wide arsenal of powers at their disposal and the legal protection for their assets and interest is embedded in codes of conduct. This article seeks to evaluate the power that shareholders have under the Companies & Other Business Entities Act (Chapter 24:31) (COBE Act).
A shareholder can be described as any person, company or institution that has purchased a share or more in a company’s stock. They are the ‘owners’ of the company but do not operate it. That is left to the management and as such they are passive in their involvement but not their interest.
MANAGEMENT OF A COMPANY
The company has separate legal patrimony and is thus distinct from the owners and as such the owners/investors do not have direct control of the business. In public companies especially, there are three main players: the shareholders, the Board of Directors and the management of the company. Each category in this triumvirate has a different set of rules regarding the power and authority to make decisions for the company, designed for the ultimate interest of the shareholder body. The shareholder is separated from his interest by the Board of Directors, who have the responsibility of ensuring that management and stakeholders act for the Company. The shareholder is the principal, and the law provides him with voting, appointment, and approval rights for various commercial decision-making as a basic prerogative of his share ownership.
Overall, the corporate landscape has altered through global market capitalisation from disbursed ownership to more consolidated concentrated ownership and as such the intensification around corporate governance standards to consider these significant developments in ownership. Disbursed ownership refers to multiple shareholders with none having the ability to exercise power over the company and concentrated shareholding refers to individuals or controlling shareholders that have exactly that ability to exercise their power over the company.
RIGHTS OF THE SHAREHOLDER ENTRENCHED
Corporate decisions, which are wide-ranging, from employment directives, to entering contracts with suppliers or service providers with third parties, or issue of further shares can be exclusively given to the Board or Senior management without referral to the shareholders. The general distribution of decision-making power is set up as a default rule in the Memorandum of Articles for public companies, but often are conditional upon the nature of the decision, for example issue of shares, large sale of assets, major acquisitions, and contracts with third parties which impact the overall market price of the shares can be attached to certain shareholder pre-conditions of approval, and these are referred to as “instruction rights”. The rights of a shareholder, or their power, are crafted around the business requirements, where decisions that can alter the nature and fortune of the business which result in financial implications for the shareholder will more than likely imply a requirement for shareholder insistence on protection by virtue of approval rights or veto rights that are accorded.
Power of the management is curbed to a certain extent by the nature of the investment or business decisions, where along with the Board of Directors, management need to be observant to the information dissemination they share with the primary benefactor, that such information and reporting is in line with the directives and business objectives set by the Company, and in this manner shareholder rights mitigate against the managerial agency problems that can be experienced. Zimbabwe Company Law confirms that the shareholder power in decision making is directed through the general meeting, and that any alteration to the articles must be done by way of a resolution, allowing for the delegated powers to the Board, to be retained by the shareholders should they so arrange it. Management accountability under Section 79 of the COBE Act provides for minority shareholders as well, by special resolution.
Additionally, shareholder protection, under Section 195 of the COBE Act outlines the function and responsibilities of the Directors. This section lists the obligations of the Directors, as well as the long-term consequences of any decision. This specific section regulates the function of the Directors and underscores the corporate governance requirements. Liability for the directors is prescribed under Section 197, further strapping accountability in terms of decision making and extending the reach of the law to curb inappropriate conduct. This section of the Act has been enhanced such that a Director’s duties, particularly breach of fiduciary duties are held accountable, even if due to “direct or indirect consequences” of the director being present at a meeting which resulted in loss for the company. These regulations as well as the National Code on Corporate Governance, or ZIMCODE outline the requirements of the public officers of the company as well as the requirements for corporate governance. These measures give shareholders the confidence that the management of their interest is well placed and well-structured enough for them to receive the reporting of the company through the actors of the company. Shareholders are deemed passive, but they are actively receiving information on the company performance and effectiveness through the instruments that protect their interest.
Public company resolutions can only be passed in a duly convened meeting, and resolutions can be of two types, ordinary passed by simple majority under and special resolution, and shareholders can only Act through this meeting to implement their authority. Part VI and Part VII of the Public Entities Corporate Governance Act (Chapter 10:31), provides for the principals and high standards of corporate ethics that must be adhered to so as to comply with in the administration of public companies. Shareholders can also be heard at the AGM and there are a set of mandatory rules that govern the requirements of this meeting. The shareholder has removal rights over directors, and this is a mandatory rule, which protects the shareholder under shareholder-manager agency problems. Members have power to call meetings, which can be invoked and if directors fail to do so, these mandatory rules which are unalterable by the Articles of Association, do hold up shareholder rights.
In recent years institutional investors have increased their footprint and impacted in varying ways. Generally, the market has seen intensified interest from pension funds and insurance companies, who are specialised investors and control majority stocks, block-holdings which can influence corporate direction especially if collectively used. Consequently, we have seen fall in retail investors. What would ordinarily be a prime situation for shareholder activism is not the case, as institutional investors also suffer from rational apathy, abridged in thinking, they have been passive and more rationally reticent due to their push for short-term wealth maximisation. However, the market for corporate governance is stronger, and pushing to ascend to international standards of corporate governance and so passive investors may also firmly appreciate the efficiency of it and remain confident of corporate directions due to such rational.
There is good news for disbursed shareholding in other business entities and companies, namely, minority shareholders rights which vary depending on the amount of stock they control. Minority shareholders concerns centre around decisions that may be taken out of their hands, though their rights are protected for any unfair prejudice, their rights are limited and thus passive in terms of the actions they can take. Depending on their share value of 5% control, they have the right to prevent conversion of a company from public entity to private, call a general meeting, and require a passing of a resolution under the AGM. Exercise of their rights is contained in various provisions of the COBE Act.
However, minority shareholders can act collectively or in concert, to be able to sway the direction of a company if the directors for example want to sell shares or assets. The reality is most investors use proxies to exercise rights at AGM or EGM. The COBE Act does however prohibit directors and officer of the company from being proxies, in a bid to protect the interest ultimate beneficial shareholders in AGMs and EGMs. Overall, the distribution of power seems to be on the surface for the benefit of the shareholder, and as Company Law protects the rights of the shareholder, the shareholder body can then choose which powers to delegate back to the board of directors. The ZIMCODE seeks to ensure that institutional investors do not delegate their responsibility and have a duty to perform it and recognise that disclosure leads to better functioning of the market for investment mandates.
The requirement of a clear communication of policies on stewardship places a clear onus of accountability on the managers to the shareholders. The principles of corporate governance outlined in the COBE Act and the ZIMCODE ensure that the distribution of power between shareholders, board of directors and management is used appropriately, and is under scrutiny to safeguard the interests of the different stakeholders. The power of shareholders is ultimately exercised in voting at AGMs and EGMs, and can sway the company’s direction.
The introduction of provisions that specifically seek to protect minority shareholders are an indication that directors can be held accountable by even 10% of shareholders for their actions contrary to their fiduciary duties. Also, where decisions related to change in nature of business or selling off a major asset, the views of minority shareholders also have to be taken into consideration.