The role of institutional investors in promoting long-term value creation: A South African perspective

Abstract

“Short-termism” has been identified by many academics and business practitioners as a significant global problem in modern capitalist markets. The excessive focus of corporate decision-makers on short-term profit maximising goals, often at the expense of longer-term objectives, results in insufficient attention being paid to the strategy, fundamentals and the long-term value creation of an organisation. Agency theory provides a useful framework to begin to understand and address this problem, as it highlights the unaligned priorities of key stakeholders and decision-makers in capital markets. Institutional investor activism is a credible solution to short-term management behaviour and irresponsible shareholder pressures on management, because institutions usually hold significant interests in listed companies and have a vested interest in the long-term creation of corporate value. A substantial majority of the shareholding of most capital markets is owned by a concentrated group of mutual funds (collective investment schemes), pension plans, and other institutional investors such as hedge funds and medical aid schemes. Therefore the power to veto or at least control programs of raising dividends, increasing share buybacks, spinning off company divisions and requesting board representation really sits with institutional investors and this is a fact that institutional asset managers need to acknowledge. The power and the responsibility to implement sound principles and practices of corporate governance sits with institutional investors. This paper explores the questions of how and why institutional investors need to exert more influence on the boards of the companies to which they are invested. Can institutional investors be held to a more long-term view of corporate governance? What are the reasons for the failure of institutional investors to date? The South African context, including recent events in corporate South Africa, which includes the 2016 release of the King IV Report on Corporate Governance, are applied to the issue. South Africa can stand proud of its codes of good practice that promote responsible institutional shareholder activism.