New era of shareholder activism dawns

The Companies Act is likely to lead to far closer scrutiny of company officials, but this is more an opportunity than a threat

Directors can expect increased activism from shareholders under the new Companies Act - which is more to be welcomed than feared. In addition, key provisions will raise directors' accountability to shareholders and staff alike.

A number of surveys have demonstrated the correlation between company performance and good corporate governance - and shareholder activism is primarily about good governance. Even before the introduction of new minority rights in the Companies Act, a substantial increase in shareholder activism in recent years had brought about more restraint in executive remuneration increases. Given the country's yawning wealth disparity, this is one of the benefits of activism to be welcomed.

Minorities have two new tools at their disposal. Minority shareholders will be able to call a general meeting having marshalled only 10% of total shares in issue. In addition to general meetings, key provisions contained in the new law will raise directors' accountability to shareholders and increase the likelihood of shareholders participating in legal action, particularly if the company and its officers cause shareholders significant financial loss.

The scope of those able to bring an action as well as the basis for liability is now much wider. This means that anyone, including shareholders and staff members, can sue directors and officers directly, which will heighten their personal liability.

Under the previous law, shareholders could not bring an action against officers directly. They had to request the company to bring a lawsuit against an officer who committed a wrongful act. This rarely happened in practice as company officers were unlikely to bring an action against their colleagues, and therefore shareholders had limited recourse to recover damages.

Under the new act, shareholders will have direct recourse against directors and officers in a personal capacity as long as they can prove they have suffered damages. For example, if a director makes a bad decision or acts negligently, causing his company to suffer financially, and this results in retrenchment of an employee, that staff member will be able to bring an action. Another significant change in the act is that it provides for class actions.

Increased activism and the extension of liability to a wider class of persons means SA is likely to follow the trend in countries like the US, UK and Australia, which all have experienced increased litigation against companies, company officers and directors.

Australia, for example, which has gone through a similar corporate law evolution, has seen claims against directors and officers double in the last four years.

Company officials may view these developments with trepidation. They must not ignore the potential of the new law. The opportunity for companies is to embrace their shareholders, viewing activism as something to be welcomed for the potential new thinking it brings to company boards, as shareholders find new or different ways of looking at problems that the board may not have explored.

While the board remains the primary buffer in a company against fraud and unethical behaviour by staff, in this age of heightened awareness about such issues as the environment, shareholders now become a second buffer.

Directors in SA have for too long operated unchallenged and unchecked. Listed companies operate to the highest standards through their listing requirements, but elsewhere in the economy companies have been implementing policies that benefit only themselves. Active shareholders and a vibrant media have largely changed that. Company officials should be encouraging more shareholders to get active - recognising it as the best means of achieving corporate governance compliance.

• Hannington is national chairman, PKF chartered accountants and business advisers