No Longer “Silent” Partners

As mentioned in our latest blog entitled ‘‘Doing Good for Selfish Reasons’’, emerging market investors are committed to actively engaging with their investee companies. Indeed, for some asset managers, driving positive change at an investee company serves as a source of pride as well as a public relations tool. For others, value-oriented investors in particular, this is a means of generating alpha.

Listed corporates should brace themselves for greater scrutiny from investors regarding corporate governance practices, capital allocation and preparedness regarding social and environmental risks. The vast majority of investor activism will be in the form of engagement with senior management and proxy voting. Some institutional investors may take investee engagement one step further by criticizing the investee company and its board publicly – even embarking on a proxy battle by collaborating with other institutional investors.

Public disputes and proxy battles, although not quite as common in emerging markets – given substantial family or government ownership – can nevertheless grab the headlines. Institutional investor LetterOne’s public criticism of Turkcell’s board is the latest example of shareholder activism in emerging markets. LetterOne, c.20% stakeholder in the Turkish telco giant, stated that they are ‘‘deeply concerned about the governance regime at Turkcell and believe the board lacks the necessary skills, experience and accountability.” Moreover, LetterOne added that some of their corporate governance proposals, such as a new incentive plan, were turned down by the Company (1). Turkcell stated that company disagrees with the LetterOne’s assessment but welcomes feedback from investors (2).

While the outcomes may vary, public shareholder disputes and proxy battles tend to be protracted, costly, and distractive. For this reason, it pays off for companies to act proactively and go beyond regulatory requirements on issues of corporate governance, social and environmental risks to largely preclude such actions.

Proxy voting

Review of buy side literature suggests that institutional investors are determined to get more involved in investee companies via engagement and proxy voting. Our case study involving 8 large foreign investors and their proxy voting pattern in 20 listed companies in Borsa Istanbul corroborates this observation. Our study reveals that votes against management proposals have increased by c.40% yoy within 2020-2021. Though fewer in number, some of those votes go as far as not ratifying company financials and board acts, which, considering the routine nature of such items, could be deemed tantamount to a “vote of no confidence”. Assuming no substantial deterioration in the corporate governance practices of our sample companies, it seems fair to surmise that investors have become more demanding in some issues compared to a year ago.

Our study illustrates that close to half of the negative votes in 2021 pertained to board member elections and board remuneration, which seems confounding, considering that our sample was made up of large, well-established companies with above-average foreign ownership levels. We have also started to observe votes against the board or board members, with special emphasis on climate change related progress – or lack thereof. We expect to see more emphasis on climate change in 2022.

While generating awareness and initiating social- and climate change-related arrangements are paramount, implementation does require time, and the effects may not be readily discernible. On the other hand, most corporate governance-related issues, such as board independence, diversity, and accountability – topics we will be discussing in detail in the coming weeks – can be addressed and resolved relatively quickly. It would be advisable to first address the “G” component of “ESG” by laying a solid foundation through a proper corporate governance framework.

Even in a tightly controlled company, the demands and suggestions of minority investors should not be ignored. Indeed, voting patterns and investor feedback should be thoroughly analyzed to avoid an erosion of institutional investor base or a public confrontation. Galifo Partners, a shareholder advisory firm armed with decades of experience in dealing with institutional investors, would prove a valuable resource towards this endeavor.