The events re­lat­ing to the so­cial grants cri­sis show the im­por­tance of cor­po­rate gov­er­nance and the link be­tween the share­hold­ers and the board

The events re­lat­ing to the so­cial grants cri­sis show the im­por­tance of cor­po­rate gov­er­nance and the link be­tween the share­hold­ers and the board, writes Ann Crotty

Financial Mail - Investors Monthly - - Contents -

Some say the fi­nal straw was when Net1 UEPS CEO Serge Be­la­mant sug­gested the SA So­cial Ser­vice Agency (Sassa) should use pi­geons to dis­trib­ute so­cial grants; oth­ers be­lieve it was when for­mer fi­nance min­is­ter Pravin Gord­han lam­basted Be­la­mant for his rude­ness.

That it had to take ei­ther of those to shake Net1 share­hold­ers into ac­tion is in­di­ca­tion of how dys­func­tional our cor­po­rate gov­er­nance sys­tem can be.

When it be­came ap­par­ent just how bad things were, Net1 share­hold­ers had two op­tions.

The ex­ten­sive me­dia cov­er­age was not all down to wild imag­in­ings

They could do a “Coro­na­tion” and dump the shares and run as ev­ery­thing im­ploded around them. Or they could hang around and try to be­have like re­spon­si­ble share­hold­ers (with an im­age to pro­tect) and rein in man­age­ment. That the Net1 share­hold­ers opted to stay and try to in­flu­ence man­age­ment is

to their con­sid­er­able credit, though some cyn­ics claim trad­ing in Net1 shares is so sparse it would have taken decades to off­load the vol­umes.

But just as Coro­na­tion’s re­sponse to African Bank’s feral man­age­ment style was to re­mind us all that share­hold­ers have no fidu­ciary duty to a com­pany (un­like the mar­ket­driven re­spon­si­bil­ity Coro­na­tion had to its clients) this time around Net1 share­hold­ers are prob­a­bly work­ing out just how dif­fi­cult it is to tame a feral man­age­ment team.

Be­com­ing feral is es­sen­tially what hap­pens when the own­ers of a lim­ited li­a­bil­ity com­pany al­low man­age­ment un­re­strained free­dom.

The mid-19th cen­tury in­tro­duc­tion of lim­ited li­a­bil­ity played a key role in the growth and de­vel­op­ment of cap­i­tal­ism as an eco­nomic force. But the con­cept re­ally came into its own in the 20th cen­tury and has been a cor­ner­stone in glob­al­i­sa­tion and the cre­ation of ever more pow­er­ful multi­na­tional com­pa­nies over the past sev­eral decades. Con­sider how re­stricted Ap­ple’s growth prospects would have been — or Ama­zon’s or Google’s — with­out the op­por­tu­nity to be a lim­ited li­a­bil­ity listed com­pany.

When lim­ited li­a­bil­ity works, it works re­ally well. When it doesn’t, it can be enor­mously de­struc­tive, rather like a feral crea­ture let loose in gen­teel sur­round­ings. In essence it al­lows the own­ers of a com­pany to be sep­a­rated from the man­agers of that com­pany. Un­re­strained by the li­a­bil­ity of its own­ers the com­pany can soar to great heights.

The risk of man­agers ad­vanc­ing their own in­ter­ests and be­hav­ing ir­re­spon­si­bly is coun­tered by the pres­ence of a board of di­rec­tors. These di­rec­tors are ap­pointed by the share­hold­ers and have a fidu­ciary duty to the com­pany.

Prob­lems arise when the link be­tween the share­hold­ers and the board is weak. This can eas­ily hap­pen when the share­hold­ers are not in­di­vid­u­als in­vest­ing for the long term but in­sti­tu­tional fund man­agers un­der pres­sure to gen­er­ate com­pet­i­tive re­turns for tens of thou­sands of clients. No amount of cor­po­rate gov­er­nance guff or so­cially re­spon­si­ble in­vest­ing will over­come the pow­er­ful al­lure of trad­ing in and out of shares at the drop of a hat or ratings down­grade.

Which takes us back to Net1. Be­la­mant was such a dom­i­nant force in the com­pany that for a long time no­body even thought to ask about the share­hold­ers.

Long be­fore Be­la­mant’s pi­geon com­ment or Gord­han’s re­marks alarm bells were go­ing off all around Net1. They didn’t start ring­ing just as the end-March dead­line ap­proached; they’d been ring-

When lim­ited li­a­bil­ity works, it works re­ally well. When it doesn’t, it can be enor­mously de­struc­tive

ing since 2013, when the con­sti­tu­tional court ruled that the Sassa con­tract awarded to Net1 sub­sidiary Cash Pay­mas­ter Ser­vices (CPS) was in­valid. Ad­mit­tedly, at that stage the bells weren’t deaf­en­ing, so in­sti­tu­tional share­hold­ers such as Al­lan Gray could be for­given for ac­cept­ing ev­ery ex­pla­na­tion from the Net1 man­age­ment. Be­la­mant dis­missed the con­sti­tu­tional court ac­tion, launched by Absa/All­pay, as the ob­ses­sion of a dis­grun­tled loser. He blamed an un­in­formed me­dia and mis­guided NGOs for the nev­erend­ing crit­i­cism of his busi­ness model.

In Al­lan Gray’s de­fence, it may have been easy to agree with Be­la­mant when he claimed he was be­ing vic­timised. As he of­ten re­minds us, Net1 has not been found guilty of any wrong­do­ing by any court or reg­u­la­tor. Even the US jus­tice de­part­ment was forced to park its in­ves­ti­ga­tion with­out com­ing to a find­ing.

But you don’t have to be a le­gal ex­pert to un­der­stand that Net1’s claim that it has never been found guilty are not quite the same as Net1 claim­ing it is innocent. The re­fusal of the SA Na­tional Pros­e­cut­ing Author­ity to as­sist the de­part­ment of jus­tice al­most cer­tainly pre­vented the US au­thor­i­ties from mak­ing any progress. There’s also the point that Sassa, and not CPS, was the tar­get of the con­sti­tu­tional court ac­tion, so the court could not have made a find­ing against CPS.

One case still mak­ing its way through the sys­tem is Cor­rup­tion Watch’s bid to have the high court set aside a R275m pay­ment made by Sassa to Net1 for the “rereg­is­tra­tion” of ben­e­fi­cia­ries. Cor­rup­tion Watch claims a ten­der should have been is­sued for this work and wasn’t.

Then there was the un­re­lent­ing crit­i­cism of the cross­selling of fi­nan­cial ser­vices to the 11m so­cial grant re­cip­i­ents by var­i­ous Net1 sub­sidiaries. (Be­la­mant de­scribes his group’s cross-sell­ing as en­abling fi­nan­cial in­clu­sion for mil­lions of the coun­try’s poor­est; it’s a per­spec­tive that was un­til recently shared by Net1 share­hold­ers.)

De­spite wide­spread al­le­ga­tions, Net1 has so far never been found guilty of con­tra­ven­ing reg­u­la­tions de­signed to pro­tect vul­ner­a­ble con­sumers.

How­ever, in March the na­tional con­sumer tri­bunal re­sponded an­grily to a claim that it had in­ves­ti­gated the eth­i­cal con­duct of CPS and had “re­jected as un­founded” claims of CPS wrong­do­ing. The tri­bunal said this state­ment was in­ac­cu­rate and mis­lead­ing. “The NCT has NOT at any stage in­ves­ti­gated and ‘re­jected as un­founded’ any claims of CPS wrong­do­ing,” the tri­bunal says.

But all in all it was rea­son- able to see why Al­lan Gray, which holds 16% of Net1, saw no ev­i­dence of wrong­do­ing. “We can never be sure that any com­pany is 100% innocent and we have to use dili­gent and pro­fes­sional judg­ment to eval­u­ate the risks of le­gal and reg­u­la­tory non­com­pli­ance at com­pa­nies in which we in­vest,” ex­plained one of the most pres­ti­gious in­vest­ment man­agers in the coun­try be­fore go­ing on to say it does wield some in­flu­ence over man­age­ment and the board.

It claims that since in­vest­ing in 2012 it has ex­erted “con­sid­er­able pres­sure on the board” on is­sues of cor­po­rate gov­er­nance and sus­tain­abil­ity.

That pres­sure doesn’t seem to have come to much. There are still only three nonex­ec­u­tive di­rec­tors on the board (and two ex­ec­u­tives) and all three have been di­rec­tors since 2005. Be­la­mant’s com­bined CEO and chair­man role didn’t con­tra­vene Nas­daq reg­u­la­tions, but it should have set off alarm bells. It was un­nec­es­sary and shouldn’t have been tol­er­ated for as long as it was.

Hav­ing said it had ex­erted some pres­sure, Al­lan Gray goes on to stress: “We are not in con­trol of the com­pany, nor are

Full marks to all con­cerned for en­sur­ing the most ur­gent is­sue was ad­dressed — se­cur­ing CPS’s support for the dis­tri­bu­tion of grants to end March 2018

we the largest share­holder (the In­ter­na­tional Fi­nance Corp — IFC — is). We are not com­pany in­sid­ers, and the only in­for­ma­tion we have about Net1 is pub­licly avail­able.” And therein lies the prob­lem. Cer­tainly share­hold­ers have ac­cess only to pub­licly avail­able in­for­ma­tion but it does seem Al­lan Gray and the IFC opted to rely on the in­for­ma­tion made pub­licly avail­able by Net1.

Nei­ther of these ma­jor, well-re­sourced en­ti­ties seems ever to have both­ered to go to a pay point and chat to some of the mil­lions of so­cial grant re­cip­i­ents. (Why didn’t some ea­ger young in­tern take the ini­tia­tive?) If they had, they would have re­alised quickly that the ex­ten­sive me­dia cov­er­age was not all down to wild imag­in­ings

of the me­dia.

They might even have re­con­sid­ered their views on the claimed ben­e­fits of this sort of fi­nan­cial in­clu­sion.

So where to from here? Can the share­hold­ers re-do­mes­ti­cate Net1 with­out de­stroy­ing its profit-gen­er­at­ing spirit?

Full marks to all con­cerned for en­sur­ing the most ur­gent is­sue was ad­dressed — se­cur­ing CPS’s support for the dis­tri­bu­tion of grants to end March 2018. Mind you, this may have been down to the in­volve­ment of the con­sti­tu­tional court (which ev­i­dently has as lit­tle tol­er­ance for cor­po­rate machi­na­tions as it has for po­lit­i­cal ones) more than to Al­lan Gray and the IFC.

(As an aside, what should we make of the other 60% or so share­hold­ers, many of whom are non-South African? Is it even ap­pro­pri­ate that such a so­cially sen­si­tive busi­ness is for­eign owned?)

No doubt Al­lan Gray and the IFC are en­vi­ous of the court’s pow­ers. By con­trast, their pow­ers as own­ers of Net1 bor­der on the ephemeral.

Af­ter its change of heart in mid-March Al­lan Gray’s chief in­vest­ment of­fi­cer, An­drew Lap­ping, re­ferred to is­sues re­lat­ing to the in­tegrity of man­age­ment: “If they are not re­solved to our sat­is­fac­tion we will not hes­i­tate to call a gen­eral meet­ing and at­tempt to re­move the board.”

It doesn’t carry quite the author­ity of the court’s or­der but it’s en­cour­ag­ing. Al­lan Gray did also call on Net1 to “com­ply with the spirit of the or­der”. And it has asked the com­pany to con­sider changes to some of its prac­tices.

That its tone sounds like that of a sup­pli­cant re­flects the grim re­al­ity of Al­lan Gray’s chal­lenge. With a 16% stake it can only ask nicely.

And much as it may want to en­cour­age other share­hold­ers to join its ef­forts, it can’t risk talk­ing to them lest it be deemed to be act­ing in con­cert.

The IFC, which seems to be­lieve the whole thing is down to poor com­mu­ni­ca­tions, said that since be­com­ing a Net1 share­holder (as recently as last year) it has been work­ing along­side other share­hold­ers in urg­ing the com­pany to in­crease pub­lic un­der­stand­ing of its mar­ket­ing and lend­ing prac­tices and en­gage more con­struc­tively with a wider range of stake­hold­ers.

Strangely, though the IFC seems to think peo­ple just need to un­der­stand Net1’s lend­ing prac­tices a lit­tle bet­ter, the World Bank sub­sidiary has also en­cour­aged Net1 to un­der­take an ex­ter­nal re­view to cer­tify its lend­ing prac­tices are okay — a process “we are now en­cour­ag­ing Net1 to com­plete with greater ur­gency”.

The IFC seems less both­ered about the “act­ing in con­cert” tag. In early April it told the me­dia: “The IFC will con­tinue to make its voice heard and ex­ert in­flu­ence on Net1’s board to pro­mote ro­bust man­age­ment, gov­er­nance and good lend­ing prac­tices, along with

The IFC seems to think peo­ple just need to un­der­stand Net1’s lend­ing prac­tices a lit­tle bet­ter

im­proved trans­parency”.

It may be less ner­vous about act­ing in con­cert be­cause it wasn’t around for the Com­parex case.

That’s the case that’s used to chill as­set man­agers who’ve had enough of feral cor­po­rate ex­ec­u­tives and want to do some­thing. Back in the early 2000s a con­sor­tium of as­set man­agers, hold­ing more than 35% of Com­parex, were ac­cused of act­ing in con­cert when they no­ti­fied the Com­parex board that they’d agreed in prin­ci­ple to change the com­po­si­tion of the board.

The nonex­ec­u­tive di­rec­tors ar­gued this was tan­ta­mount to a change of con­trol and the con­sor­tium was obliged to make an of­fer to Com­parex mi­nor­ity share­hold­ers.

The Se­cu­ri­ties Reg­u­la­tion Panel dis­agreed and said there was no obligation to make an of­fer to mi­nori­ties.

More recently the Takeover Reg­u­la­tion Panel has said a con­cert party is not cre­ated where in­sti­tu­tional in­vestors sim­ply dis­cuss mat­ters of mu­tual in­ter­est or share their views as to con­cerns about par­tic­u­lar com­pa­nies. But then comes the part Lap­ping prob­a­bly knows by heart, “A con­cert party is only formed where share­hold­ers agree a com­mon plan un­der which to work to­gether,” the panel says.

This is why, when he talks about call­ing a share­hold­ers meet­ing and at­tempt­ing to re­move the board, Lap­ping has to sound ten­ta­tive. And it is why ef­forts to re-do­mes­ti­cate Net1 man­age­ment could be time-con­sum­ing and ex­tremely frus­trat­ing. But it might be a lit­tle eas­ier than what hap­pened at African Bank.

Of course, with the ben­e­fit of hind­sight the ob­vi­ous thing to do is avoid feral man­age­ment in the first place.

Cover: VUYO SINGISWA

Pic­ture: THE TIMES

Re­cip­i­ents queue to col­lect their so­cial grant money in Soshanguve near Pretoria

Net1 CEO Serge Be­la­mant. Pic­ture: SUN­DAY TIMES

Scores of peo­ple queue out­side the South African So­cial Se­cu­rity Agency build­ing in the Capri­corn district of Lim­popo to col­lect their grants. Pic­ture: SOWE­TAN/SUNDAYWORLD

Grant re­cip­i­ents wait for pay­outs at a South African So­cial Se­cu­rity Agency of­fice. Pic­ture: SOWE­TAN

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