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
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
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
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