Gordhan has a dream. So why doesn’t he act on it?

PRAVIN Gordhan, the finance minister, is a complicated man. There’s something that burns away inside him and he can’t seem to find a way to put it out, or, if it is a thirst, to quench it.

From the outside, we may see his fight to retain investment status for our national debt as the heroic and courageous climax of an already illustrious career.

But Gordhan has a bigger dream and anyone who has listened to him speak in public in the past five years will know what it is. He wants a fairer society. A fair and inclusive society would have time and space for more people. What we have now is the opposite. Unfair and unsustainable.

He speaks about it all the time. He wants, as he told an audience again this week, the elite to “come to the party”, whatever that may mean. He wants ideas. He wants action. I’m sure business listens to him politely and then continues on its merry way, knowing, perhaps, that Gordhan is aware that without the taxes and salaries business pays, there’s no society here at all, let alone a fair one.

It must be frustrating. Yet Gordhan himself holds many of the levers that need pulling to make us a less exclusive economy, or to at least start the process. He just needs to pull them. The key symptom of our disease is a drug-fuelled monster called the quarterly earnings forecast.

One of the great movements in modern capitalism (not here, our capitalism remains Victorian) is the growing certainty that taking a longterm approach to creating wealth and value is the right way to go.

The world’s biggest fund manager, BlackRock, with $5-trillion under management, constantly presses the companies it invests in to think and act long-term. The days of the corporate raiders of the ’70s and ’80s are over.

Harvard Business School agrees. So does consulting group McKinsey. Way back in 2006, it was writing: “Most companies view the quarterly ritual of issuing earnings guidance as a necessary, if sometimes onerous, part of investor relations… we believe they are misguided… (we find) no evidence that it affects valuation multiples, improves shareholder returns or reduces share price volatility.”

The day he took office, Unilever CEO Paul Polman announced he was eliminating earnings guidance in the group’s quarterly reporting. Unilever is thriving and Polman is still at the helm. The fact is companies focused on the long term make transformative investments. Those obsessed with the quarterly numbers make incremental investments, if at all.

South African CEOs are slaves to quarterly earnings guidance and to practically every other short-term fix capitalism has invented. Our CEOs spend more time worrying about their share prices than they do about customers, suppliers, workers or their country. It is wrong. Unemployment is often the inevitable result. And Gordhan can start to fix it.

The reason CEOs worry about quarterly targets is that they are trying to keep shareholders happy. They want shareholders to stay, not to speculate. What Gordhan can do about this is not complicated: encourage long-term behaviour and discourage short-term behaviour by using his power to tax or to not tax.

As BlackRock CEO Larry Fink wrote in 2015: “Government leaders around the world … must act to address public policy that fosters longterm behaviour. We believe that US tax policy incentivises short-term behaviour. For tax purposes, the US currently defines a long-term investment as one held for one year. Since when was one year considered a longterm investment? A more effective structure would be to grant long-term treatment only after three years, and then to decrease the tax rate for each year of ownership after that….”

In other words, all the Treasury has to do is find a tax regime that encourages people to hold their shares for a long time and, by doing so, take the pressure off the CEO of said company to keep feeding them, at whatever cost to society, targeted quarterly earnings.

What BlackRock suggests is that companies declare their wider strategic goals for the years ahead and use their quarterly reporting to update that. The point here for Gordhan is that any economy in which the corporates are making money fast without being on steroids is going to be a lot more stable.

In just a few weeks, AB InBev will take control of SABMiller. One of the most profound changes the Brazilians will bring will be to phase out the traditional South African three-year share incentive scheme. They’ll replace it with a five-year scheme, and Gordhan should take note. Taming the behaviours and expectations of shareholders and managers would have an extremely healthy effect on SA.

Just do it, Pravin.

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Bruce is editor-in-chief.