Fortress probe a small vic­tory

Business Day - - Opinion -

I t took a while, but Fortress Reit’s de­ci­sion to sub­ject it­self to an in­de­pen­dent in­ves­ti­ga­tion should be wel­comed as a small vic­tory in the quest for more trans­parency. To re­cap, it has been about three months since Busi­ness Day re­ported that some of SA’s largest in­sti­tu­tional in­vestors, in a fairly un­prece­dented move, had writ­ten a let­ter de­mand­ing a foren­sic probe into the Re­silient group of prop­erty com­pa­nies.

Be­fore we heap too much praise on Fortress, we must note that the ini­tial re­ac­tion was no dif­fer­ent from the oth­ers in the sta­ble, choos­ing to ap­point its own com­mit­tee, which found that a full foren­sic in­ves­ti­ga­tion is not fea­si­ble.

Nev­er­the­less, Robin Lock­hart-Ross, the nonex­ec­u­tive di­rec­tor who came on to the scene only shortly be­fore the in­sti­tu­tions is­sued their di­rec­tive, is to be com­mended for in­ject­ing lead­er­ship and ur­gency on the is­sue. Im­por­tantly, he seems to have taken on board in­vestors’ con­cerns, say­ing the scope of the PwC in­ves­ti­ga­tion had re­ceived broad sup­port from in­sti­tu­tions.

The rest of the com­pa­nies — Re­silient, Nepi Rockcastle and Green­bay — have not cov­ered them­selves in glory, which is not good enough, con­sid­er­ing what is at stake. It is hard to imag­ine any other coun­try where di­rec­tors can be so dis­mis­sive with in­vestors hold­ing clout equiv­a­lent to that of the Pub­lic In­vest­ment Cor­po­ra­tion, Al­lan Gray, Corona­tion, Old Mu­tual, In­vestec, Stan­lib, San­lam and Pru­den­tial in the SA mar­ket.

Ex­clud­ing Stein­hoff, the loss of share­holder value after the shares of the com­pa­nies crashed ear­lier in 2018 has been the coun­try’s stand­out cor­po­rate scan­dal of the year. The R120bn fig­ure does not tell the full ex­tent. For one thing, it does not ac­count for the harm it did to con­fi­dence more broadly, con­tribut­ing to the listed prop­erty in­dex in the JSE los­ing about a quar­ter of its value in 2018 so far. South Africans from all walks of life have tra­di­tion­ally re­garded prop­erty as a rel­a­tively safe as­set of­fer­ing a fairly con­stant in­come stream. Most peo­ple are ex­posed to com­pa­nies through their pen­sion funds and other in­vest­ment ve­hi­cles, mean­ing the ef­fect of a sud­den drop is not al­ways im­me­di­ately felt, and much of the com­men­tary por­trays, wrongly, the loss as ac­cru­ing to fund man­agers, rather than in­di­vid­u­als. Prop­erty is dif­fer­ent and that to­tal loss will have been a cause of much mis­ery across the coun­try, with pen­sion­ers los­ing a sub­stan­tial por­tion of their sav­ings. These will be peo­ple who started sav­ing decades ago, be­fore the cur­rent wis­dom about di­ver­si­fi­ca­tion be­came the norm.

The col­lapse in the com­pa­nies’ shares was sparked by al­le­ga­tions of share price ma­nip­u­la­tion that be­gan in Fe­bru­ary after a num­ber of as­set man­agers raised red flags about the com­pa­nies. These in­cluded al­le­ga­tions of in­sider trad­ing in their shares and po­ten­tial con­flict of in­ter­est in deal­ings be­tween re­lated par­ties.

The com­pa­nies’ ex­ec­u­tives re­sponded by ap­point­ing former au­di­tor-gen­eral Shauket Fakie to look into the al­le­ga­tions, who cleared Re­silient of any wrong­do­ing. There were al­ways reser­va­tions about the scope and ac­cu­racy of that in­ves­ti­ga­tion. It def­i­nitely did not con­vince some of the big­gest in­sti­tu­tions in the coun­try. They at­tacked “a per­ceived lack of in­de­pen­dence and in­suf­fi­cient scope” in pre­vi­ous probes by the com­pany’s di­rec­tors.

While the PwC probe is a step in the right di­rec­tion and in­vestors need to put pres­sure on the rest of the sta­ble to fol­low suit, this can­not be a sat­is­fac­tory end. Any probe com­mis­sioned by the com­pa­nies them­selves will at­tract a de­gree of scep­ti­cism.

This is where the reg­u­la­tors, who so far have shown ev­ery sign that they are asleep at the wheel, need to come to the party and do their job. It is sim­ply not good enough that the Fi­nan­cial Ser­vices Con­duct Au­thor­ity, which an­nounced in March that it is in­ves­ti­gat­ing the com­pa­nies for share price ma­nip­u­la­tion and false and mis­lead­ing fi­nan­cial state­ments, has had noth­ing more to say other than that its in­ves­ti­ga­tion is on­go­ing.

For its own cred­i­bil­ity, it needs to show up.


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