Fortress probe a small victory
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.
THE REGULATORS SO FAR HAVE SHOWN EVERY SIGN THAT THEY ARE ASLEEP AT THE WHEEL