Banks out of step with the national interest
Last week’s FirstRand annual general meeting (AGM) joined a slew of shareholder meetings at which remuneration and implementation plans by the management teams who theoretically run these entities in their interest have caused alarm.
Ian Moir came under fire at Woolworths meeting, and last week Alan Pullinger and his team received similar scrutiny. More than half (56.68%) of those present at the AGM voted against the FirstRand remuneration implementation report.
While the remuneration of these executives in a context of great difficulty and uncertainty loomed large, it clearly was not just a boardroom or shareholder matter.
That the FirstRand board defended the “Covid-19 instrument ” introduced to the pay structure to cushion the returns from long-term incentives paid to executives is revealing. The argument the board pursued was that it is in the interests of ensuring longevity, so that the executive team won’t be lured elsewhere. It s an argument that is not unique to SA, but it does not reveal social fissures elsewhere quite like in the world’s most unequal nation.
In a country battered by inequality that predates the onset of Covid-19, decisions on what the highest earners should be paid is necessarily the subject of great scrutiny, especially in the financial sector.
This is not only because of the financialised nature of the SA economy, in which even nonfinancial firms pursue corporate strategies premised on maximising short-term gains in share prices and shareholder value, but also for the “real economy” implications.
SA is a paradox of deep and sophisticated financial and capital markets coexisting alongside the funding hunger of small businesses and other industrial players in the real economy.
While a well-regulated sector in terms of capital adequacy and reserves, the banking sector has once again shown us that the commercial bank lending nexus may not be the best way to channel financing to small businesses and those who need it most.
Less than 10% of the proposed Covid-19 stimulus of R200bn in the credit scheme has been dispatched to the entities we see closing around us daily.
Alongside this there is an inclination to distribute income upwards in the world’s most unequal society. If not, there would not have been the strongly worded injunction by
the registrar of banks to hold off on generous dividends and buybacks at the start of the lockdown, least of all while not only capital preservation but its allocation to productive use is a life or death matter for many small, medium and micro enterprises (SMMEs).
As the latest records show, for small businesses the “relief ” underwritten by the Treasury and Reserve Bank fed into a risk-averse and behaviorally conservative lending channel that required personal surety, up-to-date records and existing relationships with the banks.
Yet World Bank data on small businesses access to credit from more than a decade ago shows that less than a third of SA SMMEs would have had such a relationship in the first place, and it is doubtful that the picture looks much different now.
In the throes of a once-in-acentury crisis the banks were more preoccupied with their own balance sheets, default risks and credit impairment costs than they were in playing their role as a functional transmission mechanism for state-underwritten financing support for SMMEs.
It is an indictment not only of the banking sector but also of those in oversight functions charged with overseeing the implementation of the scheme. It makes tangible the impact of the financialisation of the economy.
Rather than an abstract concept, financialisation helps us better understand why the behavioural incentives of banks would prohibitively constrain the magnitude of support to be extended to small business.
Further, it explains the incentive to buy back shares rather than reinvest in the real economy and productive activities that generate employment and strong social multipliers.
The credit scheme was a good idea, but the government may have overestimated the vehicle through which it would be delivered — the banks. In so doing we may have seen not only a misalignment in bank behaviour and shareholder interests, but also the broader national interest.
Cawe (@aycawe), a development economist, is MD of Xesibe Holdings and hosts MetroFMTalk on Metro FM.