For the sake of share­holder cap­i­tal­ism’s fu­ture they must act like real own­ers, not just fee-earn­ing agents, writes Ann Crotty

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As­set man­agers must act like real own­ers, not just fee-earn­ing agents

The JSE is hop­ing the “guardians of gov­er­nance” , or GOGs — the boards of di­rec­tors, as­set man­agers, pen­sion fund trustees, an­a­lysts and au­di­tors — will weigh in and help to strengthen gov­er­nance and in­vestor con­fi­dence and trust. Good luck with that.

With the ex­cep­tion of the pen­sion fund trustees, all the GOGs iden­ti­fied by the JSE are in the frame for, at least, ac­com­mo­dat­ing the R200b­n­plus value de­struc­tion at Stein­hoff. In time we might even get around to track­ing down de­tails of the pen­sion fund trustees’ role in this mess. For now there seem to be big­ger fish to fry.

The re­al­ity is that the JSE is run like a club. It re­lies on the good­will of its mem­bers, and a rea­son­able de­gree of ad­her­ence to the rules, to en­sure a level of trust that will keep every­thing run­ning smoothly. The abil­ity to use pun­ish­ment, other than a mod­est fine or cen­sure, to en­cour­age good be­hav­iour is not avail­able.

There has been only one suc­cess­ful, al­beit mod­est, pros­e­cu­tion of an in­sider trad­ing case since it was in­tro­duced into com­pany law in 1973. As with mar­ket ma­nip­u­la­tion charges, in­sider trad­ing cases, has tended to be sorted out with a slap on the wrist.

That said, the re­cent R30m fine on Har­mony, for mis­state­ment of re­sults all the way back in 2007, might sig­nal the be­gin­ning of a tougher stance by the reg­u­la­tors. But it dashes any hopes of speedy ac­tion from reg­u­la­tors. The fine was for a fairly straight­for­ward case of mar­ket ma­nip­u­la­tion that oc­curred 11 years ago.

As for share­hold­ers go­ing af­ter di­rec­tors for losses they have suf­fered, that’s pretty much a hope­less cause, as demon­strated by the re­cent rul­ing by the North Gaut­eng High Court in the case brought by African Bank’s BEE share­hold­ers against Leon Kirki­nis. It’s likely to send a chill through Stein­hoff share­hold­ers who be­lieve they can call for­mer CEO Markus Jooste to ac­count.

The court ruled share­hold­ers can­not sue di­rec­tors for losses they have suf­fered. In SA share­hold­ers have to re­sort to ex­pen­sive de­riv­a­tive ac­tion if they want to sue di­rec­tors, which may ex­plain why no di­rec­tor of a listed com­pany has been sued.

It is be­cause op­tions for pun­ish­ment are so lim­ited that the JSE has re­sorted to ex­hort­ing the GOGs to get more in­volved.

In a world of share­holder cap­i­tal­ism and lim­ited li­a­bil­ity the as­set man­agers are the most im­por­tant GOGs. They are the share­holder of ref­er­ence and play the game on be­half of mil­lions of savers and in­vestors. It is they who de­cide what com­pa­nies to in­vest in, what di­rec­tors to vote for and what au­di­tors to ap­point.

De­spite their key role in the Stein­hoff case they have, with the ex­cep­tion of the PIC, avoided the sort of pub­lic in­ter­ro­ga­tion suf­fered by di­rec­tors and au­di­tors. They have been seen as vic­tims more than per­pe­tra­tors who failed to play the role the JSE now ex­pects of them.

The ap­par­ent lack of ac­tion by as­set man­agers might be down to their pref­er­ence of en­gag­ing with cor­po­rate ex­ec­u­tives “be­hind closed doors”.

There may have been a lot of “be­hind closed doors” en­gage­ment be­tween Coro­na­tion and African Bank be­fore the as­set man­ager dumped a for­tune of its 22% African Bank stake on an un­sus­pect­ing mar­ket back in Au­gust 2014.

“We do not like to make mis­takes,” said the Cape Town­based fund man­ager, which just over three years later

emerged as a ma­jor player in SA’s next big­gest cor­po­rate col­lapse, Stein­hoff.

While the “be­hind closed doors” pol­icy doesn’t go down well with the me­dia, which re­lies on dis­clo­sure to func­tion, there is jus­ti­fi­ca­tion from the per­spec­tive of as­set man­agers.

“In a pri­vate en­gage­ment the con­ver­sa­tion can be more can­did and con­struc­tive, you can build a re­la­tion­ship which gen­er­ally pro­vides the best chance of gen­er­at­ing good out­comes,” said a top as­set man­ager.

The as­set man­agers’ view is that a pub­lic cam­paign alien­ates the tar­get com­pany and re­duces the abil­ity to in­flu­ence be­hav­iour.

This at­ti­tude doesn’t quite stack up with the ex­pe­ri­ence of in­di­vid­ual ac­tivist share­hold­ers such as Theo Botha, Chris Lo­gan and Al­bie Cil­liers. They may have in­flu­enced more be­havioural changes at listed com­pa­nies than the com­bined might of our mul­ti­tril­lion-rand as­set man­age­ment in­dus­try.

For 25 years as a listed com­pany, Naspers’ an­nual gen­eral meet­ings had all the hall­marks of prayer meet­ings rather than an op­por­tu­nity for share­hold­ers to quiz di­rec­tors on cor­po­rate strat­egy. Even be­fore Naspers won the Ten­cent lot­tery, they were som­bre af­fairs where the only com­ments from share­hold­ers were ex­pres­sions of grat­i­tude.

In essence they were point­less — un­til 2016, when Botha made an ap­pear­ance. At one stage there was talk of a walk­out in protest at his im­per­ti­nent ques­tions. More of the same fol­lowed at the 2017 AGM, where the chair called an un­ex­pected halt to pro­ceed­ings be­fore Botha had fin­ished his ques­tions.

By 2018 the Naspers board, largely thanks to Botha, had worked out what was re­quired from the AGM of one of the most valu­able com­pa­nies in the world. This year’s AGM fea- tured a vig­or­ous and in­for­ma­tive en­gage­ment be­tween di­rec­tors and share­hold­ers.

Botha also man­aged to en­sure one of the largest as­set man­agers in the coun­try, San­lam, dis­closed its proxy vot­ing record. Re­mark­ably, de­spite be­ing a sig­na­tory to the UN Prin­ci­ples of Re­spon­si­ble In­vest­ing for sev­eral years, San­lam never pro­vided de­tailed in­for­ma­tion on its vot­ing — un­til Botha raised the mat­ter pub­licly.

Sim­i­larly, Lo­gan’s pub­lic stance on ex­ec­u­tive pay at Ton­gaat Hulett, with use­ful backup from an In­vestec an­a­lyst, has prompted long-over­due change. Lo­gan’s ef­forts on the Tren­cor front have helped to stir things up but it might need some push from the so-far ret­i­cent in­sti­tu­tional share­hold­ers.

Re­mark­ably, Cil­liers is one of the few share­hold­ers to have used the 2008 Com­pa­nies Act to ini­ti­ate le­gal ac­tion against a com­pany. De­spite a sys­tem heav­ily stacked against him as a small in­vestor, Cil­liers pre­vailed against both Sov­er­eign Food and La Con­corde.

All in all, his­tory does not en­cour­age much hope that the as­set man­agers will heed the JSE’s call to ac­tion. With­out a fun­da­men­tal change in at­ti­tude the best we can hope for is that they hud­dle to­gether and form an in­ef­fec­tual Crisa (code for re­spon­si­ble in­vest­ing in SA) sub­com­mit­tee to give the ap­pear­ance of con­cern.

As for the an­a­lysts, in light of In­vestec’s pub­lic apol­ogy for its an­a­lyst’s re­marks about the sus­tained over­pay­ment and un­der­per­for­mance of Ton­gaat Hulett’s Peter Staude, there’s as lit­tle hope on that front. And there’s the mat­ter of Stein­hoff’s leg­endary re­sponse to a crit­i­cal 2007 re­port by an an­a­lyst from JPMor­gan, which no doubt will have helped nur­ture the gen­eral in­cli­na­tion for self-cen­sor­ship and the pub­li­ca­tion of up­beat re­ports.

As for the di­rec­tors and au­di­tors, given that the for­mer se­lect the latter and the for­mer are based en­tirely on self­s­e­lec­tion, there’s al­most zero hope of change. The manda­tory ro­ta­tion of au­di­tors, which kicks in in 2022, will cre­ate some un­cer­tainty but, given the

With four Stein­hoff class-ac­tion cases on the go, we will see the role of di­rec­tors com­ing un­der a spot­light

lim­ited choice (by then the Big Four may have re­duced to the Big­ger Three), this may not lead to much change.

As for di­rec­tors, the Stein­hoff de­ba­cle high­lights how they can make a bad sit­u­a­tion worse. Given SA law, le­gal ex­perts don’t hold out much hope of in­di­vid­ual di­rec­tors be­ing held li­able. Pressed for com­ment on pos­si­ble breaches of fidu­ciary du­ties at Stein­hoff, one aca­demic re­sponded: “Fidu­ciary duty is like the tooth fairy, ev­ery­body talks about it but no­body has ac­tu­ally seen it”, be­fore go­ing on to point out that no share­holder has ever suc­cess­fully sued a di­rec­tor for breach of fidu­ciary duty.

But it’s not all de­spon­dency. There are signs of ma­jor struc­tural shifts that could as­sist the JSE. With four Stein­hoff clas­s­ac­tion cases on the go, at the very least we will see the role of di­rec­tors com­ing un­der a spot­light that could prompt changes. And au­dit firms are fac­ing a global ex­is­ten­tial cri­sis that might em­bolden them to play the vig­or­ous over­sight role in­vestors had al­ways as­sumed they were play­ing.

The JSE it­self has in­di­cated that Stein­hoff is a cri­sis that will not be wasted. Its CEO, Nicky New­ton-King, has made a num­ber of stir­ring pre­sen­ta­tions to the mul­ti­ple-com­mit­tee ses­sions in par­lia­ment. She has ruled out the prospect of ad­di­tional reg­u­la­tions but has en­cour­aged the pos­si­bil­ity that the ex­ist­ing ones will be more strin­gently en­forced. Michael Katz, chair of law firm ENS, be­lieves the re­cent con­tro­ver­sies point to a lack of en­force­ment of ex­ist­ing laws rather than a need for new ones.

The most im­por­tant GOGs are the as­set man­agers, who need to start be­hav­ing more like real own­ers rather than just fee-earn­ing agents. At stake is not just in­vestor trust in the sys­tem but the sur­vival of share­holder cap­i­tal­ism.

The JSE in Sand­ton: its CEO, Nicky New­ton-King, has ruled out the prospect of ad­di­tional reg­u­la­tions but has en­cour­aged the Pic­ture: SIMPHIWE NKWALI, THE SUN­DAY TIMES pos­si­bil­ity that the ex­ist­ing ones will be more strin­gently en­forced

Pic­ture: WALDO SWIEGERS Theo Botha

Ex-Stein­hoff boss Markus Jooste told the in­quiry that he was not to blame for the Pic­ture: ESA ALEXAN­DER, THE SUN­DAY TIMES scan­dal.

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