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