Financial Mail - Investors Monthly
Not a crowning achievement
Listed firms have not been convinced to take further action regarding disclosure and corporate governance, writes Ann Crotty
As the list of JSE casualties mounts, with investors losing billions of rand every day, any hope that institutional shareholders would be able to step in and effect a speedy resolution to our troubled corporates suffered a nasty reality check at Coronation Fund Managers’ (CFM’s) recent annual general meeting (AGM).
The fund manager’s chief investment officer, Karl Leinberger, described institutional shareholder activism as a glacially slow process that is slowed even further by a proboard and anti-shareholder legislative framework.
As the largest listed fund manager, CFM is both a substantial investor and an investee, a sort of poacher and game-keeper rolled into one. Until recently, perhaps because CFM was flying high, this was cause for little concern.
But a few years ago — five, to be precise — shareholder activist Theo Botha started to pitch up at the AGMs. He has been concerned about CFM’s shockingly poor remuneration disclosure. His gripe is that CFM is flaunting some of the very rules South Africans expect it to enforce on the listed firms in which it invests on their behalf.
The activist’s high-profile engagements at the AGMs have resulted in some improvement in disclosure, but it still falls short of best practice. And it seems the board is determined not to go any further.
Hugo Nelson, chair of the remuneration committee, said it is not to anyone’s benefit to disclose information about Leinberger’s remuneration. He told shareholders attending the AGM that it was all about retaining key staff in the context of a very competitive market for skilled resources.
“We want to ensure the team is around for many more years,” said Nelson, who evidently fears competitors will rush to lure Leinberger with the same sort of package once they know the details.
CFM’s remuneration system is unique and its structure lies in the group’s history as an aggressive new player that shook up the rather stodgy fund management industry back in the mid-1990s.
Its employees receive a low fixed salary and a generous variable portion. A hefty 30% of net operating profit before tax is set aside each year to fund the variable portion. The money is invested in CFM shares and unit trusts, which are subsequently used for the payment of cash allocations and deferred awards to the employees.
While CFM discloses the remuneration paid to CEO Anton Pillay and chief financial officer John Snalam, it provides no information on Leinberger, who must surely be deemed a key employee or, as the Companies Act might describe him, a prescribed officer. Section 30 of the Companies Act requires the annual financial statements to include details of the remuneration or benefits paid to directors and prescribed officers of the company.
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Law by Farouk Cassim and others says the definition of a prescribed officer is broad “and would encompass a wide group of persons, including persons who are not directors of a company”. Leinberger is not a director of CFM. Regulation 38(l) of the Companies Regulations under the act says a person is designated a prescribed officer of a company if that person “regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company”.
CFM seems to justify the nondisclosure of Leinberger’s remuneration on the grounds that he is an employee not of the listed entity but of a subsidiary. So much for substance over form.
Little wonder we’re unlikely ever to hear CFM criticise the corporate governance standards of any of the companies in which it is invested on behalf of the public. And given market rumours of the eye-watering amounts being paid to Lein-
“We have to methodically, slowly and conscientiously work out a ‘to-do’ list … it takes years
berger, it’s also very unlikely CFM will challenge JSE remuneration packages that are increasingly looking out of step with shareholder interests.
The second chilling aspect of the CFM AGM is Leinberger’s description of how the fund manager plays its role as an active shareholder. Slowly, it seems. Following Leinberger’s presentation of CFM’s current investment strategy, Opportune Investments CEO Chris Logan asked how, when the company is a big investor, it tries to restore value to long-term underperforming investments such as Trencor. CFM holds about 30% of Trencor, which Logan says has been a longterm underperformer with contracts that shelter management, in its main operating asset, from the consequences of that underperformance.
“Trencor is a good example of a case where we have been quite active,” Leinberger told the meeting. He described how about 20 years ago a complex holding structure provided six entry points for investment in Trencor. “We engaged very strongly with the company to simplify those entry points to the single one we have today,” said Leinberger, who described the “huge work done behind the scenes to unlock the legal structures”.
CFM also “engaged strongly” with the board to beef up the management team following poor performance at its USbased operating company Textainer under the leadership of CEO Philip Brewer, who had replaced long-serving CEO John Maccarone in 2011.
“For many years the company was incredibly well run under Maccarone, but when he retired a weak management team was put in place,” said Leinberger, who explained that after putting pressure on the board the CEO and chief financial officer were recently replaced and a “high-calibre” team now ran Textainer.
After the meeting Logan questioned whether CFM should take all the credit for the changes, pointing out they followed closely on his more urgent high-profile campaigns.
Leinberger said CFM understood investors’ frustrations when poor corporate governance appeared to go unchallenged for two or three years, but pointed out: “We’re not allowed to go in and run these companies; there are fiduciary structures in place and we’re only one stakeholder — the boards are in control. We have to methodically, slowly and conscientiously work out a ‘todo’ list … it takes years.”
At the meeting Logan, who has led a number of activist moves on companies, suggested that a more urgent process that would generate faster results was necessary.
“We would also like to see more urgency,” said Leinberger, “but the way governance and legislation have developed has made it a whole lot easier for boards to obstruct shareholders. These days boards can bat away shareholders and say they are acting in the interests of the company and not just one single stakeholder.”
As one of the first to point out potential problems in Tongaat’s business model, Logan believes this resigned approach explains why investors are now suffering so much value destruction. He believes the situation could be changed, and speedier action secured, if the large institutional shareholders were prepared to back activists, as has become the practice in the likes of the USA.
It may be time, as JSE CEO Nicky Newton-King said at the recent Investment for Inclusion Forum at Gibs, to “question the basics of how companies operate — we have to tackle the actual model of capitalism”. She was talking in the context of the growing inequality at the heart of the commercial model.
But the combination of growing inequality and value destruction demands a speedier engagement, over months rather than years.