Ann Crotty
It is unlikely that any of the executive directors of the listed construction companies involved in the Competition Commission’s collusive tendering case will be required to repay any of the remuneration awarded to them during the period of collusion let alone – for those still in charge – face shareholder pressure to resign.
This situation, which has caused much frustration among South Africans, is yet another example of what US corporate governance guru Robert Monks calls the “absentee ownership” that characterises the ownership structure of large listed corporations across the globe.
“Ownership has become more diffuse and corporations now have only a nominal accountability to any identifiable ownership. By ‘identifiable owner’ I mean a shareholder or a group of shareholders who are willing to accept the responsibility of being stewards and monitoring the functioning of the corporation,” Monks wrote recently.
He went on to say that in the past when corporations were owned by “flesh and blood individuals the experience was, generally speaking, that flesh and blood individuals acted the same way with respect to their corporations as they acted in their own life, and that they had concerns for the externalities of the corporation and they had concerns for its long-term implications”. In 21st century parlance they were “responsible investors”.
Monks is certainly not suggesting that collusion and other nefarious corporate practices are new to the corporate world and a direct consequence of the diffusion of ownership. What he is arguing is that this diffusion has meant that executives who run our powerful corporations are not being held to account.
Traditionally, a company’s shareholder register identified the individuals who owned the company. Now that register is dominated by nominees, who overwhelmingly comprise institutional fund managers.
In South Africa these institutions are “managing” companies on behalf of the millions of South African citizens who have investments or are part of a pension or provident plan. They are what Monks refers to as the “absentee owners” who “own” companies on behalf of millions of individual beneficiaries.
And despite numerous corporate governance codes, regulation 28 and the Code for Responsible Investing in South Africa, their notion of accountability has focused almost entirely on short-term share price performance. Thus, the executives of the construction companies will survive because their share prices have recovered.
To a considerable extent the millions of South African beneficiaries have been complicit in this “absentee ownership” situation. We have been happy to hand over “ownership” to these professionals for as long as they are able to secure share price increases. We have allowed financial considerations to dominate our perception of responsible investing to the detriment of environmental, social and corporate governance considerations.
We have been happy to pay huge fees to consultants and fund managers who have extracted the strongest share price performances – no questions asked.
But increasingly developments such as the Competition Commission’s findings demand that we ask questions and make our passive support of “absentee ownership” a little more uncomfortable.
Part of the explanation for our passivity is that life is just getting too complicated; fund management is a highly skilled job that requires a considerable amount of time and a lot hangs on how well it is done.
Delegation of responsibility seems inevitable. Savers, employees and pensioners delegate the job to trustees – often colleagues – who in turn delegate the complicated job to consultants and fund managers.
But things may be about to change. A powerful group of players in the financial sector have got together to produce a pioneering guide that will give trustees the tools necessary to play a more active role and to ensure a responsible investment strategy is pursued.
“The guide aims to change the dynamics in the investment chain and to build awareness among trustees of the power that they have and how they can use it effectively,” remarked one analyst.
The draft guide, which involved input from the International Finance Corporation of the World Bank, the Principal Officers Association of South Africa, the Government Employees Pension Fund and the Association for Savings & Investment SA, has been endorsed by the National Treasury.
The guide is aimed at trustees and principal officers who are new to the subject of responsible investing and “who need a comprehensive introduction as they prepare to take their funds through the first steps of planning and implementation”.
The authors of the guide contend that appropriate consideration of environmental, social and governance (ESG) dimensions is increasingly shown to reduce risk and to open up new investment opportunities. In addition, they note that South Africa’s revised regulation 28 requires pension funds to appropriately consider any material factors that may affect the performance of funds’ assets, particularly over the long term.
David Couldridge, an ESG analyst with Element Investment Managers, welcomed the guide, which he described as “another responsible investment first for South Africa”.
Couldridge said he believed the project had the potential to be replicated globally “to ensure trustees of pension funds take their rightful place in the investment chain”.
However, he is concerned that the proposed timetable for full implementation of the guide is as late as 2016.
The guide can be downloaded from the Sustainable Returns website at www.sustainablereturns.org.za.