ESG principles closer to 'God’s work'

PF 24Mar camcol update IOL PF Illustration: Colin Daniel

The high-profile, treating-clients-like-muppets resignation of South African Greg Smith from the world’s largest investment bank, Goldman Sachs, knocking more than R2 billion off the capital value of the company overnight, has elicited widespread comment both here (because he is a local boykie) and abroad.

The comment has ranged from “grow up man, everyone knows that financial firms have one focus and that is profits” through to “Goldman Sachs, you had it coming, this has highlighted your cheating ways”.

Yes, as I wrote last week, the unacceptable blind chasing of profit to the detriment of clients, consumers, investors, policyholders, is pretty widespread. It happens in South Africa, in the United States (US), in the United Kingdom, in Singapore and even in China, where everyone, in political dogma, is supposed to be working for the common good.

Some see this “profits above all else”, as a former chief executive of Goldman Sachs said, as “God’s work”. Others, such as the recent anti-bank protesters in the US and Europe, see it as the devil at play.

Why I raise the issue for a second week in a row is to highlight two issues. The one is the sustainability of companies that see profits above all else. The second concerns those individuals within companies who are driven to maximise short-term profits because of personal greed based on the financial rewards they will reap through those profits.

The issue is that individuals are taking the decisions that result in consumers, both rich and poor, being ripped off by companies. In some companies such decision-making may be out of character. In others it can be pervasive. Or they start off well but the corporate culture changes.

A significant problem is arrogance – companies think they can get away with it, as did Goldman Sachs. It got away with it when it knowingly sold off toxic mortgage loan debt in the subprime crisis of 2008 in the US; it got away with it again last year when it sold off dud Greek government debt in the Eurozone crisis. But it took a letter of resignation from a mid-ranking Goldman Sachs executive to really shock the world.

The same arrogance can be seen in South Africa. Let’s, for example, take a company like Alexander Forbes. Under its initial management the company got involved in numerous unacceptable practices, which were exposed by Personal Finance. It started with what were called 3D policies, which were sold to trade union retirement funds to their detriment, through to providing advice to employers on how to rip off their retirement funds. This included getting regulator approval for the surplus stripping by actively misleading the regulator.

Initially, now-former Alexander Forbes executives blatantly lied to Personal Finance and retirement fund trustees. Our absolutely correct reports were treated with contempt. The company even boasted in annual reports about how it was making profits from creating awareness among employers about retirement fund surpluses and profiting again in the distribution of those surpluses.

Initially, the Alexander Forbes response was to deny bad behaviour and stupidly attack the credibility of Personal Finance. The exposures had little effect on the client base, with retirement funds asking for some sort of compensation and, in the case of the illegal secret bulking of retirement fund bank accounts, most accepted an offer that was far less than what they had lost.

But gradually the effect was felt. The company was forced to pay up about R500 million in compensation, knocking its profits and hopefully staff bonuses in that year, and its reputation was increasingly that of a crooked organisation (particularly when it resisted making good for its role in the surplus stripping in the 1990s). It may not have lost many customers but it was definitely not recruiting new ones.

The company was delisted and sold to private equity investors, and the senior management of the company tried to do the minimum to set matters right . It was only the appointment as chief executive of Edward Kieswetter, recruited from the South African Revenue Service, that saw the company turn the corner. He came into the organisation and bluntly told it to make the past right and to change the culture to one where consumers (retirement funds and their members) are put first.

The interesting thing about the Goldman Sachs case is that in all probability if Smith had sent his letter of resignation to the New York Times two or three years ago it might not have been published. It would have been seen as the rantings of a naïve, aggrieved employee.

But times are a-changin’. There has been an incredible growth in public indignation at the excesses and the arrogance of the financial services industry. Governments around the world are responding, albeit slowly, but effectively.

There is now a worldwide movement which involves institutions as diverse as the World Bank through to the Acme Retirement Fund with 30 members that is placing what are called environmental, social and governance (ESG) principles very high on the investment agenda.

ESG is founded on what is called sustainable investment. A company must behave in such a way that it will still be here 40 years from now and not wiped out because it behaved like an Enron in the US or even an Aurora gold mining company in South Africa or the imploded Fedsure financial services group.

In simple terms, ESG investment should be driven by the long-term common good. Investments should be in companies and projects that do not do long-term damage to the world in which we live; they should be to the advan-tage of most people, and they should be ethical.

Often these issues can be contradictory. Take, for example, fracking for petroleum gas in the Karoo. Yes it will create jobs, yes it could be good for the economy, but what is the environmental impact?

A nice part of ESG is that it will bring increasing pressure on financial services companies and particularly their bonus- and greed-driven executives to behave better.

And that pressure is increasingly coming from retirement funds. In countries around the world and in South Africa an ever-increasing obligation is being placed by governments on retirement funds to invest according to ESG principles. The retirement fund trustees in turn place pressure on investment managers to invest according to ESG principles, and this includes voting against massive incentive packages for senior executives of companies where shares are held by a retirement fund, or even selling off the shares.

ESG is still in its fledgling stages and it will take time for retirement fund trustees to set up systems that are not simply lip service and for asset managers to understand that they really have to invest money according to ESG principles. These principles extend to decisions on investing in companies such as Goldman Sachs or, in a local example, in life assurance companies that continue to flog high-cost investment policies with confiscatory penalties if you do not stick to the one-sided contractual terms.

And when retirement funds do shake their collective fingers, asset managers and all companies will have to start behaving. We have already seen the mighty Government Employees Pension Fund, with its massive and very influential R1 trillion in assets, through its main asset manager, the Public Investment Corporation, starting to enforce an ESG agenda on the companies through which and in which it invests.

There is still a long way to go with the application of ESG.

You as a retirement fund member, in your own best interests, can speed up the process.

You should be questioning your retirement fund trustees about what they are doing about ESG. This should include finding out, for example, whether your fund/asset manager did anything about one of South Africa’s extraordinarily overpaid executives, Whitey Basson of Shoprite Checkers, getting another massive increase, through to asking the same questions when you read reports of a company behaving badly.

If enough members ask the right questions of their fund trustees, the trustees in turn will ask more of the right questions of asset managers, who in turn will be forced to ask the right questions of company managements.

In this way, those greedy executives, who arrogantly and unacceptably claim to be doing “God’s work”, will be hit by that proverbial bolt of lightening!


sign up