SOUTH AFRICA - PRETORIA - 27 February 2019. Justice Lex Mpati at the PIC Commission of Enquiry. Picture: Oupa Mokoena/African News Agency (ANA)
PRETORIA –  Former Independent non-executive director at the Public Investment Corporation (PIC) Vuyo Jack testified at the PIC Commission of Inquiry on Monday that a draft Governance Review Report found the need for urgent remedies for the asset manager’s governance.

“The risks identified after staff interviews and the documentary review necessitated urgent action on the board’s part,” Jack said before presenting the following summary of the report:

1. Inchoate Delegation of Authority 

There are a number of governance and structural issues which confound clear fiduciary decision-making authority and reflect a highly fragmented and dysfunctional system. There are, for example, currently several fracture lines related to issues such as delegations of authority, delegations of duties, and related risks in the oversight and reporting processes of the organisation. The result is a continuing process of friction and abrasion that often manifests in tensions driven by a culture of fear that runs along reporting lines as a modus operandi by executive leadership to maintain narrow agendas at the cost of the wider interests of the PIC, its clients and the shareholder. 

2. Weak and unaccountable leadership 

Overlaying all this is a crisis of leadership and challenge of purpose. As noted above, lack of clear authority also equates to lack of clear accountability and therefore inconsistencies, operational dysfunctions, and a lack of a galvanising sense of mission among leadership. This has taken the form of de facto vetoes by EXCO of committees, structures and managers delegated by the Board to execute its mandate, as well as threats and fear tactics through the use of the remuneration system to bully staff into line. The latter was a theme that ran across the full spectrum of staff we consulted during the review. While current dysfunctions have been largely between two chiefs and their respective opponents and supporters, it is foreseeable that similar power plays could erupt into any of the many fiduciaries with overlapping and inconsistent roles.

3. Dereliction of fiduciary duties by the executive 

There were several limitations to the review, however, which effectively prevented further investigation of the impact of the practices at the PIC on its core business: investments. Some evidence emerged which suggested derelictions of the fiduciary duties of leadership which should be investigated. They include deliberate and conscious efforts by EXCO to dissemble crucial oversight bodies such as Risk from an independent look at investment processes and decisions. At least one consequence that came to light during the review was a raft of reclassifications of listed companies in which the PIC is invested to ‘un/isted’. There are others, which will be taken up in the final report to be presented to the Board in July. 

4. Suspicion and polarisation 

Similarly, limited legitimacy; a ‘parochial mentality’ that foments suspicion and polarisation and impedes the ability to transcend divisions; a lack of clarity or vertical coherence; and limited attention to overall PIC goals were other factors encountered that to a greater extent has constrained the capacity of the organisation to reach its objectives. A consequence of this problem was the absence of clear, weIl-articulated and designed, and consistent strategies. Thus the ability to achieve synergies between interventions by departments at different levels of responsibility was weakened by mission drift within the PIC as a whole. 

5. Misaligned PrincipaI-Agent relations 

There are also a number of internal factors that have debased the role of the PIC. To some extent, these were an extension of the factors mentioned above. In the PIC investment context, the principals are the stakeholders and shareholder and the agent the PIC. In theory, public sector agents will have very different agendas to those of their principals in the private sector. However, the PIC’s largest principal is the GEPF, and therefore government. Thus, individual agents seeking to maximise self-interest in the PIC context constitutes a blatant conflict of interests and therefore a dereliction of fiduciary duties to the principal. This misalignment of agent incentives with the interests and objectives of the principals appears to be the core of the governance problem at a macro level and requires urgent intervention if the PIC is to be spared from reputational and financial risk. It is, we conclude, a matter of bringing divergent incentives back into alignment. 

6. Weak monitoring and accountability 

We have already referenced the problem of accountability. Suffice it to say that the apparent leadership crisis is compounded by poor formal systems of oversight, monitoring and accountability, including the oversight role of risk management, partly because of a lack of specificity of the underlying activities of structures responsible for oversight. At issue is both the overriding role and identity of the structures (risk management, HRRC, Company Secretariat) and the incentive structure which seems to be deeply embedded in the remuneration system and moderation system. At the risk of reducing this observation and interpretation to generalisation, the growth context of the PIC in which approximately R1.7t is under management, combined with the absence of a performance-based incentive structure in the different departments, has distorted the governance system. In that regard, the incentive for demanding accountability from leadership is compromised by lax oversight, but largely undefined underlying activities of the departments that are not functionally aligned to their core business. 

7. Low specificity and oversight of deals 

The final conclusion of the review is a conceptual observation. A great deal of organisational theory outlines mechanisms to bring the incentives of principals into greater alignment with the agent’s utility functions. By contrast, there appeared to be a low utility functionality by investment teams at the PIC. In other words, much energy and attention in the past year has been on getting as many deals as possible to push the quantity line and meet numerical outputs irrespective of the quality of the return benchmarks set by clients in their investment mandates. While this was not explicit in our interviews with staff, it was most certainly implicit in data from PIC documents supplied to us. The danger with such an approach is that it compromises quality and results in an exponential rise in the number of bad deals. 

To sum up, then, driven by vague and sometimes contradictory delegations of authority and lines of accountability, there is a tendency by executive leadership toward a substitution of accountability and delegation of roles and related outputs with practices and behaviours geared towards executive control. In that sense, the interests of the executive as well as commitments to the PlC’s goals seemed to have run counter to incentive structures and best practice.