Issue: November/December 2005


King Without Clothes

Not to put too fine a point on it, the King code on corporate governance is being made to look like claptrap. After more than three years since the committee's revised report was heralded as the beacon for boardrooms, a moral of the children's fable is revealed: King has no clothes. Its report encapsulated the noblest intent. Its practice is a corporate marketing exercise clothed in the striking imagery of respectful compliance. Otherwise, it's business as usual.

Two recent examples suffice. Both have implications for retirement-fund trustees, liable similarly to company directors for fiduciary duties.

One is in the creditors' settlement with non-executive directors of insolvent Leisurenet, from which individual and institutional shareholders get nothing. Leisurenet's board had ticked all the right boxes for King compliance. To the extent that these directors admitted responsibility for loss, they were covered by fidelity insurance whose premiums had been paid by the company. Thus is the deterrent of personal liability side-stepped (see box).

So, too, with fund trustees, provided fidelity cover is taken on their behalf, but with an important difference.

As "new generation" trustees from member ranks are encouraged onto management boards, lower levels of financial experience imply higher levels of insurance premiums.

This will mean an added cost to fund members. It will also mean they needn't be as intimated by their duties, which is not necessarily a positive. At least the barrier to entry is lowered by diminished personal exposure were they to be sued.

The other example, from a wholly different perspective, is in the disgrace of R51 million being awarded as a "share appreciate rights" bonus to Shoprite chief executive Whitey Basson in addition to the R7 million salary he received for arriving at work this year. The disgrace is less in the egregious amount than in shareholders, many being institutions representing retirement funds, allowing it to happen.

Not one institution actually attended the meeting at which the bonus was approved, or kicked up stink beforehand on the consequences of the Shoprite remuneration formula that had earlier been disclosed. Only 20 percent of shareholders opposed the resolution, and this by the non-confrontational means of proxy. If ever there were an instance where shareholders should have attended a meeting, to register their protest by shouts, this was it.

A la King, Basson's package had been processed by a Shoprite remuneration committee. Formalistically and farcically, it therefore bears the imprint of good corporate governance. In effect, remcos are less independent of management than King likes to purport and shareholders have less influence over executive remuneration than they like to pretend. Except when it comes to naming and shaming. This happened, conspicuously, a few years back with selected Nedcor executives who were to have enjoyed a bonus from efforts that had little to do with their own performance. Public pressure, in the form of pure noise, caused the scheme to be abandoned.

In the case of Basson, there's been no noise in time to cause the scheme's abandonment. And although Basson's efforts must have contributed significantly to Shoprite's profits, for which he receives a generous salary – marketrelated because remcos define the market, peer pressure pushing it to levels ever-more obscene – they cannot be said to have defined the share-price appreciation.

Share prices move in market cycles. Globally and locally, they've been moving north. South Africa's retail sector, of which Shoprite is part, has enjoyed an unprecedented consumer boom fuelled by low interest rates and the availability of imports from Chinese sweatshops. Shoprite has been able to capitalise on both but did not create either. Bully for Basson, who keeps the cash irrespective of sustainability or penalty had fortune not favoured him.

King is premised on "shareholder activism", a fine oxymoron (words conflicting with one another) as it turns out. The code extends the concept to "stakeholders", including consumers, who are supposed to be the recipients of regular and intelligible information affecting them.

Ask the life offices about that one. Ask the Pension Funds Adjudicator too. Or ask stakeholders whether they're left any the wiser by the technical bumf that the JSE obliges listed companies to communicate.

Retirement funds, through institutions, are custodians for the savings of roughly 10 million South Africans. Often, they are the only vehicles for the savings of black workers. To avoid tokenism, so that corporate behaviour is influenced by talking inside the offices of companies rather than by marching outside in the streets, they need a champion.

Hold your breath, now that black membership of retirement funds is recognised by the finally approved Broad-based Black Economic Empowerment Scorecard.

For far too long in South Africa, shareholder activism has been described as in its infancy. It has to be the oldest infant around, a teenager frightened to get behind the steering wheel of daddy's car.

It mocks the objectives of King, and it frustrates the onset of corporate democracy.

Allan Greenblo
Editorial Director


In the Leisurenet context, consider this:

  • "Civil remedies are available to shareowners in that contraventions of the provisions often give rise to a delictual action and even personal liability. The exposure of directors and managers to such civil liability is an important regulatory and enforcement tool."

In the Shoprite context, consider this:

  • "Sanctions should be visited upon . . . institutional shareholders who fail to attend shareholders' meetings of companies in which they are invested. Directors and managers of financial institutions such as insurance companies, and trustees and managers of financial retirement funds, who do not attend shareowners' meetings of companies in which they have a certain prescribed limit of investment . . . or who fail to send representatives to such meetings, should be censured."

– Code of Corporate Practices & Conduct, June 2002.