Issue: December 2007/February 2008
Editorials

FINANCIAL SECTOR CHARTER

Business as unusual

Is there to be a policy reversal on member representation on the boards of retirement funds? Implicitly, it would seem so. But whether it’s desirable is another question altogether.

Mohlala... rules are rules

The financial sector is the engine-room of the economy’s transformation. When funds are allocated to good things like empowerment financing and infrastructure development, in which good South Africans say they believe, then good things are expected to follow.

Now compare the enthusiasm with which the Financial Sector Charter was greeted in August 2002, for implementation from January 2004, with progress to date. The 2006 annual review by the Charter Council, released in October, awards the signatories less than three boisterous cheers. There are simply too many defects for comfort, either because ambitious targets have been confronted by a reality check or because initial commitments were structured in the hope of holding government at bay.

This is not to suggest the hallmark of Charter implementation is lethargy. It isn’t. Within particular areas, notably corporate social investment, spending targets have been exceeded. Within particular categories, such as support for enterprise development, there’s been enormous growth. On the other hand, taking skills development for black people as an example, there’s been widespread underperformance. Fortunately for some but perhaps undesirably for the whole, the report does not identify which institutions have been more proactive than others.

The Charter is a voluntary code. Here lies a rub, because it is not entirely aligned to the codes for broad-based black economic empowerment (BEE) that have been gazetted. So be forewarned that a switch from voluntary to statutory can be rather abrupt.

“It is acknowledged that the first two years have been a formative period for all participants, including members of the financial sector and the Charter Council,” says the review. “The pace, intensity and accuracy of transformation needs to be speeded up in the remaining years (to end-2014).”

Noting with patience rather than threat that there are “significant gaps to close”, Charter Council principal officer Enoch Godongwana urges: “While measurement is important and keeps one on track and focused, the objectives of the Charter go beyond measurement and individual scorecards. The temptation to ‘tick the box’ and then move on is perhaps a feature of our lives, but the objective of transformation deserves more than this approach.”

Highlighted is the inadequate reporting of “unquantified commitments”. Participants’ reports, it finds, have “largely just answered questions in a mechanistic manner, giving the impression that that institutions may just be doing what needs to be done to get Charter points, rather than that there is a greater objective at play”. These responsibilities it describes as “the cement between layers of hard bricks, ie the soft substance that holds together the transformational objectives that can be quantitatively measured”.

An outstanding example relates to the Charter chapter on shareholder activism. The Council report makes not a single mention of it. The reason, Godongwana explained in an interview, is that “there hasn’t been any”. This is despite the financial sector recognising in the Charter that “shareholder activism is a critical component of continued confidence and long-term growth of the sector”.

Similarly, the Charter says “pension fund trustees are encouraged to play an increasingly active role . . . in the entities in which they have taken significant investments”. In the report, there’s not a word on this either; on who’s encouraged them, how they’ve been encouraged, or on the outcomes of any encouragement. Perhaps next year’s report will be able to deal encouragingly with the consequences of the lead taken by the Government Employees Pension Fund in the proxy-voting guidelines that mandate the managers of its assets, including the Public Investment Corporation.

Most immediately, it’s in the self-interest of institutions to promote shareholder activism because it can assist them attain their minimum target of 25 percent BEE ownership by 2010. Once they have achieved 10 percent direct black ownership, the 15 percent balance can be made up by indirect black ownership – for example, black members of pension funds invested in the institution – provided these indirect owners have a mechanism to vote at shareholder meetings.

Much less heavily weighted, rating only two scorecard points, is consumer education. Nevertheless, the amount of money to be made available is huge because each institution is committed to spend 0,2 percent of post-tax operating profit on it.

The Council has produced clear guidelines for implementation. Among them, initiatives must be targeted to lower-income groups and at least 25 percent of the funding must be allocated to rural areas; product marketing doesn’t qualify and branding by service providers is restricted, while materials must be easily understood.

On this latter score, there should be a common objective between shareholder activism and consumer education. They’re joined at the hip by the need for financial communications to be intelligible. The King code on corporate governance enshrines ready comprehension as an imperative for reporting to stakeholders, but the JSE shows little inclination to enforce it (TT Sept-Oct). May the Charter be more successful than King in avoiding box-ticking compliance, and the Council more efficient than the JSE (a signatory to the Charter) in promoting substance.

CAN DO BETTER

Some areas for concern:

  • Widespread underperformance on the employment of black matriculants in learnerships;
  • Training for black staff decreased;
  • High volatility on procurement, raising questions about the sustainability of contracts;
  • Investments in low-income housing, transformational infrastructure and agricultural development are overclaimed. Also, they tend to be concentrated around the major centres rather than in rural areas;
  • No real progress has been made in financing black small to medium-sized enterprises in the poorer regions;
  • Black ownership of reporting institutions increased from 16 percent to 17,8 percent. But only two-thirds of reporting institutions submitted returns on direct ownership and, of them, less than half claimed any black ownership at all;
  • Although the mass of the sector is involved and is being actively transformed, “a gamut of institutions” has opted not to participate.