Issue: June/August 2008


Sauce for the goose

The PIC has come up with some really good policies to improve corporate governance, and is committed to oversee their implementation. It’s a shame these principles don’t apply to its own shareholder, government itself.

There’s a concerted move, at the highest level, to improve and enforce best-practice governance standards. The programme has all the right ingredients of accountability, transparency and the other apple-pie goodies so eloquently preached and so frequently ignored. What’s more, it will work because it’s driven from the top. Where it leads, others will have little choice than to follow.

A brazen irony, however, is that it comes from an agency whose sole shareholder is government. Principles adopted by the Public Investment Corporation (PIC), to monitor and put pressure on JSE-listed corporates, enable the pot to declare its approval or otherwise of the kettle’s colour. What the PIC will be doing unto others is not what’s being done to, for or by its own shareholder.

Were consistency equally apparent across the public and private sectors, SA would be on its way to a pristine governance model. Instead, the former is to be scrutinised in a manner that the latter isn’t. Paradoxically, the PIC comes into its own as the watchdog of corporate SA at the same time that the Scorpions are about to be defrocked, sparing government and the ruling party the embarrassment of its anti-corruption endeavours.

This is not to detract from the PIC’s muscular initiative, undertaken at the behest of the Government Employees Pension Fund (GEPF). The PIC is SA’s largest investment manager because it is the agent of the GEPF, the country’s largest pension fund. Once the GEPF had become a founding signatory of the United Nations Principles for Responsible Investment, the PIC was virtually obliged to follow with a complementary policy for corporate governance and proxy voting that could be applied in practice. Its whole theme is to focus on ethical behaviour for prevention of power abuse and financial chicanery.

With this policy in place – down to the nitty-gritty not only of voting but also of disclosing how it votes at shareholder meetings on such specifics as executive remuneration and directors’ control over unissued shares – other investment managers would be similarly obliged to follow if they intend to compete for a slug of PIC business.

So prepare for the onset, at last, of shareholder activism with more teeth than the meek King code was ever able to clench. By wearing its heart on its sleeve, the PIC is in a position to assert enormous moral suasion.

Realistically, the effect might be limited because the PIC is usually a significant but not a controlling shareholder. Collusion with other shareholders, to override a board, invites complications that arise from ownership being extended to control, and the PIC is not in the business of control.

Additionally, it is a captive shareowner. Because it administers GEPF assets of some R800bn, sheer portfolio size restricts its ability to express disapproval by dumping the relatively few JSE shares with sufficient liquidity to command its investment.

To make an impact, therefore, the PIC will have to grandstand. Like any other shareowner, it has rights simply to vote and receive dividends. The persuading will be in the voting, especially in the brouhaha that will accompany it.

Everything about the PIC’s principles is good, fair, right and necessary. They are consistent with the objectives of the Financial Sector Charter, and they will blast fresh air into boardrooms. They enshrine the paramountcy of the stakeholder, holistically embracing the broader society as opposed to the narrowly defined shareowner, to strike a balance between social and economic goals.

More is the pity that these principles, laudable and forceful, put corporates exclusively to the test. For corporates are only a segment of societal influence, operating within the ethical example primarily set by government.

Consider that the PIC’s principles are concerned with discipline, namely “senior management’s commitment to correct and proper behaviour”. Think of the qualified reports from the Auditor General, revealing financial mismanagement, into a mounting number of government departments....

Or consider transparency, “ensuring that outsiders have the power to view and thus assess corporate philosophies and actions”. Think of diplomacy over Zimbabwe, less quiet than silent . . 

Or independence, being “the entrenchment of checks and balances of power in a corporate structure” to avoid “dominance by a strong chief executive”. Think of centralisation of authority in the presidency, the subservience of the legislature . . .

Or accountability, notably “the mechanisms to expose policies, decisions and actions to investor scrutiny”. Think of secrecy over the arms deal . . .

Or responsibility, pertaining to “behaviour that allows for corrective action and for penalising mismanagement”. Think of Home Affairs, Police Services, Health, the Eastern Cape, Eskom . . .

 There’s lots of other good stuff, like the approach to directors’ remuneration that must “firmly link reward to performance”. Think of empowerment deals . . .

The PIC will also require companies to establish a set of ethics, core values and principles of business practice that will support these values, communicate them to stakeholders, and then “constantly monitor how these principles are applied”. Think of rampant crime . . .

Directors, says the PIC, should be nominated only after “a thorough background investigation” has been completed and confirmed into their “ethical conduct, conflict of interest and exercise of independence”. Candidates for directorships will be supported only if they are “fit and proper for the role”, without “a reputation of poor integrity and unethical conduct”. Think of Jacob Zuma, or the Travelgate MPs . . .

Come to think of it, a PIC-type unit to enforce a PIC-type code in government and the ruling party might be rather neat. Why shouldn’t sauce for the goose also be sauce for the gander?


Through 2007, the PIC voted at dozens of shareholder meetings. Its website now shows how and why it voted as it did.

As a matter of policy, it’s evident that the PIC opposes two common practices. One is placing unissued shares under the control of the directors when there’s no clear motivation for it. The other is retrospective approval of directors’ remuneration, where the PIC is inclined also to oppose remuneration increases exceeding about 10% of the previous year’s level.

As other investment managers seek to follow the PIC’s lead, there can be all sorts of fun and games. It’s conceivable that the conventional boardroom practice of directors having an unlimited mandate over the issue of shares will be thrown out. Equally conceivable is that directors’ remuneration would require shareowners’ approval in advance of it being granted, and confined to increases the majority of shareowners will allow.

On these counts, directors will no longer have it their own way. To the extent that other investment managers emulate the PIC, shareowners will intervene directly in the boardroom. There is no need for collusion between them, to gain a majority of votes against resolutions proposed by the directors, as the principles guiding the PIC votes are known to all.

From here, it’s only a small step to the newly adopted PIC policies on corporate governance being similarly asserted by other investment managers. They can choose to follow, in their own interests, or not to follow, at their peril.

The PIC is simply too big to be bucked.