Edition: Dec 2013 - Feb 2014
Editorials

FIRST WORD

Towards a stakeholder democracy

Pension funds are the critical component to build a social contract. There’s no similar vehicle through which the interests of South Africans come together. A small change can make a big difference.

In the annual benefit statement of each pension-fund member, there should be disclosed on a single page the dozen largest equity investments held by that fund at its reporting date.

This is not merely a suggestion. It’s a plea. It’s also a proposal that, if not adopted voluntarily, begs being made regulatory. Why?

Simply put, there can hardly be a better way for fund members to realise that they have a vested interest in the performance of these companies; and, in turn, on the economic environment where these companies operate. For the members’ livelihoods depend on it. So too do the livelihoods of us all.

This should be self-evident. Unhappily, it isn’t. If it were, SA wouldn’t be as lacerated by outbreak after outbreak power confrontations that debilitate its growth prospects. Unless the penny drops, that all stakeholders have a commonality of interest, the ‘Us versus Them’ syndrome will perpetuate and the political discourse will remain in an adversarial stalemate.

Pension funds offer the platform for the penny to drop. They aren’t only a means to provide for retirement but also the structure potentially to glue together a social contract. The starting point is for fund members, inclusive of the least sophisticated and the lowest earners, to know it; to realise that through their funds they already own, substantially and collectively, what Marx and Lenin described as the economy’s “commanding heights”.

Consider that pension funds are the largest single category of shareholders in JSE-listed companies. Consider further that they’re the largest, and often the only, repositories of black workers’ savings. Take the totality of fund members at around eight million individuals, then add say three dependents on average for each, it would make for some 24m South Africans.

This number, directly impacted by the operation of SA’s larger companies, is higher than on the national electoral roll. Whether these companies are in mining, financial services or manufacturing industry, they’re owned by the broadest array of people.

The beauty of benefit statements as a communications tool is that they’re dispatched to individual fund members as an annual routine. Whether they’re universally read and understood might be another matter, creating its own challenge for consumer financial literacy, but they do reach targeted recipients.

At least there’s a strong incentive to read and understand them because they tell the members what’s happening with their money. The logical complement is to show them the shares where their money has been invested. Let them ask why particular share prices have moved up or down. Let them become aware of the effects on their pockets of government policies, of corporate practices and of labour behaviour.

It’s called transparency and accountability, in this case to the investments’ ultimate beneficiaries. To be sure, show these individuals a reduction in their year-on-year
benefits – inclined to happen after cost deductions from flat share prices -- and all hell breaks loose irrespective of polite explanations for long-term market movements.

More than this, disclosure of shareholdings sparks responsiveness to share ownership. It’s the beginning of an appreciation that something out there is inextricably linked to somewhere in here, tying the remoteness of an institutional investor to the intimacy of a member’s family. Were this to ignite in only a fraction of fund members a curiosity and desire for better financial education, it would be progress indeed.

What are the obstacles? Presumably none, apart from the cost of a printout on the back sheet of the benefit statement. The information should be readily available because asset managers provide it to fund trustees.

Once done and established, the process might extend to other investments such as bonds. If fund members want to find out what they are and why they’re invested, so much the better.

As a next step, think bigger. Electronic media, particularly company intranets and smartphones, allow for addenda to the printed benefit statement. They can disseminate additional information to which members are entitled.

For instance, tell members how their representatives have voted at shareholder meetings. Again, there should be no cost implications. Asset managers are obliged by the Code for Responsible Investing to make these disclosures, and it doesn’t restrict them on how the disclosures are to be made.

Neither is it too much to expect that they explain their reasons for having voted in a particular way, in compliance with Regulation 28 requirements on funds to bring “sustainability” criteria (including corporate governance) into their investment decision-making. It’s a forum for members to understand that they have a say by virtue of the proxy-voting mandates that their trustees provide.

Their inclusion, through the engagement and voting processes with investee companies, puts onto a different plateau the muscle-flexing on such contentious issues as workers’ pay and directors’ remuneration. It’s insufficient merely to record dissent but rather to approach agreement on how dividend flows, destined for members’ portfolios, can be sustained and improved.

This is the lever for building consensus because, at the level of pension funds, the benefits ultimately received by members are the litmus test. It’s where the impacts of government policies, corporate practices and labour interests converge.

The trick is for the funds to make their voices heard and to assert the influence that legally empowers them. Until many millions of fund beneficiaries realise it, the social contract on which the National Development Plan relies can never happen. 

Allan Greenblo,
Editorial Director