Edition: Mar - May 2014
Change the discourse
Pension funds can, and should, play a pivotal role in answering the plea from a person well qualified to make it. By default, the funds can shift SA closer to the win-win German model of cooperation between employer and employee for overall economic gain.
Opening the Actuarial Society of SA annual convention late last year, Dennis Davis concluded on a sharp note: “The future of this country depends largely on negotiating a course between those who believe in a minimalist state inextricably linked to austerity measures, and those who believe that only the state can achieve the transformation of our society as envisaged in the Constitution.”
Davis . . . stern warning
Caught within this binary discourse, he argued that “at best SA is hurtling towards a cul de sac and at worst a fall from a socio-economic cliff”. How to ensure that our route takes a different direction? “By beginning to think differently, developing a different discourse, and learning significantly from history.”
Davis is not only a sitting judge in the Cape High Court. He is also judge president of the Competition Appeal Court, a judge in the Labour Appeal Court, and chairs the Tax Review Committee appointed by Finance Minister Pravin Gordhan.
With such credentials and range of perspectives, Davis is deeply wedded to the Constitution as a “transformative” charter. He’s clearly frustrated by SA’s “incoherent (industrial) policy located within a global economy still battling to find a coherent discourse”. Marked differences in the three major government strategy documents – the Industrial Policy Action Plan, the New Growth Path and the National Development Plan – frustrate SA’s ability to negotiate itself out of the difficulties that the world economies have had to confront since 2008.
In particular, having presided in the competition court over the Walmart/Massmart merger, he learnt that it is impossible to understand or respond to the changing global world unless there’s “vigorous engagement” with new forms of production sourced in a multiplicity of supply chains that have replaced the vertically-integrated firm.
Yet, as the national elections approach, the emotive SA discourse hones all the more around obsolete cold-war polarisations. Stereotypical rhetoric on the role of the state – that hoary debate on the defects of capitalism against the failures of socialism to address inequalities and unemployment – gets nobody anywhere. How then to change the discourse?
Davis didn’t attempt to answer his question. But an obvious starting point must be in recognition of corporate ownership through pension funds. The more that trade union-backed funds become active shareholders, as they intend (see Cover Story), the stronger the probability that SA moves by default towards something akin to the German industrial model that has successfully integrated the interests of workers, corporates and the state to the inclusive benefit of the economy.
Pension funds, as shareholders, have no fiduciary duty to the companies where they invest. But trustees have fiduciary duties to their funds in the same way that directors have fiduciary duties to their companies. The source of commonality is in the convergence of these respective duties, for trustees and directors being similarly bound to act in the best interests of the parties for which they’re stewards.
As Reserve Bank governor Gill Marcus has put it: “German industrial relations are characterised by a high degree of cooperation between employer and employee organisations. Both workers and firms take a long-term view of the economy and both parties recognise the importance of sharing productivity gains. This allows for an alignment of incentives between workers and employers.”
Like Germany, she submitted, SA also needed at the micro or firm level “to find ways that enable the workforce to have greater knowledge of the financial affairs of the company and sector, while management needs to better appreciate the living and working conditions of the employees”.
In SA, to use the clichéd terms of the pervading discourse, by their nature pension funds are “capitalistic” vehicles for their role to invest people’s savings in private-sector companies. By their function, they’re also “socialistic” vehicles for the rights that shareholdings confer. When companies are owned by “the people”, in numerous collective investment schemes of which pension funds are the outstanding example, nationalisation becomes a nonsense and adversarial sloganeering becomes displaced by shared practicalities (TT Dec ’13-Feb ’14).
The proviso is that pension funds exercise the rights to which they’re entitled. These include engagement with companies and voting at shareholder meetings. They also include that asset managers comply with mandates thoughtfully formulated by trustees, that there is transparency and accountability on the engagement and voting processes, and that there isn’t merely token protest; for instance, on pay disparities where objections aren’t contextualised and explained.
Because pension funds rely on investment performance for benefits to members, there can be no tunnel focus on any single item of contention. At issue is governance as a whole, for investee companies’ prosperity and funds’ portfolio values to march in tandem.
If executives are to be paid less, will the right skills be attracted and retained? If workers are to be paid more, will job losses result? If the company is getting away with abuse of consumers, or polluting the environment, or scrimping on product development, will trustees turn the other cheek for the sake of short-term earnings enhancement against the longerterm prospects for dividend flows and share-price appreciation? Does social conscience come into play?
SA’s investment universe is far too small for pension funds to vote with their feet. They must vote with their hands, which means holistic consideration of their funds’ interests. It also means the ability to be heard in boardrooms, which they can influence, rather than the streets, which can be counter-productive. Equally, it’s for company boards to take heed.
The penny has taken a long time to drop, but now it has. The union-led launch of trustee body Batseta is potentially a game changer because, in seeking to use pension funds for promoting workers’ ownership rights, it combines capitalistic structures with socialistic infusion. The groundwork for interaction between the boards of funds and companies is laid.
The mining industry stands out. Striking workers, members of funds invested in companies against which they’re striking, are oblivious to the connections between their pension benefits and the SA economy’s reliance on mineral exports. The platinum sector has been hit particularly hard by industrial unrest.
Its flip side is in the portfolio, for instance, of the 124 000-member Mineworkers Provident Fund. Of its R22bn in managed investments at the last count, R800m is invested in such participating employers as Amplats and Northam (as well as a host of gold and coal mining companies). And of the R6,5bn invested directly in JSE-listed entities, there are big chunks in Impala Platinum and Lonmin too. Some 60% of its portfolio is in SA equities, reflective of conditions in the macro economy.
Then take the 300 000-member Metal Industries Provident Fund. Its biggest constituents are the National Union of Metalworkers (which last year crippled production at SA motor manufacturers) and Solidarity (these days more a labour service than a confrontational union). At last count, the market value of the fund’s investments was 36bn. No less than 70% was in SA equities.
To top them, of course, is the mammoth Government Employees Pension Fund with over a million members. Of the fund’s R1,2 trillion-plus portfolio, more than half is invested in SA equities. It mocks the case for nationalisation. It illustrates the potency of the Code for Responsible Investment, which the GEPF led, for the stakeholder activism that it propounds.
But all this can only be optimised if members of pension funds, in multitudes, appreciate the interrelationship of their immediate and ultimate interests. In contradistinction to the former defeating the latter, their pockets as individuals stand to benefit from their power as shareholders.
Unless this power is asserted, by research and engagement that bring directors and trustees to negotiated understandings, the SA firmament will continue along its predictable course: rising inequalities and unemployment; divisive labour tensions and inadequate fixed investment; lower domestic savings and reversals of foreign inflows; a hammered rand and raised interest rates; then on again to recommence the cycle of rising inequalities and unemployment.
To blame it on emerging-market contagion is a cop-out. It apportions responsibility to externalities for the home-grown constraints on global competitiveness, prerequisites for which are social stability and improved productivity. Back to Davis: “We cannot have a profoundly unequal society in which historical disadvantage is conflated with present disadvantage and still expect to develop a long-term viable constitutional society which is profoundly democratic and resiliently so.”
No. Not until we find ways to stop shooting ourselves in the feet. Such a way is certainly, as Davis told the actuaries, to change the discourse. It’s within the remit of pension funds to take a lead.