Edition: September / November 2015


Vision gains traction

In their own interests, and for the broader social good, the role of
pension funds in corporate governance is manifest. Enough of the
lip service as a hard challenge comes to the fore.

Over many months, we’ve been banging on in support of the ANC Gauteng initiative to promote the shareholder activism of retirement funds (most recently, TT June-Aug). We’ve also done what we could to help facilitate the ANC Gauteng conference, for stakeholders to discuss the initiative specifically on the nomination and election of company directors, at the JSE on July 21 (see elsewhere in this TT edition). Potentially, for better or worse, this engagement marks a turning point.

The ANC Gauteng, undoubtedly the most innovative and independent-minded of the provincial bodies, has its own political objectives. These are couched, taking leaves from its October policy document, in the language of “radical economic transformation”.

Immediately relevant, though, is not the jargon but the upshot. That the initiative is being driven by the ANC Gauteng, a fresh participant in these matters, portends clout in the circles that count.

At worst, it can lead to attempts at cadre intrusion onto the boards of JSE-listed companies.

But such a sinister interpretation belies the well-publicised intentions and explanations provided by ANC Gauteng chairman Paul Mashatile. At best, it can fall four-square into what TT enthusiastically seeks. To summarise:

  • All the legislation (e.g. the Companies Act), regulation (e.g. the Financial Services Board circular PF130 and Reg 28 under the Pension Funds Act) and governance codes (e.g. King and CRISA) spring to life for the enhancement of stakeholder democracy;
  • The nationalisation debate becomes redundant;
  • The penny drops that it’s counter-productive for workers to strike against companies in which their pension funds are invested;
  • What’s good for pension funds is good for the national economy, and vice versa, as well as conversely. The sheer number of fund members and dependents, perhaps as large as the electorate as a whole, makes them a potent lobby in the formulation of government economic policy provided they cohere to articulate their best interests;
  • In law, the sole responsibility of company directors is to their companies and of pension-fund trustees to their funds. In theory, when it comes to the nomination and election of company directors by the representatives of pension funds, their roles converge for the welfare of both. In practice, this cannot happen without serious attention to the training of aspirant directors and trustees;
  • The National Development Plan relies on a social compact. Recognition of the commonality in objectives between companies and pension funds, each with their myriad stakeholders, provides the essential linkage to “radically transform” the adversarial nature of SA’s current discourse.

If there’s another way, let’s hear it. “I don’t know what new social compact we’ll have,” says Richemont chairman Johann Rupert, “but we’d better find one.” There’s no overnight wand. Yet it can be waved sooner than later by the large pension funds where the commercial and intellectual capacities lie. Funds in the public sector (ultimately underwritten by taxpayers) will need to be especially mindful that they aren’t agents of government (ultimately the ruling party).

And those in the private sector (including many allied to trade unions) will similarly need being alive to the likely, hopefully benign, reliance on financial institutions as service providers.

Not only have smaller pension funds merged into institutionally-sponsored umbrella arrangements, but these same institutions also represent many millions of other savers through collective investment schemes and assurance policies. The agglomerated voting power under their control is formidable. Application of their own self-proclaimed social principles (which stakeholders can monitor) and the legislatively-backed Financial Sector Charter (which the Charter Council will monitor) are the beacons to keep them on track. Make no mistake that shareholder activism, properly done, will require research and resource.

What the cost could be, and who’ll pay it, hasn’t yet spoiled the anticipated nirvana. A means for money allocation, perhaps, is through adjustments to the Financial Sector Charter.

Myners . . . ownerless corporates

Alternatively or additionally, larger funds have the bulk to spread the unit costs over a larger number of members.

At the end of the day, one way or another, members will pick up the tab. They, and their trustees, will then need to become much more sensitised to long-termism in investment priorities. The role of trustees will consequently elevate from functionaries to strategists.

Nice as shareholder activism sounds, it requires a reality check. It should be seen in both a philosophical and global context. Separately interviewed by Canadian magazine Listed, two of its most prominent exponents expressed their views. Some extracts that should resonate in SA:

Paul Myners, former UK city minister and author of the landmark Myners report on institutional investment:


Threads of Marxist cliché continue to pervade ANC polemic, as if they’re prerequisites for ideological consistency and credibility, reflecting how the influence of the SA Communist Party persists.

But their underlying intents can differ markedly, from the well-worn sloganeering of such officials as Jeremy Cronin to the refreshingly populist-averse analysis of deputy finance minister Mcebisi Jonas. To appreciate the difference, the latest edition of African Communist is worth a read.

The policy document of the ANC in Gauteng, on which its proposals for the activism of retirement funds is based, is similarly rich in the rhetoric of the “national democratic revolution”. Does it matter?

In the 19th century, Karl Marx argued that liberty meant the collective ownership of capital so that the rich could no longer oppress the poor. In the 21st century, pension funds embody the collective ownership of capital.

Thus, on the Marxist argument, collective owners have rights they’re entitled to use. In modern-day capitalism, pension funds have an open door to exercise them.

Changes have been more superficial than substantive. Governance codes have been rewrittenbut are largely motherhood missives that lack real enforceability. We’ve seen the emergence of an ineffective governance industry, do-gooders rather than powerful agents. Not much has changed in the field of law. The governance community must reflect critically on why reform hasn’t penetrated practice. All of us must be challenged as to what we’ve achieved.

In the last 50 years we’ve seen (corporate) ownership fragment as a consequence of the accumulation of people’s savings in large funds to provide for retirement and health. Our public companies, owned by these investment-minded funds, are now effectively ownerless corporations. In public companies we’ve seen this fragmentation accompanied by high portfolio diversification.

The result is that the fiduciary owner– large institutional investors – has interests in so many companies that it cannot possibly act as a proper fiduciary. These institutions don’t think of themselves as owners. Consequently, they are not equipped or rewarded for performing the duties of ownership.

The debate has missed the relevance of fragmented ownership on the decisionmaking behaviour of public companies. Instead of addressing fund-management companies, debate has focused within the public company on the board and management. Even here, where the debate has tried to address the governance weaknesses of ownerless corporations, it has focused more on board structure than on meaningful advancement in board practice.

We’ve created rules about board structures and designed a complex set of interlocking committees, but proof that we’ve missed the mark is (that) audit and remuneration committees have gotten the attention. The nomination committee is the most important because it determines board and committee membership and thus the behaviour that will define the company and its ownership mindset. It has been almost totally ignored by governance experts.

There has been no real appreciation of the need to redefine the nature of institutional investor responsibility. There’s been a reliance on fiduciary precedent, which doesn’t cope adequately with the complexity of multiple layers of agents. Efforts at reform in governance have really been an attempt to address the loss of direct-ownership perspective in corporate decisions at the board level, by goading boards into developing efficacious practices in lieu of what really counts – an owner at the table, or at least on the nomination committee.

Ira Millstein, a professor at the Columbia law and business schools, who chairs the eminent Millstein Center for Global Markets & Corporate Ownership:

I respect and admire the corporation and oppose anything that interferes with the productive exercise of capitalism. Corporations are the best means we’ve invented to provide value to everyone – goods and services for all of us as consumers, returns to investors, taxes to the government and jobs for people – which provide them with money to invest, pay taxes and spend in the economy.

Not only do corporations provide such value now, they hold our future welfare in their share capital– the wealth we will rely on to sustain us. Everything is at stake here. Corporations protect us, so we have to protect them. The mechanism of governance offers the best protection for us all – employees, consumers, investors and government.

Governance is a necessary defence against entrenched interests, greed, corruption, incompetence and indifference. With so much money at play in our remarkable capitalist system, there’s an open invitation for abuse. I see significant risks in our future wellbeing, a future made possible by our money that’s invested in corporations.

It is our money that powers the corporate world, and which corporate governance must protect. That money doesn’t belong to the banks or the hedge funds or the pension funds. It belongs to the people it comes from, working people.

Most appalling, the public forgets that it’s their money. Consequently, there’s little sense of ownership, stewardship and accountability because most people aren’t sufficiently aware to care. Pension funds should be the bulwark of society.

Better than food for thought, it’s food to digest.

Allan Greenblo,
Editorial Director