Edition: April / June 2016


Silence of the lambs

Pension funds have been hit hard by Nenegate. They should have
been up in arms. But where were they to be heard? Nowhere.
If they had a collective voice, it would be potent.

Yet again, SA has advanced politically by disaster. By President Zuma having reappointed Pravin Gordhan as finance minister, after his inexplicable dismissal of Nhlanhla Nene, and having heeded the exhortations of business leaders, more sensitive than Zuma to the bond markets as the world’s superpower, sounds of relief were audible.

They’re tenuous. The formidable confidence-building efforts of Gordhan in his 2016 Budget were polluted by morale-sapping indicators.

There’s been the slight on Gordhan by Zuma’s curious defence of Des van Rooyen as the best finance minister he’d appointed; the attack on Gordhan (which Zuma’s non-intervention hasn’t mitigated) by SA Revenue Services through the Hawks; the passage through parliament of the expropriation bill whose effect on property rights will be nervously gauged as it is implemented; the setback for regulatory clarity in Treasury’s suspension, after it had been legislated, of a key retirement-fund reform; and the ill-timed announcement by Barclays of its intended disinvestment from Absa.

Against these negative signals is the positivity of Gordhan’s post-Budget roadshows to the world’s most influential investors in London and New York (not, mark you, to our good friends in Moscow and Beijing). Well and good that he was accompanied by Treasury officials and corporate chieftains, but most significantly by representatives of the Cosatu, Fedusa and Nactu trade-union federations.

”Give us breathing space,” they’ve said to the world that matters. “See the united front behind SA’s promise to promote economic growth.” While it mightn’t be sufficient to stave off the rating agencies, inclusion of the unions makes Gordhan’s best shot better. It’s the infancy of an omen, on the ground where it will be tested, that a social contract between the economy’s main players might indeed be on its way.

Longer term, the disaster of Nenegate may yet turn out to have been for the good. It’s forced an awakening to counter the downwards drift.

But then, around the corner, is the run-up to local-government elections. With them will return the language of ”radical economic transformation” and the ”triple challenges” rhetoric of poverty, inequality and unemployment. Business people and vote seekers have different ideas on the most effective means to address them.

The former have the stronger arguments, as Zuma appears for the moment to have conceded, but the latter have the louder voices and are overwhelmingly in a numerical majority, to which Zuma won’t be oblivious. Similarly, within the ruling ANC, there appear to be contending factions; the one determined to stave off the calamity of a sovereign-debt downgrade to junk (thus backing Gordhan) and the other prioritised on populism (thus looking, hope beyond hope, to be reined in by you-know-whom).

Throw into the polemical mix other factors more likely to frighten than encourage investors. Opportunistic attempts to propagandise against the disturbing outbreaks of racism appear to be to be inciting it.

In the heat of the hustings, intensified by ANC confrontation against the Economic Freedom Fighters, SA will be internationally assessed. So far, EFF leader Julius Malema has said not a word about the dangers of a debt downgrade: how it will damage investor sentiment, stimulate inflation and lead in turn to higher interest rates, compounding difficulties to attack the ”triple challenges”.


Laurence Fink is chairman and chief executive of BlackRock, one of the biggest fund managers in the world. In a February letter to the heads of companies where BlackRock is invested, he put it this way:

We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation. Additionally, because boards have a critical role to play in strategic planning, we believe CEOs should explicitly affirm that their boards have reviewed those plans. BlackRock’s corporate governance team, in their engagement with companies, will be looking for this framework and board review.

Annual shareholder letters...are too often backwards-looking and don’t do enough to articulate management’s vision and plans for the future. This perspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent.

As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth. Components of long-term compensation should be linked to these metrics.

During the 2015 proxy season, he points out, 39% of the time BlackRock voted with activists in the 18 largest US proxy contests. Watch for the consequences when the Fidelities and Vanguards to start acting similarly.

They’ll loom ever larger as foreign capital withdraws and borrowing costs, for government as much as businesses, spiral upwards. There’ll be less for service delivery too, unless government seriously proceeds with privatisations and reductions in public-sector payrolls. As left-wing trade unionism burgeons, in competition with the major federations, so also do prospects for disruption. Nedlac has been too lame to avoid the divisiveness for which it was intended.

The injury caused by Zuma’s dismissal of Nene cannot soon be undone. In the extremes of global market volatility, the collapse in the exchange value of the rand exceeded that of any other emerging-market currency. With it came the spike in bond yields which meant, importantly, reduction in the value of bond portfolios that SA pension funds are obliged to hold. Thus every member of a pension fund – as well as holders of assurance products and other savers – is adversely impacted.

And not only in bonds but, during the widespread sell-off, in equities also. In rand terms, they’ve bounced back. Be thankful for the rand-hedge stocks listed on the JSE, and for the offshore exposures that pension funds are permitted.

Given the scale of the post-Nene disaster, pension funds should have been in the forefront of protest. Instead, it was left primarily to financial institutions seen more as constituents of big business than as fiduciary proxies for many millions of South Africans. It’s wrong: firstly, in that the perception belies the reality; secondly, in that the absence of a coherent organisation to speak directly for pension funds weakens their communications capacity and undermines the potency of members to assert their collective voice.


The voluntary Code for Responsible Investing in SA, designed to embrace institutional investors in the same way that the King Code is intended for companies, has been signed predominantly by fund managers. Few pension funds are amongst the signatories.

This wouldn’t be too much of a problem if pension funds (being the asset owners) were explicit in their mandates to fund managers on proxy voting; in other words, that the manager acts under instruction and not by discretion. More often than not, however, mandates leave fund managers to vote in accordance with policies of their own compilation.

It opens conflicts of interest for fund managers, especially those owned by banks and life offices. A fund manager voting against say the remuneration policy of an investee company, which is also a client for other services of the institution, can cause the institution’s loss of the client. It’s known to happen.

There’s the additional conflict of peer competition. A pension-fund client making all the right noises about the long term can still be merciless in firing a fund manager who doesn’t perform over the short.

Moreover, where fund managers’ own remuneration policies are obscure, they cannot be beyond reproach. Similarly, where there is transparency but the pay of executive directors on their own controlling boards compares generously to the compensation packages they want to vote against, their moral high ground is shaky.

There’s also the question of who’s to pay for the ESG (environment, social and governance) research that must underpin proper stakeholder engagement. Done rigorously, it can’t be cheap. Are pension funds prepared to pay directly, or do they expect it as a free add-on service for the account of the fund manager?

An alternative is to heed proxy-voting consultants. But they’re an aid, not a panacea. Their recommendations require scrutiny as well as cost. And they cannot absolve the responsibility of pension funds to make decisions of their own, or help to resolve the conflicts that fund managers nevertheless face.

The upshot is that, like King, CRISA compliance tends to be formalistic. That’s not good enough.

Who will shout for them should government attempt a raid pension funds to replenish its coffers; for instance to facilitate service deliveries that wasteful expenditures have constrained? Or in other ways to restrict market returns; perhaps by reintroduction of prescribed assets to support state projects, or to curb offshore diversification by amending Reg 28?

The silence of pension funds, when it comes to participation in debates on the national economy, is as systemic as it is unnecessary and undesirable. Substantially invested in corporate SA, the fortunes of their members are interwoven with the fortunes of their investee companies. The value of their investments is a function, partly but significantly, of the economic policies that government pursues.

For their members’ welfare, it can be argued that boards of pension funds – including the massive Government Employees Pension Fund -- have a duty to become articulate. What’s good for the economy is good for pension funds and, obviously, vice versa.

A related dimension is that pension funds, by the fact of their existence and the composition of their memberships, expose as false the catchphrase of “white monopoly capital”. Recognise this and the obsolete term must evaporate from political lexicon, to the great advantage of enlightened discourse. It’s as incongruous to talk of nationalising assets already owned by “the people”, through their pension funds, as it is to resist the privatisation of state-owned enterprises where “the people”, through their pension funds, would be substantial investors.

For the ownership by pension funds of bonds and equities overtakes the capitalism/socialism divide. Those who continue with separate compartmentalisations – and EFF leader Julius Malema isn’t alone in this – display an ideological warp too pervasive to be discounted.


In a Harvard Business Review paper entitled ‘Capitalism for the Long Term’, McKinsey & Co global managing director Dominic Barton set out to address the issue that “trust in business” had hit “historically low levels”. His belief is that this crisis, and the surge in public antagonism it unleashed, had exacerbated friction between business and society.

In a Harvard Business Review paper entitled ‘Capitalism for the Long Term’, McKinsey & Co global managing director Dominic Barton set out to address the issue that “trust in business” had hit “historically low levels”. His belief is that this crisis, and the surge in public antagonism it unleashed, had exacerbated friction between business and society.

  • Business and finance must jettison their short-term orientation and revamp incentives...to focus their organisations on the long term;
  • Executives must infuse their organisations with the perspective that serving the interests of all major stakeholders – employees, suppliers, customers, creditors, communities, the environment – is not at odds with the goal of maximising corporate value. It’s essential to achieving that goal;
  • Public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.
What’s new, he argued, was the urgency of the challenge in the choice faced by business leaders: “We can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public.”

They themselves are blockages to the stakeholder democracy that pension funds are empowered to facilitate; just as they are in a world of their own on the linkages between profits and taxation (to finance state projects) and dividends that flow from corporate sustainability on which members of pension funds (mainly comprising black members, let it be said) rely for benefits.

The flip side of this proposition is in the behaviour of corporates themselves. For all the good that they do, by philanthropy and social investments and employment, around the western world there is a discernable and deepening mistrust of capitalist icons held responsible for financial crises. While they escape penalty, the citizenry pays.


In a thoughtful publication produced last year by Old Mutual Investment Group, on the role of investors in shaping the future, group head of sustainability and engagement Jon Duncan noted that during 2014 the group had collectively voted against the remuneration policies of 68 companies and undertook a range of engagements with various managements on these issues.

Some of the engagements were productive, Duncan found, but the group is constrained by the non-binding nature of votes on remuneration policies: “We see the provision of regulation to facilitate greater shareholder ‘say on pay’ as an important step in closing the accountability loop between beneficiaries, asset owners, investors and the market.”

Some of the engagements were productive, Duncan found, but the group is constrained by the non-binding nature of votes on remuneration policies: “We see the provision of regulation to facilitate greater shareholder ‘say on pay’ as an important step in closing the accountability loop between beneficiaries, asset owners, investors and the market.”

Strong arguments are presented for reform of the system itself (see boxes). Essentially, they reflect a backlash against short-termism (favoured by managements for bonus and incentive schemes) over long-termism (in the nature of pension funds’ liabilities). Critical to resolution, being attempted in the US, is an initiative engaging the world’s largest fund managers to reduce friction between management autonomy and shareholder rights.

Attempts at reform in practices of capitalism must resonate in SA too. While business leaders bask in plaudits for their interventions with Zuma, they’ll need to prepare for vulnerability to populist attack. Immediately beckoning, following remarks of Zuma in his state of the nation address, is the proposed introduction of a national minimum wage to narrow SA’s income gap. It burns in the “triple challenges” milieu.

The adversarial stances of the business lobby and trade unions are predictable. What shareholders will have to say is not. With the governance codes at their disposal, and the interests of their members paramount, pension funds should assert their say on pay – one way or the other – for executives as much as employees. It’s a hallmark in the reform of capitalism.

Fund trustees cannot on the one hand profess adherence to social responsibility and, on the other, continue to sit on the sidelines while turbulence rages around them. They are SA’s largest and most representative collective voice, were they sufficiently organised to use it.

Business leaders and trade unionists will fight their own corners. That’s why some tasks shouldn’t be left to them alone. Pension funds can be the catalyst to tie them. And if social responsibility means anything, it’s permeated by the self-interest to coordinate an attack on the “triple challenges” where the vast army of unemployed presents SA with its biggest single threat to social stability.

Little can impact on the long-termism of pension funds more than this.

Allan Greenblo,
Editorial Director