Issue: April/June 2010
Editorials

SHAREHOLDER RIGHTS

Stand up and BEE counted

Black members of pension funds shouldn’t need to defend their claims for recognition. Yet the offensive persists. It’s full of holes and should be quickly dismissed.

Just as you cannot be a little bit pregnant, you cannot be recognised as a shareholder for some purposes but not for others. That’s the fatal flaw in the argument of Sindi Zilwa, published late last year in Business Report.

In fact and in fairness, she’s way off-beam. Her arguments are short-sighted and self-serving.

Obviously, pension funds themselves cannot be black shareholders unless all their members are black. In many instances, as with several trade-union funds, this is the case. In by far the most instances, however, fund members are of all colours. Racial profiling of members, to determine the number of blacks relative to non-blacks, is merely a matter of spadework.

Whether blacks are in the majority or minority is irrelevant. Black people aren’t lesser shareholders, or not to be acknowledged as shareholders, by virtue of their shares being held through a collective-investment vehicle such as a pension fund.

The King III report on corporate governance is explicit: “An analysis of shareholders of the major companies listed on the JSE will show that they are mostly comprised of financial institutions, both foreign and local. These institutions are ‘trustees’ for the ultimate beneficiaries, who are individuals. The ultimate beneficiaries of pension funds, which are currently amongst the largest holders of equities in South Africa, are individuals who have become the new owners of capital. This is a departure from the share capital being held by a few wealthy families, which was the norm until the end of the first half of the 20th century.”

A mindset trapped in the earlier part of the 20th century is unhelpful in the 21st. It presumes structures that no longer apply and it impedes mass empowerment of these “new owners of capital” that should apply. Look no further than King III, the Financial Sector Charter and the UN Principles for Responsible Investment. Also check the Companies Act and the amended codes of the Broad-based Black Economic Empowerment (BEE) Act. Then consider why the topic is so prickly in its practical consequences of current debate.

The reality of company ownership via pension funds renders zany the ideological tub-thumping for nationalisation of the mines. The mining houses are already owned significantly by pension funds. Why transfer ownership to the state when over 10 million members of South African pension funds are already owners? What would be the costs and the benefits of nationalisation to them?

Equally bizarre, except possibly for a grab at the cookies by a favoured few at the expense of the unvociferous many, are politically-driven pressures for black ownership of financial institutions to be increased from 10 percent to 15 percent. The first 10 per cent has long been concluded in the plethora of banks’ and assurers’ BEE transactions. The balance of five percent would be far exceeded by the extent of pension funds’ holdings, mindful that millions of black South Africans are fund members.

Shareholders’ rights are twofold. One is to receive dividends. Where a pension fund is invested in a company, those dividends flow from the company into the fund and on to the fund members. Without profits there can be no dividends, and without dividends there can be no pensions.

The representatives of pension funds, as fiduciaries of members, therefore have a direct and vested interest in the production of sustainable corporate profits. The economic interest of fund members, as shareholders irrespective of colour, is undisputed.

By ignoring these members in BEE transactions, which is the norm, it is they who pay. As soon as a company issues new shares for BEE, existing shareholders such as pension funds are diluted. The more new shares that are issued, the less the proportionate dividends that flow ultimately to the members of pension funds. Since a preponderance of these members is black, and since pension funds are often the sole depositories of their life savings, the inequity in causing them to subsidise BEE deals is screamingly paradoxical.

The other right of shareholders is to attend and vote, in person or by proxy, at company meetings. That the right is not adequately used isn’t a ground for pretending that it doesn’t exist.

True, the shares owned by pension funds are usually registered in the names of financial institutions. True, the institutions hardly have an enviable record of publicly challenging company boards. True, disclosure of institutional voting is rare.

But all this is supposed to change, not in some fairyland future but on the ground yesterday. For instance, shareholder activism is a requirement of the UN Principles to which some two dozen South African asset managers are committed. More than this is the obligation placed on pension funds by circular PF130 of the Financial Services Board.

It propounds the need for every fund to adopt an investment policy statement (IPS) where the fund’s investment philosophy is set out. This is to be communicated, in a form easily understood, to fund beneficiaries and investment managers.

Amongst other things, the IPS must address voting rights attached to the fund’s investments. It recommends that funds be “more proactive in ensuring that the voting rights are exercised effectively by the asset managers in accordance with the shareholder activism obligations”.

Further, the boards of funds “should formulate and develop appropriate voting policies and incorporate these in their mandates to the asset managers including the monitoring and reporting....Such steps should also be disclosed to the beneficiaries along with the steps taken by the board of the fund to monitor the effective performance of the same by the asset managers”.

There’s also to be disclosure of voting guidelines followed by the asset managers, and how these are aligned to policies formulated by the fund’s board, in addition to “a summary of voting records indicating the percentages voted and whether the votes cast were for or against management as well as full records in important matters”.

Yet Ms Zilwa claims that “there is no link between the institutional shareholders and the beneficiaries”. That’s patently incorrect, given the formalised structures and requirements already in place.

The money that the institutions invest is provided by, and belongs to, the beneficiaries. Corporate ownership is theirs, no matter that the shares might be registered in the names of respective institutions. Nothing can prevent them from being registered instead in the names of respective pension funds, as perhaps they should.

For it would tie the funds more directly to ownership, rather than indirectly through institutions, while the legislative provision for half of funds’ boards to be elected by fund members was introduced precisely to encourage bottom-up participation in fund governance.

Poor awareness of their rights as indirect shareholders, even as beneficiaries, allows fund members to be abused. Ms Zilwa claims that “most beneficiaries do not even know who is tasked to manage and grow their retirement savings”. If so, whose fault is it? Service providers? Trade unions? Trustees? Authorities statutorily tasked with consumer financial education? Or beneficiaries themselves?

Either way, it’s a lame pretext not to count black members of pension funds as shareholders. Denial of a reality is hardly a justification for hoarding BEE largesse. That’s downright counter-revolutionary in the advance of shareholder democracy.


Sindi Zilwa

Sindi Zilwa
THROWING DOWN THE GAUNTLET

Sindi Zilwe is to be taken seriously. She’s chief executive of the Nkosi auditing firm and a director of numerous prominent companies. Be in no doubt that she has a receptive audience in places that are politically powerful.

Last year, on November 24, Business Report published her article (with the response from TT editorial director Allan Greenblo a few days later) entitled “Don’t count pension funds as black shareholders”. The article, available on the BR website, is worth googling to read in full.

Meanwhile, some of her points in summary:

  • Some quarters still believe that, if an institutional shareholder with ultimate black beneficiaries has a substantial shareholding in a company, then the company is transformed....(But) other than the growth in their pension investments, there is no link between the institutional shareholders and the beneficiaries;
  • In the case of an institutional investor . . . ultimately the economic interest, through the growth of retirement savings, does flow to black beneficiaries. However, the voting rights exercised by these institutional investors can never be said to be representing interests of ultimate beneficiaries, let alone black beneficiaries;
  • Voting rights are the most critical in influencing companies to embrace transformation. It is impractical for the institutional investor to understand the interests of black beneficiaries;
  • A company is never transformed until the economic benefits flow to majority black South Africans through dividends, salaries and board fees. This does not happen by itself. Institutional shareholders do not have the capacity to exert this influence;
  • If a shareholder appoints a black director, that director can play a meaningful role in influencing the appointment of black executives. Transformed management will ensure the company attains respectable employment equity targets;
  • No institutional shareholder, other than the PIC, has tried to influence companies to appoint black directors. Not one institutional shareholder has ever lost its mandate because the companies it invested in have no transformed;
  • It is mischievous to suggest that progress in transformation can be measured by the ultimate number of black beneficiaries.