Issue: Oct 2010/Jan 2011

Cover Story

Money wakes up

Financial institutions, including pension funds, are being asked to cop into a code designed to police and promote ‘responsibility’ in companies where they’ve invested. They should do so with enthusiasm.

Begin by getting one thing clear. “Institutional investors” comprise not only life assurers and asset managers. The term also covers collective vehicles, most notably pension funds. In fact, the dozens of big guys are merely agents for the millions upon million of little guys who directly or indirectly entrust their money to them.

That’s why the principle of disclosure, which runs as a theme through the draft Code for Responsible Investing in SA (CRISA), is paramount. It has the potential for giving power to the little guys, the ordinary people who save for their futures.

Once the big guys are obliged to compile policies that set out their approach to ESG (environmental, social and governance) issues, then apply them by engaging with companies where they invest, then voting as shareholders at company meetings in accordance with these policies, then telling the world what and why they’ve actually done, it’s the little guys who can vote with their feet -- by moving their money.

For the choices are up to them. Individuals decide through whom they want to buy assurance policies and unit trusts. Trustees of pension funds decide on which service providers to use.
So there’s a two-edged sword, both edges for the good: at the one edge, institutions capable of applying and marketing their ESG adherence as a competitive differentiator; at the other edge, clients and potential clients for whom (other things such as longer-term performance and service being more or less equal) it will be the swing factor in deciding where to place their business.
This is at the micro level. At the macro, it invites a hefty push forward for ‘sustainability’ by the application of best-practice ESG principles; in other words, that investee companies will be around for the longer term and that they will help to promote a healthier social environment for their operations. SA as whole stands to benefit.

Besides, idealistically but also within grasp practically, it’s stakeholder democracy at work. The more that ordinary people can feel a sense of ownership and influence, the more the “us” versus “them” stereotype can begin to fracture.

And the more the threats of nationalisations can be rejected as cant. An expression of “people’s capitalism” (see First Word) extends the illogic of state ownership, whether of mines or anything else.

As the report of King III puts it: “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 among the largest holders of equities in SA, are individuals who have become the new owners of capital.”

All of which is utterly consistent with the numerous governance codes already in operation. Amongst them are King III itself, the Financial Services Board’s circular PF130, and the UN Principles for Responsible Investing signed by most of SA’s major asset managers (see article on ArcelorMittal elsewhere in this edition).

Of course, there’s another code neither voluntary nor insignificant. It’s the Financial Sector Charter. Remember it? Dusted off, re-debated hopefully reworked for promulgation before much longer, the 2005 original “recognises that shareholder activism is a critical component of continued confidence and long-term growth of the sector”.

Financial institutions undertook, and presumably will continue to undertake “within the parameters of good corporate governance”, inter alia to encourage:

  • Training and awareness programmes for all shareholders regarding the impact of indirect shareholding (e.g. via pension funds);
  • Shareholder awareness through triple-bottom line (ESG) reporting.

Fund managers and asset consultants were similarly committed. In addition, pension fund trustees “are encouraged to play an increasingly active role in promoting the objectives of the charter on their respective boards and in the entities in which they have taken significant investments”.

King III noted that its report was written from the perspective of the company board as the focal point of corporate governance. However, it argued that “a code should be drafted to specifically set out the expectations on institutional investors in ensuring that companies apply the principles and recommended practices effectively”.

Now here’s CRISA in response, awaiting analysis of comment before adoption, intending to live with King III and the rest as a “voluntary framework within which the boards of companies, institutional shareholders and ultimate beneficiaries can relate to ensure that good governance is practised”. The ultimate beneficiaries, it points out, are the underlying investors to whom institutional investors owe their duties. These include members of retirement funds as well as individuals invested in unit trusts and other savings policies.

John Oliphant

Oliphant . . . in the lead

The epicentre must be retirement funds, not only because of their exceptionally broad base but also because of their organisational structures. Members elect trustees who in turn draft investment policy statements that provide mandates to asset managers. Unlike unit trusts and life policies, retirement funds have an inbuilt process for bottom-up as well as top-down communication and accountability.

The committee in charge of drafting the code is chaired by John Oliphant, head of investments at the Government Employees Pension Fund. This is appropriate because, first, the pension fund is a client of asset managers and so signals a welcome for other pension funds to become signatories; second, the GEPF is by far the largest pension fund in SA and so lends its considerable weight including the implicit approval of government-appointed trustees on its board; third, the GEPF has taken the lead (enthusiastically developed by Oliphant) in being a founding signatory to the UN Principles; fourth, asset managers know where their bread is buttered if they want to be considered for business by the GEPF and its agent, the Public Investment Corporation, which appoints external managers to handle chunks of its R800bn portfolio.

Sunette Mulder

Mulder . . . strong support

Vice chair is Sunette Mulder, senior policy advisor at the Association for Savings & Investment SA. This is appropriate too, simply by virtue of ASISA’s membership. It’s indicative of this powerful body’s intent to move along the road that the code’s principles embrace, and to take its members with it.

The committee comprises a broadly representative spread, from life offices and asset managers to the JSE and the FSB as well as the Securities Regulation Panel. There’re also a number of independents, governance champion Mervyn King and the always-outspoken activist Theo Botha amongst them.

Like King III, the code suggests an “apply or explain” approach. Unlike the UK Stewardship Code – introduced in July and so far the only similar code anywhere in the world – CRISA requires publication by institutional investors of their voting records.

What’s more, in supplementing its principles with explicit recommendations, CRISA  emphasises that they “should include but not necessarily be limited” to these specifics. There’s still sufficient flexibility for them to be relevant to the ways that particular companies do business.

“Realise that this is a draft,” says Mulder. “Comments will be assessed and incorporated where necessary. What we want is a code that will make the SA investment industry proud.”


There are four core principles:

  • An institutional investor should incorporate ESG considerations into its investment analysis and activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries;
  • An institutional investor should demonstrate its ownership approach in its investment arrangements and activities regardless of whether active or passive investment policies are followed;
  • Institutional investors should consider a collaborative approach to, where appropriate, promote acceptance and implementation of the Principles of this Code and other applicable codes and standards applicable to institutional shareholders;
  • Institutional investors should be transparent concerning their policies, the implementation thereof and the application of this Code to enable stakeholders to make an informed assessment.

The success of the code, she adds, will depend on the extent of investors’ buy in. The greater it is, the more teeth it will have.

A solid start has been made. But as the code evolves, which it will, there are a few outstanding matters to be considered for the future. Some modest examples of where the real crunch of shareholder ownership might ultimately be played out:

  • Shareholders’ say on pay i.e. whether they should have advisory or binding votes on approval of directors’ remuneration;
  • Appointment of directors i.e. whether shareholders should be able to vote them on and off boards.

And then for a little housekeeping:

  • It’s impossible for fund managers to monitor all JSE-listed companies. In practice, analysts stick to the larger and focus on the financials. As CRISA gains traction, the need will become apparent for credible and objective research services to advise institutional investors on the exercise of proxy voting. A new business opportunity awaits (as in the US and UK) in scrutinising companies’ integrated reports, identifying the issues for engagement, and recommending how to vote on them;
  • It’s all very well for CRISA to require screeds of public disclosure. But where are stakeholders, and other investors, to find it? By accessing a multitude of websites? Perhaps thought should be given to setting up a central register at least to record, in much the same way as directors’ share dealings in their companies are shown, how investors vote at shareholder meetings.

It will be a boon the financial media, the critical partner in helping CRISA to fly.


In August the US Securities & Exchange Commission issued a landmark ruling. From next year, institutional shareholders will be able – inexpensively, using company proxy documents – to nominate a minority slate of up to three director candidates for election on corporate boards.

The SEC’s decision is seen as a major victory for institutional investors which have long sought a stronger voice on how companies operate. Investor groups will now need a 3% stake in a US corporation, that they must have held for at least three years, to submit board nominations. They can nominate as many candidates as they want provided their nominees don’t amount to more than 25% of the board.

Institutional investors, including pension funds, typically hold their shares for longer than the three-year constraint and so are expected widely to use the mechanism. Should any one of these investors hold less than 3%, they’re permitted to join forces with other investors so that they can make it across the 3% threshold.

SEC chair Mary Shapiro explained: “As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of companies they own. Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfil the responsibilities of serving as a director. The critical point is that shareholders have the ability to make that choice.”