Issue: Oct 2010/Jan 2011
Editorials

FUNDS GOVERNANCE

On the subject of ethics...

Who is accountable for taking the moral high ground? This question was put to a workshop at the Institute of Retirement Funds annual conference. TT editorial director Allan Greenblo attempted an answer.

We clearly have a problem. It’s demonstrated by the need for us to hold this workshop at all.

Why should we have this problem, and must actually debate who’s accountable for taking the moral high ground in the governance of retirement funds, when we already have the FSB’s circular PF130 that comprehensively answers the question posed? In fact, so comprehensive is PF130 that (with annexures) it runs to 38 pages. This is three times the length of the Bill of Rights in the SA Constitution.

Perhaps the problem arises because PF130 is taken in practice to reflect no more than aspirational guidelines, although its principles are underpinned by statutory and common law. Or perhaps it falls down on implementation, through defective oversight or weak commitment, although the duty of retirement-fund trustees to act with integrity, good faith and skill in their funds’ best interests is glaringly self-evident as a matter of common sense.

The more we codify, the more scope there is for formalistic compliance and lackadaisical interpretation. But codify we must because that is the way of the modern world, especially the financial world where regulation is supposedly a synonym for protection. Without codes of conduct, as in PF130, there’d be a paucity of beacons because internet-facilitated globalisation has undermined the norms of individual societies that once defined their inter-personal relationships and bound their ethical cohesion.

In his Crisis of Global Capitalism, George Soros noted that when he began his career in the 1950s, business depended on the slow building of relationships. Now business has become “transactional”, a series of one-off encounters, contract by contract, deal by deal, which depend not on trust but on the presence of lawyers.

President Zuma

Zuma...selective inquiry

A similar point is made in the recently-published biography of iconic UK financier Sigmund Warburg. He would have been aghast, biographer Niall Ferguson suggests, at clients being turned into “counterparties” and at investment banks sitting on both sides of a transaction in the manner that Goldman Sachs has defended as a business model.

On the one hand, depersonalisation of financial transactions has caused profound change; practices previously considered unethical might these days be considered ethical, or at least ethics-neutral. As we’ve seen in this recession induced by irresponsibility of the securities industry, when things go wrong it’s the guiltless who pick up the tab and the guilty who pick up the bonuses. Socialisation of loss and privatisation of profit is a widely-practised expedient, for all its venality, yet goes by what’s quaintly described as “moral hazard”.

On the other hand, and partly in reaction, a new morality is stimulated in the momentum for stakeholder engagement. Its centrepiece is transparent and accountable governance. No longer is the business of business exclusively to maximise profit. Sustainability, which embraces social and environmental impacts, has been prioritised by investors (especially retirement-fund investors who dominate corporate ownership) in evaluating the longer-term prospects and ethical performance of companies competing for capital.

And so we come to SA where there’s scant consolation in sharing the recessionary consequences of worldwide financial turmoil. It’s unfortunate but telling that we need to dissect the meaning of ethics, and the accountability for them, in the retirement-fund industry. The exercise implies the devastating presumption that we’re confused in an intuitive differentiation between right and wrong, surely the most fundamental prerequisite for trusteeship.

SA isn’t unique, but we do have nitty-gritty within our own remit to address. It begins with a corruption so rampant that our social norms aren’t a product of consensus but a source of conflict.

To get rich quickly -- without risk, without effort, without creating value -- is virtually institutionalised from government tendering processes gone amiss to what Mamphela Ramphele refers to as “unintended consequences” of empowerment transactions. They aggravate class inequalities. Witness the recent public-sector strike and the ongoing protests of the poor at service-delivery hopes unfulfilled.

Our fledgling democracy is developing characteristics of a mature plutocracy. Those within the charmed circle might have a view of ethics quite different from those outside it.

Not surprisingly, then, our moral compass is skewed by a bewildering array of self interest. Not surprisingly, either, do we need to hold debates about it. What will be an exceedingly pleasant surprise, however, is if these discussions get us anywhere closer unanimity on the ethics capable of broad acceptance when the politics of avarice and entitlement collide with frustration and deprivation.

Jan Mahlangu

Mahlangu...pall over IRF councillor

Retirement funds operate within a societal context. Is it reasonable to expect that they aren’t impacted by its corruptions, that their management standards are higher than those of say the SABC? Yes, because responsibility of fund trustees is accentuated. They are the custodians of the bulk of people’s savings and consequently the bulk of the nation’s capital.

If state bureaucracies play fast and loose with taxpayers’ money – so much so that President Zuma has ordered an investigation, without assistance from the media, into how it disappears between certain cracks – trustees of retirement funds are beholden to apply “utmost good faith” on pain of personal liability. Neither good faith nor personal liability attach similarly to politicians.

Again and again, reference is made to trustees’ “onerous fiduciary duties”. The complexity of the phrase is itself sufficient to intimidate a sane person from becoming a trustee. In simpler language, a person shouldn’t qualify as a trustee if he cannot comprehend the difference between honesty and dishonesty, and lacks the integrity to hold other people’s money as dear as his own.

But this is theory. The trouble is that ethics and competence aren’t requirements for trusteeship. Half of a fund’s board is elected by fund members, so popularity is the dominant criterion. The other half is appointed by the employer, often as an extension of the employees’ workplace functions.

Both categories are equally vulnerable to interest conflicts: the former to promote the interests of those who elected him; the latter not to make career-limiting decisions. To the extent that either succumbs, they flout the legal requirement to act independently in the best interests of the fund and to account to the fund alone.

It’s not always that easy, as some courageous trade-union trustees have discovered. They had to obtain a High Court ruling to endorse their independence and accountability to their fund, not to a union leadership.

The troubles of ethics and accountability are compounded:

First, despite the High Court judgment, the subject of ownership and control of fund assets is politically fraught. During the 1980s, unions spearheaded the large-scale switchover from defined-benefit to defined-contribution structures. The reason was to gain control over their members’ savings as an investment weapon in the anti-apartheid struggle.

The struggle continues. Resolutions tabled at the most recent Cosatu annual congress indicate that at least some affiliates remain of the view that it is money to be used for their purposes, however ethical or otherwise these might be. The existing dispensation, of 50/50 member/employer board constitution and independent accountability, is apparently intolerable because it disallows “their” control over “their” members’ money.

Moreover, a discussion document on economic transformation was before September’s meeting of the ANC national general council. It proposes “active worker control of retirement-fund investments”. Implications are perhaps more sinister than savoury.

A second problem, also relating to the 50/50 dispensation, is indicated in surveys showing that relatively few fund members bother to vote in trustee elections. Even fewer can identify the trustees of their fund.

“Accountability” is mocked when, in practice, it is exclusively top-down; for example, when trustees’ communication with beneficiaries is confined to annual benefit statements, omitting guidance on financial planning and preservation, let alone the noble intentions enshrined in PF130 for communicating the investment policy statement.

Bottom-up communication, from the level of fund boards to fund managers and consultants, is impeded too. Here the fault lies with trustees unwilling or unable properly to monitor their service providers. A quantum leap in trustee education and conscientiousness is required to reverse the trend, as Lord Myners put it in his landmark report on UK pension funds, for trustees to be “led by the nose”.

Hope springs eternal. The consolidation of smaller funds into much larger units, including umbrella funds, invites higher levels of professionalism. Also on the horizon is an institutional investors’ code that, amongst other things, will guide funds and managers on their accountability for stakeholder engagement.

A third problem concerns gifts. They must be disclosed, but the exercise is pretty pointless when recipients of gifts are making the disclosures to one another. One can climb a moral high horse, and express outrage until blue in the face about their potential to corrupt, but it advances the debate not an inch. There’s nothing wrong with gifts to trustees, any more than there’s taxman-sanctioned business entertainment.

The point about gifts – whether in the form of soccer tickets or plane fares ostensibly to attend seminars – has ethical dimension in their scale, frequency and intent. But who’s to judge what’s likely to compromise a trustee’s independence, to swing business in favour of one service provider against another, or for trustees to engage more services at fund expense than might other otherwise be the case?

It’s surely not beyond human ingenuity for:

  • Funds to place a cap on the value of gifts and other perks that may be received;
  • Easily-accessible public disclosure of them on web and mobi sites i.e. by service providers (givers) and fund trustees (receivers). All service providers have websites, as do many funds. Few fund members don’t have mobile phones.

In the oft-quoted dictum of US Supreme Court Justice Louis Brandeis, “Sunshine is the best of disinfectants”. So let the sunshine in, through the ubiquitous and cost-effective means that technology allows.

Take a hard example of where the sun hasn’t shone. It’s the recently-publicised instance of Jan Mahlangu, an IRF councillor and senior Cosatu retirement-funds official who admitted to having received a motor car as a gift from a retirement-fund consultancy. Broad lessons can be drawn.

If bribery is alleged, he and the service provider should be charged. If it wasn’t, they should be exonerated from suspicion. If the worst of what happened was non-disclosure, which isn’t an offence, it motivates the need for non-disclosure to be made an offence. The former national commissioner of police faces 15 years in prison for having accepted, but not declared, an amount of money much less than the value of a new Audi.

There’s a pall to be cleared over one of the most outstanding retirement-industry figures. Four months on, nobody’s stood up to clear it. Nobody; not even the IRF.

When push comes to shove, and principle is sought in practice, a rather depressing answer is offered to the question that this workshop has posed.