Issue: March 2012 / May 2012
Early days for CRISA
On a wing and a prayer, it will take commitment to work. Trustees of pension funds must play their part.
Don't hold your breath just yet for a seismic shift in SA investment practice. It could happen – the operative word being could – with implementation from February of the Code for Responsible Investing in SA (CRISA).
To gain traction will require time and commitment, perhaps also the odd push especially from trustees of pension funds inclined to underestimate the bottomup pressure they can assert. It will also require constant monitoring, both by and of the signatories to this voluntary code, to ensure that it develops stronger potency than a bit of marketing tinsel for feel-good compliance.
Either it will succeed in its stated purpose "to give guidance on how the institutional investor should execute investment analysis and investment activities and exercise rights to promote sound (corporate) governance"; or it will fail by an inability of these investors, asset managers as much as pension funds themselves, to reverse the ingrained habit of chasing and being assessed predominantly on short-term share performance. This is anathema to the concept of investee companies' "sustainability" at CRISA's core.
The road to development of CRISA, the product of exhaustive consultation, is paved with good intentions. They're enshrined in five key principles (see box). That the initiative was led by the Government Employees Pension Fund and the Association of Savings & Investment SA, then supported in final form by the Financial Services Board and the JSE amongst others, complements the potential impetus.
More than this, CRISA is underpinned by a plethora of associated measures designed to enhance stakeholder empowerment. Importantly:
The new Companies Act which advances corporate responsibilities and shareholder rights. The latter include the rights of shareholders to elect directors and approve remuneration policies;
FSB circular PF 130 on good governance of pension funds. It includes the requirement that they produce statements of investment policy;
The revised Regulation 28 under the Pension Funds Act. It includes the need to consider environmental, social and governance criteria in investment decision-making. And, as the essential adjunct to CRISA, there's of course King III. It noted that shareholders of major JSE-listed companies mostly comprise financial institutions: "These institutions are ‘trustees' of 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."
Thus was laid the philosophical foundation for CRISA. The report of the King committee went further, arguing that a code be drafted specifically to set out the expectations on institutional investors in ensuring that companies effectively apply the principles and practices recommended by King III: "The code should encourage action that ensures all role players in the investment chain become aware of their duties." Thus was CRISA born.
KEY CRISA DEFINITIONS
A caution relates to the seriousness of CRISA adherence, for the code essentially follows the UN Principles for Responsible Investment of which the GEPF was a founding signatory. Although more than 20 SA asset managers and owners subsequently signed the UN PRI, the King report found, in non-compliance with its principles "few are voting and disclosing their votes" at shareholder meetings.
With a handful of notable exceptions, few still do. Clearly, this flies against the transparency and accountability to the owners of capital for which CRISA stands. However, early indications from main players are brimful with promise (TT Sept-Nov '11).
Institutions will be put to the test, and it won't always be easy:
A serious obstacle was recently encapsulated by Financial Times columnist Martin Wolf: "In the short-run, lower investment and higher prices of output boost both share prices and remuneration of management. Moreover, the short run is what management has.... Corporates are run not for long-term health, but for executive wealth, with bad results for the businesses themselves, and, still more, for the entire economy."
Still, there are ways through. They must be found. It depends on whether there's an institutional will to make CRISA work.Allan Greenblo,