Issue: December 2011 / February 2012


A better way

Shareholders, particularly pension funds, are well positioned to counter the ugly side of capitalism now under worldwide attack. Properly mobilised, they can do a much better job than governments.

Pension funds are where the money is. Because they’re the vehicles for investment of fund members’ money, they’re the channel through which societies’ economic interests converge: between capital and workers, between managers and owners.

Decades-old tensions are perpetuated in denial of this structural reality. Conversely, acceptance of it changes the ballgame. Interdependence and reciprocal relationships become fused in the promotion and sharing of prosperity. Joined at the hip are users of capital (companies) and the suppliers of it (savers). Then they’re bandaged at the head in the accountability of corporate boards (managers) to shareholders (notably pension funds).

Think about it. Particularly think about it in the current SA milieu; in the crowd-pulling disruption of the Malema campaigns, in the prominently-articulated frustrations of trade unions, and in such socially-insensitive boardroom excesses as widening pay disparities between those who decide on remuneration and those who don’t.

Think about it also in the groundswell of anti-capitalist populism that the Occupy Wall Street demonstrations have triggered internationally; loud in decreeing what they want to break, quiet in suggesting what they want to build.

Why should there be such outrage when, through pension funds as the largest depositories of individuals’ savings, the masses carry the keys to constrain the few? Either it’s because they’re unaware of their shareholder power, or because they don’t make sufficient effort to assert it. Probably both.

As one unionist asked when the penny dropped: “Are you suggesting that we’ve been going on strike against ourselves?” Precisely. They’re part-owners of the company, entitled to instruct their representatives on how to vote at company meetings and how to engage with the company at any time on any matters they wish.

They and their representatives can even collude with one another, to strengthen their collective voice, to their own selfish advantage. For, unlike directors, they aren’t company fiduciaries. By contrast, they are fiduciaries for those whose money they invest.

From Wall Street... Maude Street

From Wall Street... Maude Street

Taking to the streets is a weak alternative to active ownership. The more profit a company makes, the better for dividends to shareholders inclusive of pension funds; provided, critically, that directors are seen and overseen by shareholders to act in the company’s interests before their own; provided also that the parties’ mindsets are collaborative, not obstructive as on occasion they still are, in the deployment and distribution of limited resources. Pension funds are there for the long term; managers aren’t.

All this should be self-evident, but it isn’t. Systemically, adversarial conflicts of “us” against “them” are diminished by a healthier recognition of the inexorable mutuality.

Practicalities require that it’s underpinned by consensus on fairness which, since it’s incapable of unilateral imposition, must be derived at least from shareholder engagement. This places an onus on shareholders to engage, which means to challenge company boards and not merely for analysts to assess their trading positions.

From the corporate perspective, capitalism in its stereotypical sense is morphing. Hardly is there an SA corporate that doesn’t boast a social programme, even if it goes little further than legislated exercises in black economic empowerment. Many go much further, not only in community projects but also in the quest for “sustainability” of their own businesses that embrace the environments where they operate.

On the world stage, renowned Harvard strategist Michael Porter has referred to capitalism being reinvented by “creating shared value”. This concept undercuts the tension (real as much as perceived) between business and society, offering companies the means simultaneously to pursue profit and the common good; hence, to provide capitalism with popular legitimacy.

From the shareholder perspective too, SA has been in the driver’s seat of governance advances: from the new Companies Act, to King III, to the Code for Responsible Investing, to the Financial Services Board’s circular PF 130 that obliges boards of pension funds to define investment policy statements. Proof of these puddings will be in their eating, still too fresh from the oven to savour.

Father of the “universal owner” concept, which places institutional investors at the forefront of corporate governance, is Robert Monks. But even he seems to be tearing his hair at the dearth of shareholder engagement. Addressing the International Corporate Governance Network in September, he pointed out that virtually every observer had identified failures in corporate governance as a significant cause of the current financial crisis.

The world has tended to follow the US where, since the 1930s, regulation has viewed shareholders not as owners but as buyers and sellers of securities. Many institutions, it’s argued, have simply failed in their fiduciary duty to engage with investee companies. The institutions themselves, being representatives of beneficial shareholders on the one hand and acting for corporate clients on the other, have been conflicted into inaction by business lobbies’ resistance to the assertion of ownership rights.

Not only in SA is the capitalist system, as it’s generically described, under siege. A route through the morass is for the representatives of pension funds to lead in converting codified platitudes into shareholder practices. Either more of this or more of Malema.

Allan Greenblo,
Editorial Director