Issue: September-November 2011


Turning of the wheels

Not long ago, financial institutions were immensely powerful in company boardrooms. Now they are committed to being so again. Then they were accountable to themselves. Now they aren't.

The more things change, says a proverb, the more they remain the same. Sort of. Apply it to institutional influence over corporate SA. Think back less than a quarter century when outward investment was constrained by exchange controls and inward investment by sanctions. In those days, now seemingly far off, ownership of many major SA corporates fell primarily into the stables of three rival financial institutions. With nowhere else for the tides of contractual savings to settle, they pooled into formidable and often controlling stakes of these institutions across banking, mining and industrial conglomerates. Commercial property, too, was their domain. Old Mutual, Sanlam and Liberty ruled the roost. Reporting lines led directly to Pinelands, Bellville or Braamfontein. There weren't so much conflicts of interest as opportunities for incest. Common practice was for institutional representatives to serve as directors of companies to which they steered clients' funds.

There were no King codes; no FSB circulars on "fiduciary obligations"; no enforcement of insidertrading regulations; no worries about competition commissars. Oh, happy days at the Rand Club when money just kept pouring into the JSE hothouse. Few in the white elite seriously foresaw a change of government, let alone a government comprising socialist-leaning leaders of the revolutionary movements as they then were.

The SA economy's "commanding heights" could hardly have been more concentrated, or more vulnerable to state intervention by a government so inclined. With both Old Mutual and Sanlam operating under their own acts of parliament, which had separately established them, it was by simple amendment to these acts that a form of nationalisation might have been hugely effected.

Both were mutual societies, owned by nobody.

Since policyholders couldn't unseat directors, accountability to anybody was pure theory. There was little to have prevented a legislative decree that the state appoint a majority of their boards, swinging the say-so to you know whom.

Amongst the institutional giants in this predemutualisation era, only Liberty had shareholders. Southern Life fell under Anglo, then in family control. The rest, by comparison, were bit players.

Come the 1994 dispensation and everything burst open. Sanctions were lifted. Exchange controls were relaxed. The mutuals converted to public companies, returning to focus on core business. So too with major corporates, freed from their stables. The emphasis of institutional investment switched from maintaining non-financial empires to buying and selling shares as portfolios required.

Now, once again, the wheel turns. Constituencies within the ruling party and its alliance partners, stuck in the ethos of "commanding heights" (a Leninist catchphrase controversially claimed to find meaning in the ANC Freedom Charter), have caused nationalisation to rear its disruptive head. The chance they had in the 1990s, when their fellow ideologues entered parliament, is gone. And with it has also gone any rationalisation or justification that might then have existed.

For the institutions are moving back to activism, not as conglomerate controllers but as representatives of those whose money they manage. This is a sea change, underpinned on numerous scores both structurally and systemically. Amongst them:

  • A proliferation of asset managers in vigorous competition for clients to whom they're accountable;
  • The concept of ‘institutions' broadened from service providers to include retirement funds, individually obliged (under a Financial Services Board directive) to formulate investment policy statements that mandate their asset managers;
  • The lead of the Government Employees Pension Fund. No longer is the Public Investment Corporation a mere buyer of government bonds but an active manager of the GEPF's vast equities portfolio, moving into the forefront of stakeholder engagement and ‘developmental investment';
  • The new Companies Act which enhances the voting rights of shareholders, inclusive of indirect shareholders;
  • The revised Financial Sector Charter which sets out the parameters and targets for institutional transformation.

Most recent, and encouraging not least because of the headwinds overcome in compiling it (TT Oct '10-Jan '11), is the Code for Responsible Investing in SA. Endorsed by the Association of Savings & Investment SA, the Principal Officers Association and the Institute of Directors, CRISA's principles are supported by the Financial Services Board and the JSE (see box). A fresh dynamic in democratisation has been sparked.

"Some of the concerns that the CRISA process and debates post the (financial) crisis raises are about how beneficiaries' voices are heard effectively," Finance Minister Pravin Gordhan told his audience at the official launch of CRISA in July.

"Traditional notions of accountability, transparency and reporting are not always adequate to ensure that savers, pensioners and investors can clearly understand where their money is going, how it is spent, how returns are derived and what the impact of business models we are working with have on other parts of society.


Key principles of the Code for Responsible Investing in SA bind institutional investors to:

  • Incorporate sustainability considerations -- including environmental, social and governance (ESG) -- into their investment analyses and activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries;
  • Demonstrate their acceptance of ownership responsibilities in their investment arrangements and activities;
  • Where appropriate, consider a collaborative approach to promote acceptance and implementation of the CRISA principles and other codes and standards applicable to institutional investors;
  • Recognise the circumstances and relationships that hold the potential for conflicts of interest and proactively manage these when they occur;
  • Be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments.

The code applies to institutional investors as asset owners (e.g. pension funds and insurance companies), and service providers (e.g. asset managers and fund consultants). Reporting by them on CRISA's application becomes effective from February next year.

Getting these right is to move for an ending the stereotypical discord between "them" and "us", as between managers and workers; similarly with the inherent tension between short-term profit and long-term sustainability; down to the vexed topic, highlighted by Gordhan, of the sustainability cost in huge pay disparities: "It will be useful if, in the same way that proactive steps were taken to develop CRISA, a proactive approach was taken to considering a different framework within which executive remuneration and pay disparities are dealt with."

All stakeholders, direct and indirect shareholders, are in it together. They now have the capacity, and the responsibility, to engage with companies by means other than shouting and striking. They have voice as stakeholders and votes as shareholders.

Corporate ownership by financial institutions, managing some R3 trillion worth of retirement funds (apart from life policies and other savings vehicles), remains pervasive. The authority they can assert, once again into boardrooms, remains potent. But things have not otherwise remained the same. A big difference between the past and the present is, in effect, the exercise of ownership for the social good.

It's recognised that the institutions are fiduciary owners for the ultimate beneficiaries whose money they invest. They're available to be guided from the bottom up, bound to be transparent and accountable for the investment policies they formulate, and to practise the groundbreaking ‘sustainability' commitments they've taken upon themselves.

Codes and charters are all very well. But they'll only have optimal impact if the ultimate beneficiaries, represented by trustees of retirement funds, are partners in implementation. They're the private sector's bulwark.

Allan Greenblo,
Editorial Director