How Abel Sithole plans to keep politicians’ sticky fingers off the PIC

It’s the most powerful fund in Africa, with R2.6-trillion in firepower. Yet in the aftermath of revelations that it used this considerable ammunition to dispense patronage, has a chastened Public Investment Corp (PIC) become too nervous to flex its muscles?

In a wide-ranging interview with the FM, PIC CEO Abel Sithole rejects the view that the PIC has become too timid and inward-looking.

“People may want to see me in the media — this desire for a cult of personality — but I want to embed things that outlive any particular personality,” he says. “Maybe it’s a personal thing, but I don’t see my role as making me the public face of the PIC. My role is to institutionalise processes that will outlive me.”

Perhaps. But as the head of a 112-year-old institution, overseeing the pension savings of 1.2-million civil servants, as well as R135bn held in the Unemployment Insurance Fund (UIF), it would be good to have some public reassurance that the PIC is on the mend after the biggest crisis in its history.

The PIC, after all, has been badly scarred by epic revelations that its considerable resources had been roundly abused, at the behest of the politically well-connected.

Examples abound: a doomed R5.5bn investment in Erin Energy, owned by a friend of former president Jacob Zuma; a R4.3bn investment in Iqbal Survé’s Ayo Technologies (which has since lost 98% of its value); and an inexplicable R9.3bn investment in fraud-ridden retailer Steinhoff, on behalf of former unionist Jayendra Naidoo, in 2016.

The gory details were tabulated by judge Lex Mpati, appointed to get to the bottom of how and where the PIC had gone wrong. After eight months of alarming testimony, Mpati concluded in his 2020 report that the PIC had been “used as a bailout fund for connected insiders and also a bailout fund for bad investments”.

Mpati held nothing back: there had been “substantial impropriety” in investments under former CEO Dan Matjila, there was “poor and ineffective governance”, “contraventions of PIC policy”, and a “disregard for due process”. Even in its R123bn portfolio of unlisted investments, 41% were “on watch, underperforming or in distress and not servicing its loans” by 2018.

It stripped bare a fund manager that either didn’t know what it was doing, or one hijacked by nefarious interests. Sadly, there was evidence of both.

In 2019, with half the PIC’s executive committee suspended, nine directors quit, telling then finance minister Tito Mboweni that the allegations “have been unbearable to us as individuals and have undoubtedly had a negative impact on our professional integrity”.

It was to Sithole — unflappable, serene, and evidently impervious to the media spotlight — that President Cyril Ramaphosa turned to fill the vacuum in May 2020.

His pedigree was blue chip: stints at Southern Life, CEO of Eskom’s pension and provident fund and of Metropolitan, followed by five years at the helm of the Government Employees Pension Fund (GEPF), the PIC’s largest client.

Sithole tells the FM that of Mpati’s 308 recommendations, “about 90%” have been implemented.

So what hasn’t been done? He says only those that require others to act — where the police must investigate, for example, or where the government is meant to overhaul the PIC’s board — remain unfinished. “Those are still ongoing, but no longer in the PIC’s control,” he says.

Iraj Abedian, CEO of Pan-African Investment & Research Services, says Sithole has done a good job of stabilising the PIC. But he worries that the “structural issues” haven’t gone away, which make the institution vulnerable to “some kind of state capture” again.

“The performance of the PIC is not benchmarked to anybody,” Abedian tells the FM. “They are the biggest fund manager in the country and the GEPF has basically given them a monopoly, so that leaves a deficit in accountability. That is not healthy for pensioners.”

It’s a vital point, as the PIC hasn’t exactly shot the lights out. Its annual report last week revealed that while its investments on the JSE grew 7.9% last year (trumping the JSE’s all share index), its huge portfolio of unlisted assets fell short due to “impairments of nonperforming assets”, many of which pre-dated Sithole’s arrival, as did its property portfolio, which was 2.4% below the benchmark.

Overall, its assets grew 2% to R2.6-trillion (the bulk of that being the GEPF portfolio, which was up 1.1% to R2.3-trillion).

Abedian says in a normal world, the GEPF would allocate its funds to whichever fund manager performs best. But there’s been no sense  that the GEPF would ever fire the PIC. “As long as there is monopoly, there is room for political abuse,” he says.

Ironically, the closest the PIC came to losing the business was when Sithole himself headed the GEPF and, as the dubious deals hit the headlines, he reminded everyone that “legislatively, we are actually not bound to use the PIC”.

A ‘sitting duck’

Sithole may be a stickler for governance and process, but that doesn’t exactly hit the right notes in political circles.

In particular, this makes him an obstacle for some in the ANC who see the PIC’s R2.6-trillion as a war chest that could be harnessed to fill the hole in a fiscus straining to finance development state ambitions, such as National Health Insurance and a basic income grant.

“There are some people who still think the PIC is looking after government money, I’m quite sure about that,” Sithole tells the FM. “My sense is that a chunk of government officials, and even the public, think the PIC manages government money, and factually that’s just not true.”

The truth, he says, is that the PIC manages workers’ savings. “Yes, the PIC is government-owned, but these are not government funds,” he says.

The implication is that funds managed by the PIC can’t be used to bail out failed state-owned enterprises (SOEs), or invest in fly-by-night infrastructure projects. “Our fiduciary responsibility is to our clients, to give them the best possible returns,” he says.

It is precisely this misconception, and the government interference it attracts, which makes the PIC so different to private fund managers such as Allan Gray or Coronation.

As Sithole puts it: “I’ve run asset managers in the private sector, but it’s a different way of doing things here, because we have the government as a shareholder. In the private sector, management probably has more leeway in the way they run the entity.”

But, he says, it’s a part of the job he accepts.

“I know I’m a state-owned entity and I know my chair is the deputy finance minister. And I know there are certain consequences to that — for instance, next year, there will be elections, and there may be a change in administration and my chair might change. It’s just a fact of life.”

Certainly, it will alarm some that, in her audit report on the PIC’s accounts, auditor-general Tsakani Maluleke flagged the fact that the PIC’s investment activities didn’t all comply with the rules on doing business with politicians.

“In some instances, the risk relating to politically exposed persons (PEPs) identified was not assessed to ensure that the necessary enhanced due diligence and enhanced monitoring processes are applied to the high-risk PEPs,” she wrote. (The PIC doesn’t agree with that finding, but it has to accept it.)

But what makes the PIC especially vulnerable to political meddling is that the deputy finance minister automatically chairs the PIC’s board. Which is fine in a benign environment where someone of integrity such as Mcebisi Jonas is that chair; less so in a hypothetical future with a more malevolent administration.

It should never have been like this. In his recommendations, Mpati said: “The chair needs to be independent ... and the deputy finance minister should not be the PIC chair.”

And, he said, “the PIC, not the National Treasury, should source new directors ... and the appointment of ‘political appointees’ should be avoided.”

Yet the politicians opted to ignore that.

In his testimony to that commission, Matjila recounted instances where people had used political connections to try to score PIC funding. In one case, he describes how one person put pressure on the minister “to fire me”.

Dion George, the DA’s spokesperson on finance, fears that the PIC may be compromised again. “It’s already in danger of becoming a new conduit for corruption,” he tells the FM.

George knows the PIC intimately — he was first seconded to parliament 15 years ago, in 2008, and remains on the standing committee on finance, to which the PIC reports.

In 2008, George says, the PIC was strong, but it degenerated to the extent that the fault lines revealed by the Mpati commission were hardly surprising.

“The PIC manages trillions, so it’s easy to dispense patronage under the guise of offering ‘loans’ to companies which you never get back. As it is, there needs to be far greater transparency around its criteria for allocating loans, as well as the terms of those loans and returns,” he says.

It’s a point made too by Theo Botha, a former shareholder activist who is now an executive at the chemicals company Spanjaard.

“For crooks, the PIC represents low-hanging fruit, especially since there’s nothing left to steal at companies like Eskom and Transnet. It’s just a matter of time before they turn to the PIC. To prevent this, you need a fundamental change in its governance,” he says.

To mitigate this, says Botha, you’d need to fix the legislation (which has only just been passed) to remove the deputy finance minister from the position of chair. And you’d need to ensure the boards of the PIC and the GEPF aren’t appointed by politicians. In other words, it should be structured as Mpati suggested.

George says this isn’t an academic concern, given an environment where the ANC has made no secret of its policy of deploying cadres to state-owned companies.

“If these boards are populated by professionals with integrity, that’s fine. But if they’re populated by people picked from a politically charged pool, without expertise in governance, you’re opening the door to problems,” he says.

Too timid

But if Sithole’s calm-under-fire approach has stabilised the institution, critics claim it has caused the organisation to retreat into its shell, rather than using its bully pulpit to effect change.

“As the institution with the largest presence on the JSE, managing retirement funds for the future retirement of hundreds of thousands of beneficiaries, they should be firmly focused on long-term sustainability, but they’re not using their power as they could,” says Tracey Davies, executive director at nonprofit Just Share.

“They could be having a major influence on companies’ approach to climate risk and inequality, for example in relation to gender pay gaps and paying a living wage. But you never hear their voice on these crucial issues.”

An asset manager, speaking to the FM on condition of anonymity, as he handles some PIC funds, echoes this. “At the height of the Mpati commission, it was like the PIC froze. No-one wanted to do anything, in case they got smeared. But with their new governance process, it’s getting better,” he says.

At the time, the PIC was derisively referred to as Hollywood, not just because of the obscene amounts of cash sluicing through the organisation, but because it seemed that everyone was in an acting position.

Sithole, however, rejects the view that the PIC is too timid. He says it is “highly engaged” with the companies in which it invests; it just doesn’t do this publicly.

“We’re not standing there with a megaphone in the public domain shouting, but it doesn’t mean there’s no engagement. We engage often on issues of governance to ensure we get the returns we need. We have a whole ESG team dedicated just to that,” he says.

But surely sometimes it’s necessary to use the megaphone? After all, if large institutions like the PIC aren’t flagging governance issues publicly, how will the man on the street know what’s wrong? Isn’t that a recipe for far more Steinhoff-style disasters?

“If it’s called for, sure,” he responds. “But the flip side of that is that when the PIC speaks, some investors simply take our viewpoint without interrogating it. You need to have multiple voices, because we don’t have all the answers.”

It’s a pretty weak argument in favour of shying away from the public realm, say his critics.

Still, Sithole says the PIC has put a “significant effort” into releasing its voting records at AGMs, so the public can see what’s happening.

Zwelakhe Mnguni, portfolio manager at Benguela Global Fund Managers, who regards himself as a shareholder activist, doesn’t agree that the PIC has become more timid since the Mpati commission.

“They are very active in a lot of matters, but they no longer approach the matters as loudly as they did in the era of [former PIC CEO] Brian Molefe and [former GEPF CEO] John Oliphant,” he says.

Rather, says Mnguni, the PIC has adopted a policy akin to “quiet diplomacy” — “they’re driving change, but doing it a lot less publicly and vocally”.

Inconsistent activists

But if the PIC has a team of ESG specialists, how is it that the institution has large stakes in some of the largest polluters in the country? Think Sasol (17.7%), coal producer Thungela (14%) and a heap of bonds issued by Eskom.

Sithole says this is because “our approach is not exclusion, but engagement”.

Rather than simply selling out of those companies, he says the PIC “engages and seeks improvement over time”. But, he adds: “This doesn’t mean we condone practices that are contrary to ESG principles.”

Just Share’s Davies says this looks like a cop-out.

“If you’re an organisation that claims to take ESG issues seriously, it’s hugely incumbent on you to engage with the companies in which you invest about how they’re managing the climate transition,” she says.

This isn’t just about bowing to public pressure; as Davies says, if you’re managing money, and that investment could end up stranded in out-of-favour assets like fossil fuel companies, it’s a real economic risk.

She says the PIC, as one of the largest investors in retailers such as Shoprite and Woolworths, also has a responsibility to push those firms towards reducing their gaping wage gap.

“When you’ve got firms that aren’t paying a living wage to thousands of staff, you’d think that’s an obvious place for the PIC to get involved. This is especially since this will perpetuate cycles of inequality in a country on which your future depends,” she says.

Which isn’t to say the PIC has been entirely silent — it’s just that its attention is inconsistent and seemingly based on personality, rather than principle.

Take the case of Absa, in which the PIC owns 5%. After the short-lived tenure of Daniel Mminele, Absa appointed Arrie Rautenbach, a white male, as CEO in April 2022.

The PIC was furious, expressing its “downright disappointment” that Absa had failed to “publicly demonstrate its commitment to purposefully transform the banking group”.

Quite why the PIC chose to speak then, rather than in response to any of the boards laid low by accounting frauds in recent years, is anyone’s guess. But it highlighted a disturbing inconsistency.

Says Davies: “Occasionally, you hear of them voting against remuneration reports, or taking a stand against some CEO based on transformation imperatives. But these are few and far between.”

Botha echoes this sentiment.

“The PIC, and the GEPF, could be a shining light of governance for the whole economy. As an asset manager, it could attend AGMs and hold companies to account. They could speak for all shareholders on the JSE — but they don’t. They’re nowhere,” he says.

Having a quiet word behind closed doors does the wider market a disservice, he says.

“South Africa needs to have asset owners holding people to account publicly, and raising issues so we know where the problems are. Yet they’re too scared. What the country lacks is accountability — and the PIC is better positioned than anyone,” he says.

Botha points to Steinhoff, in which the PIC owned 9% (as well as the 2.7% it bought for Naidoo). After its 2017 collapse, he says the PIC ought to have immediately brought in the lawyers, and dragged the entire board (and former CEO Markus Jooste) to court.

“Had they done that, perhaps we’d have seen some action against Jooste. Instead what do we have? Nothing,” he says.

Investing in Eskom

The question over how vulnerable the PIC is to political meddling is pertinent, given how every bankrupt SOE is now scrambling for funding.

The unusual position of the PIC — on the one hand, it’s an asset manager, answerable to regulators such as the Financial Sector Conduct Authority (FSCA); on the other, it’s an SOE expected to promote the country’s “development objectives” — leaves it exposed.

But how legitimate is it to invest in Eskom, given that the money to do this comes directly from the savings of civil servants? Isn’t it reckless to use pensioners’ savings to buy into companies that are on the skids?

Sithole responds that the PIC isn’t taking inordinate risks by buying the bonds of SOEs such as Eskom.

“First, our current exposure dated back to when most of these state-owned enterprises were actually sitting with good credit ratings, higher than they are now. And, except for the hiccup that we had with the Land Bank, these entities have not defaulted on their debt,” he says.

That was some hiccup. When the Land Bank defaulted on a R50bn debt repayment in April 2020 — the first default by an SOE since 1994 — it triggered a cross-default on all its debt, affecting 60 global funders, including the PIC. (The Land Bank says it’s close to “curing the default”.)

Sithole admits there is no guarantee that other SOEs won’t default, but says that right now, they’re “living up to their obligations”.

So, is the PIC being leant on to provide more cash to otherwise uninvestable SOEs?

“No, we’re not. But the interesting thing is, South African bonds are incredibly attractive right now, since you’re getting a 12% yield, way ahead of inflation which is 5.4%. So, would we consider taking up more? If there is a government guarantee, definitely we would: you’d be getting a sovereign credit, at a high yield, for almost no risk,” he says.

And, he adds, the PIC doesn’t lower its governance standards when lending to the likes of Transnet or Eskom.

“We insist on proper governance. We want to get our capital back, and we want our returns, so for that to happen, it’s a simple thing — those organisations must be able to deliver their services,” he says.

Politically exposed

Still, however you spin it, there is no small degree of political pressure on the PIC.

Higher education minister Blade Nzimande, speaking as the general secretary of the SACP, said: “The PIC has R3-trillion, but who is benefiting from that? ... Take R1-trillion and invest it in the productive economy — hence we want prescribed assets that will see money in the private sector being invested for economic growth.”

It illustrates that Nzimande (and the ANC’s alliance partner, the SACP) doesn’t get that this money represents the private savings of civil servants.

Nor does it make matters easier that the PIC board, chaired by deputy finance minister David Masondo, doesn’t seem to have Sithole’s back.

This follows a bizarre incident in April, where the board issued a public “rebuke” of Sithole for the abysmal handling of a “settlement” reached with Survé’s Ayo.

In that case, the PIC sued Ayo in the Western Cape High Court to recover the R4.3bn it invested for 29% of the company in 2017, arguing that this was based on “misrepresentations”.

In April, however, the PIC abruptly “settled” the case, saying the terms would remain “confidential”. Within hours, it emerged that the PIC had got back only a fraction of what it had put in: Ayo would buy back R619m of its shares, while the PIC would retain 25% of Ayo, worth just R51m today.

Masondo’s board said it was deeply concerned that Sithole’s team had neglected “to timeously inform the board of its intention to settle”.

An official rebuke of a CEO by a board is unusual in the extreme. Does this suggest tensions between him and the board?

Sithole responds: “Perhaps the right person to ask would be the board. Look, the board has a role, and management has a role, but the sensitivity here is that we’ve just been through the Mpati commission, where governance wasn’t followed. So, the board chose to say publicly that if processes aren’t followed again, this won’t be tolerated.”

He says that to him, this signified nothing beyond the “usual tension” between a CEO and a board.

Yet insiders tell the FM that the PIC board isn’t entirely happy with Sithole. As one director says: “He is seen as too laid back, he doesn’t rush ... he isn’t corrupt, he knows the industry and has a wealth of experience, but maybe this is too big for him.”

Or perhaps Sithole is precisely the man for the moment — a time when the PIC needs to reassert its governance credentials, after a fraught few years when it seemed to have been run with the sort of checks and balances you’d expect of the Nkandla tuck shop.

A slew of new positions — including a head of ethics — is mandated to ensure dubious deals don’t get through again.

“Future investments will hopefully be better,” he says. “It doesn’t guarantee that all the decisions will be correct, because there’s no such thing. But at least if things don’t go the right way, it won’t be because something funny happened in the investment process.”

Sithole says his focus right now is on “ensuring there won’t be an Mpati commission 2”. Perhaps then, the PIC can reassert its moral authority. And, fingers crossed, it can find its voice again too.

Once were warriors

January 2007 might have marked the high point in shareholder activism by the Public Investment Corp (PIC). Or the low point, if you happened to be an executive director of tired old industrial conglomerate Barloworld.

The occasion was Barloworld’s AGM, when dramatic changes were made by one of the country’s oldest industrial groups — perhaps too old to have noticed the changes happening earlier in the boardrooms of its blue-chip peers.

The group was 105 years old by the time it announced, at that AGM, the appointment of its first black executive director. And it said its very long-serving chair Warren Clewlow wouldn’t be standing for re-election after all. Dumisa Ntsebeza was appointed interim chair instead. There would soon be an extensive unbundling of assets and the introduction of a new empowerment partner, the board told shareholders.

At the time, the PIC was Barloworld’s largest shareholder with 17.6%. So, when PIC head Brian Molefe announced days before the AGM that the conglomerate had to do something about its lack of transformation or suffer dire consequences, the slothful old board moved swiftly. In the end, they averted a major public showdown.

The Barloworld board had evidently paid no heed to one of the most dramatic developments to hit the corporate community in decades: the release of the PIC’s proxy voting policy in 2005. This was the first time anyone outside the National Treasury saw the principles that determined how the country’s largest fund manager would vote at shareholder meetings. As anyone who read the document could tell, empowerment was going to be a critical element.

Soon, there was even more good news for governance analysts: the PIC would release quarterly details of how it voted at AGMs.

This revealed the issues that vexed it: overly generous executive incentives, directors not deemed independent and auditors who hung around too long.

The PIC’s latest proxy voting results reveal that the same three issues occupy it today.

William Frater, former executive of governance specialist Frater Asset Management, now Element Investment Managers, tells the FM it’s hard to overstate how significant the PIC’s proxy policy was in 2005. “Because they were such a large player, they were able to force asset managers to start addressing governance issues the PIC considered important.”

The PIC wasn’t only calling asset managers to account for the way they voted, but was nudging them on how they should vote.

And, because many asset managers had slices of PIC funds — and didn’t want to lose them — all the major fund managers followed suit, drawing up their own proxy policies and making them public.

Frater, who helped with the PIC research in the early 2000s, says it exerted an extraordinary influence on disciplining the market. “Fund managers didn’t even have a legal obligation to vote,” says Frater. But that wasn’t going to stop the powerful and dogmatic PIC.

Sixteen years on from the Barloworld drama PIC CEO Abel Sithole says he has no intention of “using a public megaphone” to engage with investee companies.

One asset manager tells the FM the chief reason the PIC may have opted for a quieter approach is that it’s tricky to call out asset managers or investee companies for poor corporate governance when you’re mired in controversy yourself.

“Nevertheless, it’s a disappointment they’re so wary of a public profile that they don’t engage on any policy issues,” says the asset manager. The PIC, notably, was nowhere to be seen during last week’s public hearings on the Companies Amendment Bill, and it has studiously avoided commenting on companies that refuse to hold in-person AGMs. “That could be because the PIC is inclined not to attend AGMs,” says the asset manager.

And its most recent proxy voting policy contains little evidence of how more urgent climate issues have become since 2005.

It seems like an immense missed opportunity. Theo Botha, who kept the shareholder activism flag flying for decades, believes holding companies to account should be a public exercise. “Activism is about exposing non-adherence to good governance,” he tells the FM. “The country is dogged by corruption and the PIC should be publicly supporting the companies that are good and criticising the bad.”