Between September 2017 and March 2019, four of the country’s most powerful fund managers spent billions of rands of their clients’ money buying up shares in sugar giant Tongaat Hulett.
Then in March, Tongaat confirmed there had been a series of "accounting irregularities" and those shares, already at a low, shed nearly half their value again. Eventually, in June, Tongaat’s shares were suspended from trading on the JSE.
It has since emerged, in a forensic report by PwC, that there was a litany of "undesirable accounting practices" and "governance failures", committed by 10 former executives, which caused Tongaat’s profits to be overstated.
Yet despite these four asset managers having effectively been duped, not one of them bothered pitching up at Tongaat’s AGM last week to ask questions.
And it seems there are no immediate plans to go after the group’s external auditors, Deloitte.
(Three of the four – Allan Gray, PSG and Investec – responded to a request for comment. The PIC, the single largest shareholder, did not.)
The absence of all but one shareholder was even more surprising given that the AGM was the first since the one held in August 2018, when the slow unwinding of the 127-year-old company became apparent. It was also the first opportunity for shareholders to engage publicly with an entirely new board.
Shareholder activist Chris Logan, CEO of Opportune Investments, was the only shareholder representative to attend and ask questions. Teleconference facilities meant access to the AGM was relatively easy.
"Obviously it’s their choice whether or not they attend the AGM but it is the only opportunity shareholders have to deal with the whole board," Logan tells the FM. "And it is public, which means it is far easier to hold the board to any undertakings they make."
At Allan Gray, which lifted its Tongaat stake to just over 10% at a price of R108 a share in September 2017, chief investment officer Andrew Lapping says he did not attend the AGM in person but did recommend various voting actions to clients.
"The new management team and board have been proactive in addressing our questions and queries. There was no need to ask further questions at the AGM," says Lapping, alluding to the behind-the-scenes engagements preferred by most large fund managers.
As for the auditors: "We will consider the Deloitte issue in time, at this stage we would rather not comment," Lapping says.
PSG, which is the second-largest institutional shareholder (if we exclude FirstRand’s recently assumed exposure), adopted a similar approach. "PSG voted via proxy and we have been actively engaging with the Tongaat board since July 2018," says PSG Asset Management CEO Anet Ahern.
PSG did not support the election of any of the previous members of the board — which was presumably why Stephen Beesley and Fatima Daniels resigned as directors last week.
So, Tongaat has an entirely new board. Chair Louis von Zeuner, appointed in December 2018, is the longest-serving director.
Ahern does not believe that the new management team and new board can be held responsible for the historical problems. "Our goal when we engage is to effect change that would be in the best interests of our clients; this is often done away from public forums."
After increasing its stake to 5% in December 2017, paying R106 a share, PSG upped its holding to 10.68% as recently as March 2019 at R29 a share. Presumably, Ahern didn’t think things could be as bad as some people feared.
Logan believes these closed-door talks have some value, but he says they should be part of a multipronged engagement strategy. It’s likely the private engagements encouraged the fund managers to stock up on Tongaat shares.
Unfortunately for PSG, it turns out things were much worse. In December 2019 Tongaat revealed the 2018 audited financial statements were wrong by R11.8bn. This was nearly three times the earlier estimate that the accounts were overstated by R4.5bn.
As it happens, Logan had no intention of haranguing the new team at the AGM. Far from it: he commended the sterling effort of new CEO Gavin Hudson in righting the ship. But he still wanted someone to explain how, after just a few months, the new team had uncovered irregular accounting practices that the auditors had missed for years. He also wanted to know what action was being taken against those responsible, including the auditors.
Audit committee member Linda de Beer said: "Those responsible will be held accountable; we have a strong legal team, but right now we don’t want to absorb Gavin’s time on a witch-hunt."
Logan was not persuaded. He was particularly perplexed that Deloitte seems to be absolving itself of any responsibility. "It’s astounding that they believe they’ve done nothing wrong; this wasn’t a sophisticated fraud," Logan told the AGM.
Von Zeuner, who says Tongaat has engaged with the Independent Regulatory Board for Auditors, the SA Institute of Chartered Accountants and the National Prosecuting Authority, assured Logan that no-one involved was "off the hook".
Asked by the FM to comment on the issues raised by Logan, Deloitte referred to processes implemented by the audit regulator. "Deloitte has been fully co-operating with all these processes and is awaiting the outcome thereof."
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