Does the notion of ethical responsibility fit into share ownership? There’s certainly lots of talk about it.
Annual reports produced by JSE-listed companies devote pages to accounts of how seriously they take corporate social responsibility. A company’s impact on employees, the environment, the community and the broader economy is scrutinised. Everything imaginable is measured.
And this is done so that shareholders can take comfort they are invested in a socially responsible company.
The Companies Act and the King Code allow the board of directors to rely on information provided to them by experts. This means legally they are entitled to assume the information in the annual report is reliable.
In turn institutional shareholders acting on behalf of investors can assume the information in the annual report is an accurate description of what’s going on in the company. This is important in a system of shareholder capitalism where the owners of a company are increasingly distant from its operations. It allows them to claim knowledge of, and from that a sense of responsibility for, the impact the company has on its environment.
Bench Marks describes the JSE’s SRI index as a measure of story-telling ability
But what if it’s a case of rubbish in — rubbish out? Or if, more subtly, the full story isn’t being told?
A few years ago researchers at Bench Marks Foundation, an NGO with limited resources, did something unthinkable. It interrogated nine years of Lonmin’s social investment reports.
Bench Marks established that while Lonmin told a story every year about how it was building housing for its employees, the truth was that for most of those years nothing was actually built — the story was just retold every year.
Bench Marks’ exercise was prompted by a suspicion that something was not right with Lonmin’s housing tale. The NGO had a network of monitors living in the Marikana area who saw little evidence of what the annual report spoke about.
Remarkably, few Lonmin shareholders reacted with horror or indignation. The following year the JSE again included Lonmin in its socially responsible investment (SRI) index.
Inclusion in the index was based on an analysis of information firms make public. Bench Marks described the index as a measure of story-telling ability. It certainly seemed no-one involved in the process actually bothered to visit mining communities.
No doubt they spent considerable time analysing the data given to them. Just as fund manager Allan Gray has said it interrogated the available information and engaged with management before investing in Net1 UEPS. The investment represents just 0.7% of its equity portfolio, we’re told, as though it were an explanation for not looking too close.
Neither Net1 nor its subsidiaries have been found guilty of transgressing laws. But is Allan Gray commendably giving them the benefit of the doubt, or does it operate in a world so far from the one inhabited by the majority of South Africans that it could not care less? Surely it’s time to make corporate oversight more rigorous.
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