There was a time when you couldn’t go to a conference without hearing a stump speech from the then Government Employees Pension Fund head of governance, John Oliphant. I worried he would turn up with his soapbox and start preaching when I visited my local Spur restaurant.
Oliphant’s aim was to persuade fund managers to subscribe to the local Code for Responsible Investing in SA. His friend, Dan Matjila, chief investment officer of the Public Investment Corp (PIC), must have been fast asleep every time Oliphant made the speech. Matjila’s governance track record, after all, was widely criticised by the Mpati Commission, set up to investigate corruption and incompetence at the PIC.
But the Oliphant crusade has led to the general adoption of the term "stewardship" — at least in the private sector. And RisCura, an investment firm which is no stranger to soapboxes either, has written a lengthy report on the topic.
Stewardship is when asset managers actively engage with companies to maximise long-term value (though it is hard to know how much of this lobbying actually goes on, as most of it takes place behind the scenes).
A recent exception was when 36 managers publicly criticised the restructuring of Naspers and Prosus, but as Naspers is controlled by the holders of unlisted controlling shares, there isn’t much fund managers can do about that.
Stewardship is not just about maximising economic returns, RisCura argues, but also about lobbying on environmental, social and governance (ESG) issues. But good stewardship faces a number of regulatory hurdles. There are laws that prevent asset managers from colluding — and it is not clear if this includes acting in concert on ESG issues. And there appear to be few legal consequences for the white collar criminals who often run businesses purely for their own advantage.
No excuse
RisCura says it is no excuse for a fund manager to say that it only has a small stake in a listed company, and therefore can’t make any difference. The consulting firm argues that the size of the holding is irrelevant. Any matter brought before a board of directors which could have a material impact on stakeholders needs to be addressed with the due care, skill and diligence the fiduciary duty of the directors requires. The board should look after the long-term interests of the company. In contrast, executive management usually has a mandate, and a bonus structure, that encourages it to focus on short-term returns.
It is up to institutional investors, whether a life company or a pension fund which hires the asset manager, to set down their own requirements for ESG. But too often asset managers are a law unto themselves and resent what they consider to be interference from their clients. Too often they forget to whom the assets belong.
Asset managers often argue that a good, independent-minded chair is the single-most important factor when it comes to good governance. Good chairs need to engage honestly and openly with stakeholders and their colleagues on the board. And the board should have a diversity of independent views.
The second-most important issue is appropriate executive compensation, followed by minority shareholder rights. Yet, as the Naspers/Prosus restructuring showed, many boards are reluctant to challenge CEOs. Naspers doesn’t, in any case, have an independent chair either. Koos Bekker, the previous CEO, plays this role, something the JSE should have stopped.
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