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Allan Gray’s can of worms

Ethical considerations surrounding Net-1.

Over the past few weeks, the Department of Social Development, its minister Bathabile Dlamini, and the South African Social Security Agency (Sassa) have been the focus of attention over the social grants debacle.

Read CPS affidavit reveals futile engagements with Sassa Over grant transition

With almost 17 million of South Africa’s poorest citizens potentially affected if a solution is not put in place by April 1, this focus is warranted. However, thus far the focus has been almost exclusively on Dlamini, Sassa and the department. While their handling of the matter is unquestionably shocking, the private sector players in this fiasco – Cash Paymaster Services (CPS) and its parent company Net1 UEPS, and Net1’s CEO Serge Belamant – should not escape scrutiny. And nor should investors into Net1, which is listed on Nasdaq and the JSE, especially those that claim to be committed to responsible investment.

Despite the concerning developments around Sassa and CPS, Net1’s major shareholder Allan Gray has indicated that its engagement with the company over the contract has been minimal.

Read Allan Gray defends its shareholding in Net1

This is surprising, as many commentators have alluded to corruption as one of the possible reasons that Dlamini, the department and Sassa have seemingly failed to take any action to comply with the 2014 Constitutional Court judgement in which they were ordered to put in place a new grants distribution system.

The delays have left CPS in an extremely powerful position in the negotiations around an emergency contract. As a result, some business media has recommended that investors look to profit from the “Sassa noise”. However, if there is any indication that corruption has played a role in the department or Sassa’s behaviour, then it is incumbent on investors to ask questions about CPS’s role, or at the very least to scrutinise the company’s governance and risk management processes in this regard.

Belamant is correct to say that neither Net1 nor CPS have ever been found guilty of any crime, but there are red flags from a social and corporate governance perspective that should not be ignored.

Firstly, while the US Securities and Exchange Commission (SEC) decided in June 2015 not to recommend an enforcement action over the 2012 Sassa contract, Net1’s 2016 Annual Report notes that the US Department of Justice’s investigation into possible violations of the Foreign Corrupt Practices Act is ongoing.

Secondly, while much is made of the ConCourt’s 2014 ruling that Sassa’s conduct was the sole cause for the CPS contract being set aside, this does not exonerate CPS. The ConCourt found that Sassa failed to objectively confirm the Black Economic Empowerment (BEE) credentials claimed by CPS and, as an amaBhungane investigation has shown, these BEE credentials appear to amount to “fronting”, and provided a key piece of the puzzle in understanding the relationship between CPS and Dlamini. There have been several other allegations of corruption.

Thirdly, in terms of corporate governance, Net1 falls short in a number of areas. For example, the fact that Belamant is both CEO and Chairman of Net1, and that there is no lead independent director, is contrary to corporate governance best practice, and violates the JSE’s listing requirements that Net1, which has its primary listing at Nasdaq, is required to comply with. Similarly, Herman Kotze’s combined role as CFO, secretary and treasurer is also contrary to corporate governance principles that stipulate that the company secretary should not be a director. The independence of Net1’s three non-executive directors can also be questioned as they have all served since 2005. In light of the discovery that Mr Belamant was the “unfortunate victim of a scam” relating to his supposed honorary doctorate, you would imagine that investors would want a truly independent board in place. However, Allan Gray voted in favour of the re-election of all five directors at Net1’s November 2016 AGM.

Finally, there are questions over Net1/CPS’s behaviour in terms of its management of social grants payments. Human rights organisation The Black Sash has alleged that other Net1 subsidiaries have used confidential information given to CPS to sell mobile phone airtime and financial products such as funeral insurance and loans. The department has, in fact, turned to court to end illegal deductions being made against grant recipients. While cross-selling of financial products to grant recipients might benefit Net1 shareholders, there are serious questions around these practices in terms of sustainability, not to mention morality, as they will lead to even greater indebtedness and exacerbate inequality.

In South Africa, many asset managers, including Allan Gray, have committed to implementing Responsible and Sustainable Investment (SRI) practices through initiatives such as the Code for Responsible Investing in South Africa (CRISA) and the Principles for Responsible Investment (PRI). These commitments include incorporating sustainability factors into their investment decisions and demonstrating responsible ownership practices. As with other recent examples such as African Bank and Lonmin, it appears that Net1 will become yet another case study of asset manager failure to fulfil these commitments.

Mike Davies is a director of responsible investment consultancy Kigoda Consulting. Follow him on Twitter at @Kigoda_Consult.


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Junk article. Sensation seeking on corporate governnace which is just a set of individuals opinions.

There is no can of worms for AG.

AG re-elected the Directors so they are responsible to a point. Due diligence should have been done and clearly the Corporate Governance is an issue here.

Sell your shares.

What shares and why should they be sold?

Whoever pacaratac is he probably owns a bucketload in the nice gentleman’s company. His posts over the past have indicated an unhappy view of affirmative action. As an astute investor he would have loved the idea of a tight management team turning SASSA into a cash cow and a glove puppet at the same time, absolutely dependent on the baas to pay the social welfare grants. With each penny of growth, with each dividend check, his liver-spotted hands were gleefully a-rub like an especially horrid Uriah Heep.

No pacaratac, defeating legislation through crafty and dishonest dissimulation is not the acme of excellence, nor is it the free market. It is wrong, even if there is no CRIMINAL act it is deleterious to society to imperil democracy through advancing the fascist overtones of crony capitalism. Sociopaths struggle to understand this simple concept.

What is the point of this article it’s a re-vomit of all that in the sa news drudgery already, or is your aim Mike to score points and or make trouble?

Sell your shares if you have a conscience.

Good on Mike Davies for his brave expose of AG.There can be no smoke without fire and judging from this article,the fire may have been around for many years.More digging please.

As an Allan Gray client I would be happier if they were not involved in the debacle

Investing in Net1 or investing in Oakbay.

Same difference.

Where does AG rank on the SRI Index?

But it’s interesting to learn several things from the article, for instance that at Net1, the chairman and CEO positions are filled by one person, etc

This seems so “old-fashioned” when compared to most modern companies…

Both Pacaratac and Kemisky9 have a conflict and could be investors in Net1 and thats why they would object to such a brilliant article. I suppose if they had some interest in the Guptas than they would have made the same comments like, sensation seeking and re-vomit.

Mike, well done and please keep informing us of all the corruption that goes on behind the scenes whether that is old news or new news.
You guys are the checks and balances of our economy and purses.

No shares in Net 1 and no conflict. Absolutely nothing to be concerned about and no soul searching other than wondering just how so many people have been conned into believing the excesses of CG are valid. King 4 blah blah. What makes it relevant and even workable.

The corp. governance blathering is just that.

There are so many rules and regs it is virtually impossible to move without making a mistake some where

When you have to report monthly to the Con Court to operate then it is beyond concerns over corporate governance.

I wonder if Mr AG (Alan Gray) really cares as he sips his Gin and Tonic overlooking the Caribbean Sea in his Canary Island home, not that far from his offshore stash of serious money?

Old fashioned isn’t’ a serious issue, many small family companies are also still a bit old fashioned in as far as they rely mostly on paper rather than IT. It doesn’t mean they can’t exist – just slightly clumsy and inconvenient.

But when it comes to big, cross border, listed corporates I was under the impression that it’s quite difficult to still find practices like chairman/ CEO and CFO/ secretary/ treasurer not being filled by different people. (Admittedly, haven’t studied each and every listed co so stand to be corrected….)

My view: Alan Gray’s ‘’apartheid style’’ conduct just never seems to amaze me anymore. I have always thought that they operate as if they think that they are a law above the law.
Barry Sergeant’s, unchallenged comments pertaining to Allan Gray’s role in the Investecgate sage (in his book ‘’The Kebble Collusion’’, is further prove of the above!
I wouldn’t touch AG with ‘’a pair of pliers’’, for this reason. I think ‘’Corporate Governance’’ is not high on their list at all!

Other than the obvious big commonsense issues sincerely hope that AG does not get bogged down in the minor non value adding CG tripe that is mentioned above.

The headline obviously caught my attention. Having now read this, one has to wonder why, particularly someone who has “responsible” in his very own title, would use a headline of this nature. I could think of some, but perhaps agenda differ.
Why did he not engage his deep sense of responsibility, and first obtain managements response to his thoughts, and publish them too.
Or be truly responsible, investigate and comment a long time ago, instead of seeing an opportunity to hop the SASSA bandwagon.

Dissappointing really.

Honestly, as long as AG is still producing quality returns, I’m fine. All these comments about SRI and investors “with a conscience” – don’t flatter yourselves.

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