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‘Investment sector can drive better corporate behaviour’

An industry in need of introspection.
Andrew Canter of Futuregrowth, which took action after the environmental affairs minister fired the entire board of Umgeni Water without anyone knowing about it. Umgeni was given an AA+ credit rating two weeks later, even though it was without a board of directors. Picture: Supplied

In a representative sample of 10 South Africans, five would earn just 8% of the country’s income and own 5% of the assets and 4% of the net wealth.

One person would have 55% of the income and own 70% of the assets and 71% of net wealth.

It is widely known that South Africa is one of the most unequal societies in the world, but the figures shared by independent consultant Dugan Fraser at an investment forum on inclusion at the Gordon Institute of Business Science (Gibs) on Wednesday provides a bit more perspective.

Research from the OECD, the IMF and others support the notion that significant inequality is not only bad for growth, but can fuel political and social instability, which may keep investment away, Tracey Davies, executive director of Just Share, said. Social divisions fuelled by inequality also make it harder for governments to find the necessary consensus in society around how to tackle social and economic crises.

Growth is not a magic wand

“A growing economy is an essential component of poverty and inequality reduction, but GDP growth does not automatically lead to greater social equity,” she said.

“Prioritising economic growth as an end in and of itself – without paying any attention to strengthening that growth by ensuring that it is more widely and fairly distributed, that it takes place without destroying the environment and unduly burdening future generations – will continue to exacerbate already historically high levels of wealth and income inequality.”

Davies said historically high corporate profits and shareholder returns have not discernibly reduced inequality.

Moreover, relative pay for executives in South Africa is among the highest in the world and far exceeds those in similar developing countries when adjusted for purchasing power.

According to data from Bloomberg and the IMF, South African executives earn on average 541 times the per-capita share of national income, compared to 483 times in India and 66 times in Malaysia.

But what role can the investment industry play to improve inclusion?

Wish list … or action plan?

Davies provided a long wish list, including that:

– Asset managers improve their disclosure practices and address their incentive structures;

– Analysts interrogate the claims companies make about their environmental, social and governance (ESG) performance and call out misrepresentations;

– Investors tackle excessive executive remuneration – not just in relation to company performance, but by asking whether it is fair and responsible in the context of overall employee remuneration;

– Pension fund trustees take their fiduciary duties seriously;

– And that regulators seriously up their game on oversight of implementation of responsible investment and corporate governance requirements.

Andrew Canter, chief investment officer at Futuregrowth, said his firm has engaged very actively with the JSE to improve standards with regards to bond market requirements.

This came about after environmental affairs minister Nomvula Mokonyane fired the entire board of Umgeni Water in June 2017 without anyone knowing about it.

In the listed equity space, companies must publish an announcement on the Stock Exchange News Service (Sens) when directors change. A rating agency affirmed Umgeni’s credit rating as AA+ two weeks later, even though the state-owned entity didn’t have a board of directors.

Firm stance

Canter – who landed himself in hot water in 2016 when Futuregrowth stopped lending to six state-owned firms – said this was a breach of the Public Finance Management Act and the Water Services Act, probably of the Companies Act, and threw the King Code in the shredder.

“The system is radically rigged to disempower institutional investors [and] pension fund investors at the expense of the issuers and the banks.”

Nicky Newton-King, CEO of the JSE, agrees that the distinction between equity and debt market disclosure requirements is inconsistent and anachronistic. She said the JSE is about to come out with new listings requirements that will provide the levels of transparency one would expect.

While she doesn’t expect any issues in getting tighter transparency with regard to state-owned enterprise bonds, she said there are big vested interests in the market for other bonds.

The JSE issued a document at the end of 2018 in response to the issues at Steinhoff and Resilient, which addresses the role of the “guardians of governance”, Newton-King said. These are not roles that regulators write into law, but are about the responsibility and conscience of individuals.

More rules not the answer

“If we are going to make a difference here, we shouldn’t be looking for more rules, we should be looking at our own personal agency.”

Wits academic and former Treasury budget chief Michael Sachs said that while fighting corruption is important, the debt-to-GDP ratio will continue to deteriorate even if corruption is defeated because there is no confidence in the economy.

Against this background, there is a need for the private sector and those who look after the significant accumulation of wealth to do some introspection.

“And it can’t be appeals to conscience of how much you are paying people who work in your house,” Sachs said from the audience. “It has to be sound structural change in the way we use particularly equity, because people involved in debt contracts are not going to transform anything quite frankly … We need to look at how equity begins to invest in a form of capitalism that is sustainable away from the one where it is now.”

Lip service

Asief Mohamed, chief investment officer at Aeon Investment Management, said there is a lot of lip service in the asset management industry when it comes to ESG, caring about South Africa and how the industry can assist in reducing inequality.

The vast majority of Shoprite shareholders previously voted in favour of buying roughly R1.7 billion in shares from its former chief executive, Whitey Basson.

“If that is not creating inequality, I don’t know what it is – but asset managers voted in favour of it.”

Mohamed said there is also a possibility that shareholders will soon pay Christo Wiese a significant amount for his voting shares even though it has almost no economic benefit.

“Isn’t that creating inequality?” he asked.

Economic activist and social entrepreneur Wendy Luhabe challenged the investment community to re-examine the percentage of their portfolios they are dedicating to supporting entrepreneurs.

Shareholder activist Theo Botha said asset owners and managers really need to step up to the plate and work harder on engaging with clients and disclose how they vote at annual general meetings (AGMs).

Of the 579 registered investment managers, 35 have formally adopted the Code for Responsible Investing in South Africa (Crisa), but only six of these members publish their voting records at AGMs on their website, Ince owner Alban Atkinson said.



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Asief Mohamed is being a hypocrite. As CIO of Aeon he in all probablity earns multiples of the average wage of the country. He is the amin shareholder, if for the sake of argument Aeon gets taken over will he sell his share in Aeon at a discount as to not drive inequality?

What is the difference between Whitey Basson selling his shares in a business that he built up over many years and created wealth for shareholders and is one of the biggest employers in the country.

Just once again a prime example of the subtle and sometimes not so subtle discrimination applied by Southern Suburb asset managers against successful Afrikaans speaking businessmen.

I fully agree that investors can be more critical when voting at AGM’s. There is also a place for sustainable, ESG type investing. It is however not the place of the market to get involved in enforcing the narrow social justice demands from a segment of society.

Tracy Davies confuses cause and effect. Some decades ago, South Korea embraced free enterprise and is rich today. South Africa clung to State intervention and State ownership. Result – poverty and inequality.
However, it has to be conceded that organised business in South Africa has displayed incredible complacency in the face of entrenched socialist and populist tendencies and is largely to blame for the sorry condition of business and the economy today.

End of comments.



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