Ann Crotty, journalist with Business Day, shared her reflections on the state corporate governance in South Africa during an interview with business journalist Bruce Whitfield and EY Senior Researcher, Jess Schulschenk, on 25 May 2012. The video interview is included above, and reflections from both this and the longer research interview are given below. These findings were made possible by the Gordon Institute of Business Science (GIBS) and form part of the ongoing Corporate Governance Research Programme with the Albert Luthuli Centre for Responsible Leadership (University of Pretoria) supported by Ernst & Young.
“Messy and confusing” were the terms used by Crotty to describe the state of corporate governance in South Africa today. She felt that with all the information out there, the reality has become buried in the detail. Whilst she acknowledges significant changes over the past two decades, she questions whether this is really progress or merely a process of densification.
“If you go through the principles it's like deconstructing a day in the life of a director, there is nothing there that they shouldn’t be doing anyway. I think it's like teaching people how to drive, most of it is stuff that directors should be doing without being told. It's useful to be reminded”.
Crotty did reflect that, as a journalist, King III has been very useful for keep companies in check, “because you look through the annual report and you say hang on this isn’t quite what it should be, please explain and then they will give you an interesting explanation. But you can write about it so then the public become informed”.
The issue of director remuneration
King II saw the introduction of a principle on the disclosure of director remuneration. Although controversial at the time and certainly a progressive move considering South Africa’s lack of transparency on this issue in the past, executive pay remains a contentious issue - “Executive pays is one issue that is really the kind of Achilles heel of it all - it demonstrates what the problems and complexities are”.
Crotty elaborates on how the considerable remuneration packages currently being paid out are not challenged by King III but many people, including her, view them as fundamentally unethical. In this way, she sees King III as allowing unethical behaviour to be treated as acceptable. The principle behind the King Codes supporting the disclosure of director remuneration is the belief that the relevant stakeholders will apply the requisite pressure for the right changes in behaviour to take place. This has not happened, and speaks to issues of responsible investment as well. It also speaks to a fundamental flaw in the system whereby short term behaviour essentially remains incentivised.
In reflecting on the path that the US went down, Crotty expressed the concern that “there is always incentive for massive failure. I’m not really sure why there hasn’t been any [in South Africa] - that is interesting. I don’t think it's necessarily goes to the integrity of the people concerned but presumably there is a systemic explanation for it. But I do think the incentive system in SA does lend itself to failure, if not in the short term definitely the long term”.
The need for responsible investment
“King I came out in 1994 and would’ve been enough if the shareholders on the other side of the equation had been engaged. King II and II seem like desperate attempts to get more attention from the shareholders. They paying as little attention to King II and III as they weren’t to King I. Can you imagine what we are going to do with King lV? How big is that going to be? The lack of shareholder engagement does seriously undermine the point of it”.
The history of South Africa’s corporate and investment sectors has a role to play in the state of responsible investing today. The major investment companies held disproportionately large shares within South African business. Issues were discussed behind closed doors which resulted in transparency and activism taking a back seat. Essentially, considerable conflicts of interest arose and continue to arise as investors choose not to engage with companies on sensitive issues as given that many of the companies are also potential clients.
“Because institutional shareholders in SA have such a powerful position as a shareholder block I think there are huge conflicts of interest, veritably in terms of holding executives to account and in a public forum. We get told constantly that they are engaging with the board behind closed doors and they say we attend meetings either in person or by proxy but then vote 99% in support of everything”.
This undermines attempts being made by the introduction of integrated reporting and other measures in King III to promote transparency and accountability. Crotty asserts that CRISA (the Code for Responsible Investing in South Africa) tries desperately to overcome some of these issues but already it's looking like it may not succeed given that the signatories to that code are not disclosing their votes publicly. Realising an active interest in responsible investment may be the ultimate challenge for corporate governance.
“King III is a good code but it is just not guaranteeing the implementation of what's in there because you don’t have the shareholder engagement. It's such a bland statement - it's supposed to give comfort and it doesn’t”.
Crotty felt that the apply or explain principle in King III holds merit, but that it becomes pointless when these explanations are scattered around in integrated reports to the extent that too much information almost becomes no information at all. She called for a clear and transparent summary on the first page of any annual or integrated report to simply state where the company has applied King III and include explanations where they have not.
She further called for the disclosure of voting, as contained in CRISA, to be legislated such that every fund manager must reveal their vote within 24 hours of an AGM. Even if they work through proxies, fund managers need to be held accountable to their beneficiaries and display a clear commitment to engagement. Companies should also disclose publicly the number of votes with which a resolution was passed as opposed to the current practice of merely declaring that resolutions were passed ‘with the required majority’. This will bring greater light to when there is no engagement on an issue (as with cases of a 99% majority) and also show when an issue was contentious for the shareholders.
CRISA has tremendous potential for changing the landscape of governance and sustainability as currently experienced in South Africa. Crotty sees the potential for putting the responsibility on the shareholders to ensure that the directors of companies are doing what they are supposed to. She also recognises the untapped opportunity for trade unions to use CRISA to, amongst other things, force fund managers to vote on remuneration. This will start sending strong messages and create pushback where there currently is none. Coupled with activism by the Government Employee Pension Fund, trade unions would have a much stronger voice within in the corporate community: “so they don’t have to march and throw stones they can just pitch up at AGM’s”.