Missing in action

SA institutional investors have publically bought into the principles of responsible investing practice, but they are not always asking the right questions when it comes to corporate governance – and Marikana is a case in point. Stephanie Giamporcaro asks why.

In all the commentary on Marikana and who is to blame, one constituency has been startlingly absent from the debate

The role of institutional investors – those who chose to put money into Lonmin in the run-up to the tragedy in 2012 (and subsequently) – has not been interrogated at any point, and nor will they be.

In a very real way, institutional investors are the silent – and most powerful – players in the South African business landscape, but they are never in the firing line or even among those questions when things go awry.

From African Bank and First Tech to the Marikana tragedy, we are so used to them not having a voice, we forget they exist – and yet they are very much there.

South African investment companies are, by and large, signatories to the United Nations-supported Principles for Responsible Investment (PRI) Initiative, an international network of investors that seeks to understand the implications of sustainability and supports signatories to incorporate these issues into their investment decision-making and ownership practices.

Yet, too often there is a sense that these companies are turning a blind eye to corporate governance red flags that, at best, are contrary to the principles they are pledged to and, at worst, threaten the very sustainability of their investments.

Until the day of a bank's default or an organisation's collapse, institutional investors, along with top executives, often claim ignorance of the state of the company's affairs.

Lessons from Marikana

In the case of Marikana, many argue that a cold look at how much Lonmin workers were being paid and the conditions they were living and working in, alongside the usual examination of balance sheet items and earnings projections, might have yielded some insights into the coming troubles.

If Marikana has shown us anything, it is that risk profiles increase when social responsibility is neglected. While it might be too much to expect institutional investors to take a stand against the extractive industries and their dubious HR practices, at the very least, the appalling conditions of the miners might have raised some investment red flags.

Even if the plight of the miners had not troubled investors unduly, from a corporate governance perspective, questions should have been asked about the credibility of the Lonmin board. In many respects, the board was not properly informed and was poorly functioning. Deputy President Cyril Ramaphosa's extraordinary role as non-executive director with too much power is evidence of that.

Among other things, the board has been accused of failing to uphold its duties under chapter 8 of the King III codes governing stakeholder relationships, by ignoring the shifts in union relations and not recognising key minority unions as stakeholders — a key contributing factor to the awful deaths that followed.

Lonmin is not the only example in recent history where corporate governance red flags were not seen – or were ignored – by investors. When the First Tech Group collapsed in 2011 (the first-ever investment-grade corporate bond default in SA involving between R800 million and R3.5 billion of investor fund fraud), investors also missed blatant corporate governance shortcomings.

Tick-box mentality

A study by students of the Graduate School of Business showed that key problem areas at First Tech were an overcomplex corporate and financial structure, a ghost board of directors in no position to ask the right questions, a lack of independent and reputable auditors, and a tick-box attitude towards codes of corporate governance.

Maybe it is harder than we think to spot these issues – hindsight is, after all, always easier than foresight – but the point is, corporate governance guidelines provide institutional investors with a perfect blueprint to at least ask the right questions at the right moment.

It is a tool that should enable investors to see beyond the numbers.

The King III report on corporate governance offers guidelines on required structures and processes that help guard against undue risk. Some might say they are basic common sense.

Investors should always be on the lookout for red flags, that may include anything from fraudulent accounting schemes, to too much power being invested in individuals, or top management taking on multiple corporate roles.

At First Tech, for example, the fact that founders Jeff Wiggill and Andy Bertulis shared the roles of chairman, CEO and CFO, should have set the red flags fluttering.

But it did not. The GSB study found an unusual complacency among many institutional investors apparently charmed by the charismatic personalities of the two founders and their promises of high financial returns.

One of the big problems of the financial industry is that it is a sector naturally inclined to look for short-term profit. High-yield investments are popular and investment experts are always searching for lucrative deals. Investors were said to choose the First Tech bond because it was the best fixed-income return opportunity at the time.

Often, investment decisions are made without taking longer-term views and this lack of systemic oversight was instrumental in the collapse of African Bank in 2014. Investors more attuned to sustainability and ethical principles would have picked up on the unsecured lending business as potentially fragile investment ground.

Investor duty

Investors have a duty to help prevent such corporate governance violations, especially when they threaten the lives and livelihoods of citizens. However, right now in South Africa, it appears that a culture of looking the other way prevails.

Lonmin, First Tech and African Bank were largely celebrated, prior to the dramatic events that cannoned them into the spotlight, as good corporate citizens.

Lonmin actively marketed itself as a “sustainable investment” up to May 2012, and the CEO of African Bank Leon Kirkinis was frequently and sycophantically quoted in the media as being in business “for the poor”. Nobody questioned this until it was obvious that the bank's agenda towards the poor was anything but sympathetic.

These companies are proof that a tick-box mentality is still largely pervasive in SA in relation to environmental, social and governance issues. This should send the business, finance and government elite back to the drawing board – if they want to build a truly sustainable and inclusive economy.

This might include strengthening regulatory incentives to make voluntary codes perhaps a little less voluntary. But it also requires that institutional investors play their part in holding the companies they invest in to account.

Individual investors and shareholders have a role to play here too. As individuals we can put pressure on companies and institutional investors by asking the awkward questions. The fast-growing global divestment campaign is one example that individuals don't have to wait for the big institutions to do the right thing – we can force them to.

This is not an idle or idealistic call to action. As South Africans struggle to put Marikana behind them, we need to realise it could happen again – in any sector of the economy.

Terrible conditions continue on the mines, the gap between the rich and the poor grows, and many furniture companies and microcredit agencies are pushing South Africans into a dangerously indebted position. The situation is bound to create societal tension – and where there is tension, there is the risk of and potential for systemic disaster.