Good Governance Matters – Now More Than Ever

One doesn’t have to look very hard today to see that South Africa is at an economic and political crossroad. If a serious effort across all sectors to improve the current situation is not undertaken swiftly, the consequences will be dire for the future of our country and our economy. 

We see a stepped-up approach to good governance across all sectors of the economy as being a critical component of the remedy to ensure that a sustainable future is achieved.  Below, I examine some of the challenges we face, as well as some of the recent developments in the governance arena that seek to address these challenges, including our own efforts as an asset manager. Here we note the concerns South Africans have about poor governance; assess its impact; show how King IV creates a platform for good governance practices; and how we, as Old Mutual Investment Group, are rising to the challenge of holding our investee companies to account for their governance practices.

South Africans across the board concerned about decline in governance 

According to over 1 000 respondents to the Institute of Risk Management South Africa’s Risk Report on South African Risks for 2016[1], lack of leadership and increasing corruption rank among the top ten risks facing the country. Respondents were from all industry sectors, including both the public and private arenas, and from all demographics. Furthermore, in a recent survey of Old Mutual’s retail customers, governance failure was highlighted as the biggest perceived risk to our customers’ investments and savings. As responsible stewards of the assets we manage on behalf of our customers, we think it is particularly important to manage potential governance risks effectively, as we all face the direct or indirect consequences, should they materialise.

The impact of poor governance on SA

As a nation, South Africa has suffered the consequences of poor governance, such as the sacking of ex-Finance Minister Nene, which has directly impacted our economy and our ability to attract foreign investment. The co-ordinated effort by business and government to address these consequences resulted in a joint eight-point plan (strongly supported by Old Mutual), which, if implemented, will look to minimise the impacts on the SA economy.  One of the points of the plan was the need for more effective management of state-owned entities.

In his 2016 Budget Speech[2], Finance Minister, Pravin Gordhan, acknowledged the critical importance of good governance in state-owned entities stating: “Our aim is to strengthen our state entities so that they can play a propulsive and dynamic role in our development. Further financial support to state-owned companies will depend on the clarity of this mandate and firm resolution of governance challenges.” The implication of this statement is that state-owned entities with weak governance, or that engage in corrupt practices, risk losing the support of government.

The impact of poor governance has not only been felt in the public sector. Recent examples of poor governance across the local listed-equity space, such as African Bank,  and MTN, and, internationally, Volkswagen, show how destructive governance failure can be for investors, with the share prices of those companies falling materially and rapidly, cutting huge chunks from investors’ retirement savings, and taking a very long time to recover their value, if ever.  By actively researching the governance quality of the companies we invest in and, additionally, through direct engagement with management we believe we can actively support the pursuit of our customers’ long-term financial goals, while at the same time raising the bar on good governance practices in South Africa.

An important departure point for our approach to good governance practices is the King Code on Corporate Governance, which critically aims for a stakeholder-inclusive approach.  We have recently been involved in the drafting of King IV, which will make an important contribution to strengthening governance practices in South Africa.

Why is King IV important & how is it different this time?

King IV is important as it places a specific focus on long-term value creation as a foundation principle, and it is exactly in the long term where good governance can and does support the sustainability of companies and societies. This is in line with the needs of investors, who are becoming more vocal in their demands for companies to focus on long-term value at the expense of short-termism[3].

Essentially, long-term value creation can be achieved through strengthening of the existing principles in the Code, with specific regard to: executive and director remuneration; integrated reporting; responsible investing and linkage with the Code for Responsible Investing in South Africa (CRISA); the strengthening of the composition of committees; and leadership and strategic risk management.

We therefore expect that the final version of King IV will emphasise integrated thinking across all entities to which the Code will apply (including state-owned entities). This in turn should enhance how these companies contribute to long-term value creation. It will also underpin existing legislative frameworks, such as the JSE Listing Requirements and the Public Services Financial Management Act, in helping to place good governance at the forefront of the strategic management of those entities. 

The main difference from previous iterations of the Code is that by focusing on outcomes, and facilitating the creation of practices to put the principles in action, King IV provides a comprehensive guideline for companies in all sectors to step up to the application of corporate governance best practice.

What role can Old Mutual Investment Group play in improving good governance practises?

We continue to take a proactive stance with regards to our active ownership responsibilities on behalf of our customers. We use our influence in the market to assist in improving the governance practices of the companies we invest in, and we have achieved many successes in these engagements over the last year. These include improvements in board governance, focusing on the quality and leadership of directors and their remuneration, along with better disclosure on climate change practises. 

We seek to be a positive influence on the future development of good governance in South Africa, especially during this currently challenging time, not only through responsible investment, but also though building the governance skills of our current and future leaders. To support this, we have partnered with the University of Stellenbosch Business School and INSEAD in creating the Africa Directors Programme, which is a modular course aimed at improving the calibre of boards and directors on the African continent. The inaugural course started in August 2015, and was attended by Old Mutual Investment Group executives and investment professionals. Enrolment for the 2016 course is now open on www.usb.ac.za. 

To conclude

Given the implications of not motivating for change in how entities are governed in both the public and private sectors, it is time to be bold and we, as an active owner and responsible steward of our customers’ assets, commit to do this by working to improve the governance practices of our listed investee companies via targeted engagement, championing industry initiatives that enhance governance best practice, and promoting the improvement of the leadership skills of African directors.

[1] http://c.ymcdn.com/sites/www.irmsa.org.za/resource/resmgr/2016_Risk_Report/IRMSA_2016_Risk_Report.pdf

[2] http://mg.co.za/article/2016-02-24-pravin-gordhans-full-2016-budget-speech

[3] Blackrock; http://www.businessinsider.com/blackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2