South Africa’s economy continues to struggle and faces significant headwinds in the immediate future. Against this backdrop, a stepped-up approach to good governance across all sectors of the economy is a critical component of the remedy to ensure that a sustainable future is achieved.
Key factors to note for this approach are the number of challenges facing the industry, 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.
These include the concerns South Africans have about poor governance; assessing its impact; showing how regulation such as 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.
Governance failure ‘biggest perceived risk’
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, it is particularly important to manage potential governance risks effectively, as we all face the direct or indirect consequences, should they materialise.
As a nation, South Africa has suffered the consequences of poor governance, such as the sacking of ex-finance ministers Nene and Gordhan, which has directly impacted our economy and our ability to attract foreign investment.
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. The share prices of these companies fell 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 through direct engagement with management, asset managers can actively support the pursuit of their customers’ long-term financial goals, while 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 been involved in the drafting of King IV, which will make an important contribution to strengthening governance practices in South Africa.
King IV and long-term value creation
King IV is a significant factor as it places a specific focus on long-term value creation as a foundation principle, and it is 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.
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.
The key difference from previous iterations of the Code is that by focusing on outcomes, and encouraging 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.
As an asset manager, Old Mutual Investment Group continues 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 practices.
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.
Given the implications of not changing how entities are governed in both the public and private sectors, now is the time to be bold.
Robert Lewenson is ESG engagement manager at Old Mutual Investment Group.