Recent high-profile and devastating governance controversies in the country make it clear that companies and their investors, need to pay more attention to ensuring the practical execution of the behaviours that are written into the code of ethics and governance policies, especially when it comes to day-to-day operations of the board and governing committees.
This was a central theme of discussion at the annual Nedgroup Investments Treasurer’s Conference hosted at Summer Place yesterday. Sean Segar, Head of Cash Solutions at Nedgroup Investments says the event raised some tough questions and has opened a crucial dialogue for SA Inc.
“It is encouraging to see the robust discussions held here today – especially with some of the most important parts of government. The challenge now will be to make sure these discussions materialise into action –and soon,” he says.
Ray Wallace, CIO at Taquanta Asset Managers, who manage Nedgroup Investments Cash funds, presented at the conference and highlighted the need to move away from a compliance-based mind-set of ticking the boxes when it comes to governance and ethics.
“Most companies have fantastic codes of ethics and governance policy documents, based on the King IV Report on Corporate Governance. These documents contain a wealth of information about the company’s governance objectives and their progress in attempting to meet all the Principles of good corporate governance contained in the King IV report. Yet despite the extensive reporting and disclosure of governance matters, the problems at a company like Steinhoff managed to catch the investment industry (and its Board of Directors) by surprise,” he says.
Only subsequently have matters such as the independence and/or term lengths of some directors been questioned by investors. “Is governance reporting at major corporates merely a tick box exercise and are investors paying lip service to the process without the necessary due diligence being applied to the interrogation of information provided by the companies they invest their clients’ money in?” asks Wallace.
According to Wallace, when it comes to ethics and governance, more focus should be placed on the board of directors. He proposes that it is no longer acceptable to make investment decisions based purely on the volume of information presented about the board and its governance in the company reports. “Fund managers need to be much more critical when looking at the detail of these reports. They cannot just rely on the information at face-value and they must dig deeper and ask the important questions to get a real sense of who is running the show – and what factors are at play,” he says.
- Who are the directors and what skill and/or experience do they bring?
- Is the remuneration of directors appropriate?
- How are conflicts of interest dealt with?
- Are there enough genuinely independent directors?
- Do independent directors have the necessary capacity: If they have numerous other board positions on different companies – do they have enough time to give each one the due attention it deserves?
- How long have they been on the board for and are there terms limits and rotation policies?
- Is there sufficient diversity on the board? Are there enough women and a diversity of race and cultures on the board – people asking questions that will provide different perspectives?
Essentially, fund managers need to actively engage with companies they are invested in and request more information from the board – especially when related to more subjective issues like composition of the board and independence of non-execs.
“Importantly, while this this interaction between company management and fund management must be led by fund managers, we can’t do this in a vacuum. What we are talking about, needs commitment from Parliament as well – starting with the SOEs. Good ethics and governance is a culture that needs to flow down right from the very top. So it’s very encouraging to see the attendance of senior government officials here today. Fund managers simply cannot justify investing their clients’ funds into entities without sound governance,” comments Segar.