Code gives ‘new bosses’ more say

Illustration: Colin Daniel

Illustration: Colin Daniel

Published Jul 24, 2011

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There is a new generation of bosses called “grassroots tycoons”, whom the current bosses and institutional investors need to take into account.

This is according to John Oliphant, the chairman of the Committee for Responsible Investing by Institutional Investors in South Africa, who was speaking at the launch this week of the Code for Responsible Investing in South Africa (Crisa).

Oliphant, who is also the head of investments and actuarial at the Government Employees’ Pension Fund (GEPF), says that employees, whom he calls “grassroots tycoons”, should have a much larger say in the running of the companies for which they work and business in general, because, through their retirement and other savings, employees actually own a large slice of South African companies, particularly those listed on the JSE.

The GEPF, the largest retirement fund in the country, and the Public Investment Corporation, which invests most of the assets of the GEPF, have led the charge for sustainable investment in South Africa.

Oliphant says that, although the people who are currently on strike may not be individually rich, their voluntary and compulsory retirement savings mean that they “are our new bosses”. This, he says, raises the question about what they expect “from us, their servants”.

The people who believe they are the bosses are in fact the servants, “because there is a general lack of understanding of this in the market, in political debates, and among owners themselves, as to who owns who and how much”, Oliphant says.

Ownership has changed hands, but the system of accountability has failed to take account of this reality, he says.

Institutional investors, which are the custodians of the savings of individuals, have not done enough to exercise ownership of the com-panies in which these savings have been invested.

Crisa will enable the new bosses to exercise far greater control over the companies in which their savings are invested, to ensure that they adopt policies that will make them sustainable, Oliphant says. It is the new bosses who suffer when markets crash because companies chase short-term profits, he says.

The 2008 financial crisis is a powerful reminder against tolerating an arrangement that allows the rug to be pulled out from under the feet of the masses of people who have worked hard to secure their homes and the financial future of their families, Oliphant says.

“Our approach to investment as an industry is too focused on the short term, and there is a general lack of appreciation for long-term sustainability issues.

“As fiduciaries and custodians of people’s savings, we need to think more about sustainable returns. We need to ensure that we deliver on our promise of long-term prosperity through investments,” he says.

There is no doubt that the activities that led to the 2008 crisis undermined the financial integrity and resilience of many communities, increasing hardship for those already struggling with poverty, Oliphant says.

The long-term sustainability of companies in which the savings of individuals are invested must be based on the principles of protecting the environment, adhering to standards that aim to improve the lot of the poor and sound corporate governance, he says.

According to documentation accompanying the Crisa launch, the code is aimed at institutional investors that hold the savings of individuals – including retirement funds, life assurance companies, collective investment schemes, asset managers and asset consultants.

Crisa seeks to place a voluntary obligation on institutional investors to invest only in companies that meet certain standards of behaviour to ensure that they will make sustainable profits.

The committee that compiled Crisa was mainly made up of institutional investors but also included people such as Theo Botha, who has a reputation as a shareholder activist not afraid to take on errant companies. The financial services industry body, the Association for Savings & Investment SA, is a signatory to the code.

The King III code, which set standards of corporate behaviour, is seen as parallel to Crisa and includes Crisa principles.

CRISA’S FIVE PRINCIPLES

The Code for Responsible Investing in South Africa (Crisa) is a voluntary code for institutional investors (retirement funds, asset managers, life assurance companies) that is based on five principles. These are:

Principle 1. An institutional investor should incorporate considerations about sustainability, including environmental, social and corporate governance (ESG) issues, into its investment analysis and activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.

The code requires institutional investors to develop policies on how they incorporate sustainability into their investment analyses and activities. In other words, institutional investors must ensure that the companies in which they invest are:

* Not exploiting their employees or others but are adding to the general good of civil society;

* Not damaging the environment; and

* Behaving as good corporate citizens.

Institutional investors should ensure that their policies are implemented and must establish processes to monitor their compliance with their policies.

The Crisa committee believes that companies that meet ESG standards will become far more sustainable and will make better long-term profits.

Principle 2. An institutional investor should demonstrate its acceptance of its ownership responsibilities in its investment arrangements and investment activities.

Institutional investors must demonstrate a responsible approach to shareholding by, among other things, implementing a policy that details mechanisms to intervene and engage with companies when concerns have been identified, as well as the means of escalation if the concerns raised cannot be resolved.

The policy must detail the institutional investor’s approach to voting at shareholder meetings, including the criteria used in reaching voting decisions, and the public disclosure of its full voting record.

The institutional investor should also introduce controls to prevent insider trading as defined by the Security Services Act.

Principle 3. Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of Crisa and of other codes and standards that are applicable to institutional investors.

Institutional investors are encouraged to work with other shareholders, service providers, regulators, investee companies and ultimate beneficiaries to promote Crisa and sound corporate governance.

Principle 4. An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these conflicts when they occur.

Institutional investors are encouraged to develop a policy on the prevention and management of conflicts of interests and to establish processes to monitor compliance with this policy.

Principle 5. Institutional investors should be transparent about the content of their policies, how the policies are implemented and how Crisa is applied to enable stakeholders to make an informed assessment of their policies.

The code requires institutional investors to disclose fully and publicly to their stakeholders at least once a year to what extent they have applied the code.

If an institutional investor has not fully applied one of the principles of the code, the reasons should be disclosed.

Institutional investors and their service providers should also, before agreeing to a proxy or other instruction to keep voting records confidential, carefully consider the reasons put forward to justify such confidentiality.

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