A new report on stewardship in South Africa has been launched today by investment firm RisCura. “Moving the Needle – Stewardship in South Africa” is the result of research into fifty-two South African private sector asset managers, with over R3.9 trillion in assets under management. This represents 70% of South Africa’s total savings and investment pool of R5.5 trillion managed by South African private sector asset managers.
For many years, the South African financial services industry was rated very highly globally, as was evident by the country’s favourable ranking in the WEF Global Competitiveness Report. That was until 2016 at least. Then the rankings slipped, particularly in the areas of shareholder governance and investing back into the country by financing SMEs, an important engine room for economic growth.
According to RisCura, this is where institutional investors and the asset managers who invest on their behalf have a huge role to play.
“Properly engaging with corporates about factors that materially affect their long-term sustainability, such as improved corporate governance, better environmental and social practices, can improve their financial stability, reduce risk and become a crucial part of making companies more investable, both by local and international investors. Institutional investors have the opportunity to ‘move the needle’ by actively engaging with the companies they invest in on these important issues,” says RisCura managing director, Malcolm Fair.
The research was a combination of both an online survey, and one-on-one interviews, which focused on three specific questions, namely:
- How are you moving the needle through stewardship activities towards a better South Africa and world?
- How are you contributing towards dealing with the bad actors, individual or corporate alike?
- How do you rate the ‘plumbing’* of your proxy voting systems and processes internally?
“With the many environmental, social and governance (ESG) challenges that South Africa faces, asset managers can and should play a vital role as stewards of savings they are entrusted with. Indeed, they have many tools at their disposal, from engaging with the investee companies through to removing and replacing directors or ultimately driving up the cost of capital through disinvesting,” says Fair.
Stewardship includes both engagement with corporates and voting shareholder proxies. This is where asset managers exercise the voting rights attached to the shares they invest in on behalf of their clients, be they institutional investors such as retirement funds, or individual investors through unit trusts.
Governance still dominates
According to the report, asset managers by and large continue to spend more effort engaging with corporates on governance issues (the G in ESG). While there is an increasing, more recent focus on environmental issues, specific attention on social issues remains weak.
“With the world facing a global climate crisis, and South Africa predicted to be amongst those more severely affected, the level of attention to environmental issues was lower than expected, especially given the survey was conducted in the lead up to COP26. Social issues hardly featured in the interviews. This was surprising given the combination of COVID lockdowns, massively increased mortality and social unrest and looting that severely impacted particularly SMEs in South Africa earlier this year. SMEs are the growth engine of any economy,” Fair says.
Dealing with bad actors
According to the report, many managers rate themselves relatively highly on actions that they have taken to weed out bad actors in the market (the average score here was 7.3/10). Yet, their efforts have clearly been thwarted in the past few years with the series of corporate governance failures that corporate South Africa has witnessed, most notably Steinhoff, African Bank, the Resilient Group, EOH, Tongaat (to name but a few in the listed equity space), with many more examples when one includes the unlisted space. Of course, the judicial system needs to improve as well, by bringing white-collar criminals to book.
“Bad actors getting away with their misdeeds with limited consequences sets a bad example for those that follow. We need to give more thought to how these bad actors are dealt with and particularly how white-collar criminals are brought to book in South Africa. The industry could do more here to lean in and help clean up,” says Fair.
Stewardship practices are improving
Notwithstanding the above, stewardship practices are improving, the research found. Ten years ago, in 2011, RisCura conducted a similar exercise and produced the report Spoilt Votes. The current research revealed that across the board the quality and quantity of stewardship has improved dramatically since then. The proxy voting process has also improved.
However, many respondents said that there are systems issues such as regulatory or judicial hurdles that act as hindrances to better stewardship.
“There have been areas of improvement in stewardship practices in South Africa, but at the same time, we appear to be falling behind our global peers. Our report concludes with some critical suggestions for how South African asset managers, their investors, and all players in the industry can regain lost ground move the needle further for the long-term benefit of all savers.
Click here to download the report