LEADING GOOD GOVERNANCE IN THE FIXED INCOME ENVIRONMENT
As a responsible investor, our focus has increasingly been on the “G” element of the ESG (Environmental, Social and Governance) aspects in our due diligence and investment decision-making.
We believe that good governance lies at the heart of a sustainable business that delivers returns for ALL the stakeholders of the business, viz. shareholders, lenders, employees, customers, suppliers and society at large.
ESG factors are integral to the investment analysis and due diligence process and we apply these to listed and unlisted assets, equity and debt, and across the various sectors we invest in on behalf of our clients. In this context governance is an important risk indicator in the fulfilment of an entity’s mandate and its ongoing operational sustainability.
KING IV: PRINCIPLE 17
Our focus on ESG in our investment decision-making has recently been affirmed by the release of the King IV Report on Corporate Governance. In addition to a focus on ethical and effective leadership and transparency, there is a specific principle (Principle 17) that is directly applicable to institutional investors in King IV. Principle 17 requires “the governing body of an institutional investor to ensure that responsible investment is practised by the organisation to promote the good governance and the creation of value by the companies in which it invests”.
Events during 2016 in the state-owned entity (SOE) sector led to us suspending new funding to six SOEs on governance concerns. Following this suspension, we committed to embarking on an in-depth review of the corporate governance practices of these entities with a view to better understanding the governance mechanisms underpinning them, the risks and opportunities, and to facilitate an engagement process with the management of the SOEs. Our vision was to create a long-term foundation for better governance, better transparency and disclosure and long-term sustainability of our investments.
ENHANCING DISCLOSURE AND TRANSPARENCY
Typically, to date, governance reviews of large listed companies and SOEs have followed a tick box/desktop analysis approach. Publicly available information has been limited to what is presented in the integrated annual reports, on the entities’ websites and in media reports. In the past, we relied on these sources as inputs to our due diligence process. However, the ongoing and concerning news flow in the SOE sector prompted us to amend our approach and expand the scope of our review. We stretched our evaluation to include a detailed assessment of policies, processes and practices; an assessment of the relevant board’s independence and commitment to fiduciary responsibilities; and an understanding of the relationship with the shareholder.
Governance is a dynamic process, the monitoring of which requires ongoing attention and engagement with management and shareholders. An important aspect of our governance reviews is encouraging enhanced governance practices through specific recommendations and increasing public disclosure and transparency to create sustainable improvements. More frequent and dynamic reporting over and above that which is currently available has already been negotiated with some SOEs.
Most significantly, this information is available to the broader market via SENS announcements, on the relevant SOE websites and in their integrated annual reports – our hope is that this will shine a light on governance and contribute to improved standards in governance practices to the benefit of all stakeholders.
Our review allowed us to make certain recommendations to improve governance and disclosure and included (but was not limited to):
- Restricting the authority delegated to certain sub-committees to more appropriate levels
- Improvements to how directors’ conflicts are dealt with
- The implementation of “cooling off” periods for board members conducting business with the entity once their directorship has ended
- The implementation of an appropriate politically exposed persons (PEP) policy, and
- Increasing the quorum and voting requirements for board and sub-committees.
Additional public reporting, preferably on a real-time basis through SENS, agreed to includes:
- Disclosure of board charters
- Reporting on significant changes thereto
- For lending institutions, loans approved per transaction approval level
- Reporting on changes in the board composition
- Details of loans made to PEPs and the performance of these over time.
ETHICAL LEADERSHIP IS A DAILY TASK
Policies and procedures form the skeleton of corporate governance but ethical and effective leadership is at the heart of sound corporate governance. Policies and charters only tell a small part of the story and, on their own, are not enough for an entity to claim that their governance is sound.
An ongoing commitment by the shareholders, the board and executive leadership to implement and practise good governance on a day-to-day basis is of paramount importance in ensuring the SOEs can sustainably execute their mandates. We also recognise that sound corporate governance is a journey and that ongoing improvements and corrections are necessary to ensure ongoing focus and execution.