đź”’ WORLDVIEW: Forget politicians, SA corporate management is terrible

There is a trope – especially among free-market enthusiasts – that things would be better handled by the private sector because private businesses are run better and more efficiently than their public sector peers. True believers will cite Eskom and SAA as proof of this.

But on the flip side, those who are wary of the private sector have plenty of fodder for their cannons too. The last few years have given us corporate failure after corporate failure, from Steinhoff to EOH to Tongaat, providing plenty of evidence of the fallibility and moral turpitude of SA’s executive class. Turns out the nation’s managers are just as bad as its politicians, private sector efficiency notwithstanding.

While South African politicians have rightly come in for criticism for their involvement in corruption and their mismanagement of resources, the private sector has somehow managed to hold on to an increasingly undeserved reputation for competence. This must change if we’re to fix the problem.
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What’s happening?

By and large, the drivers of both corporate and public sector misbehaviour are the same.

First, and most importantly, there is a chronic, serious lack of oversight in SA. Voters are supposed to hold their political leaders to account by voting out bad actors. Similarly, shareholders are supposed to hold their board and executives to account by, well, voting out bad actors. This isn’t happening in SA.

Voters have returned the ANC to power for over 20 years with no apparent interest in how well or how poorly the ANC is doing (in fairness, they also have no real, plausible, appealing alternatives to the ANC either, but that’s a different problem).

On the corporate front, SA shareholders and, much more importantly, their representatives at large asset management institutions, are failing to hold boards and executives to account.

There is a very cosy relationship between SA’s corporate management class and its asset managers. They socialise together, they eat at the same restaurants, and they help one another out and have one another’s backs. This is typical of a small community but is bad news for effective governance. Without an arms’ length relationship between managers and those who are meant to oversee them, there is little chance that bad actors will be weeded out.

Read also: Piet Viljoen is right: Public companies often run by managers for managers.

For ordinary South Africans, this is a difficult problem to address. Often, individuals don’t have any control over who manages their assets – you don’t get to decide who manages your company’s retirement fund. And when it comes to buying investment products directly, would-be investors are faced with SA’s financial services oligopolies. With few choices, it’s hard to avoid asset managers that aren’t taking their jobs seriously.

In addition, most people simply don’t have the time or capacity to monitor corporate actions, read financial statements, and attend shareholder meetings – that’s why we outsource asset management to professionals. The problem is that, in SA, many of those professionals are not doing their jobs.

For example, one study on JSE corporate governance found that institutional shareholders voted against corporate resolutions just 6.6% of the time. The study said they prefer to “engage with investee companies in private”, which is all well and good, but not if it means the kind of corporate governance disasters we’ve seen repeatedly over the last five years.

Misaligned incentives are another major driver of the massive governance failures we’ve seen in SA. Politicians have found that they can make huge fortunes through cronyism and corruption without paying any price in terms of jail time or losing an election. They, therefore, have no incentive to do the right thing – doing the wrong thing is all upside.

Similarly, in many instances in SA, executives are incentivised based on certain financial metrics, such as earnings per share. They thus have every reason to boost that number from year to year, no matter how they do it. Thus, we see executives selling attractive assets and skimping on long-term investments to boost short-term EPS. We also see executives padding or outright falsifying their numbers and not being caught because of lax oversight by accounting firms. (Incidentally, this, too, is a failure of incentives, since accounting firms are chosen and paid by the very executives they’re meant to be overseeing and thus have no incentive to call out their crimes.)

What does this all add up to? Well, to me, it seems clear that Corporate SA needs an Operation Carwash as badly as the SA government. There should be prosecutions and jail time for executives and auditors involved in financial fraud.

Executives who make major strategic errors should lose their jobs (Woolworths CEO Ian Moir is a good case study here). When low-level employees are bad at their jobs they are fired, retrenched, or otherwise moved along. We should do the same with CEOs.

Dealing with the problem of ineffectual asset managers is challenging. The long-term solution would be increased competition in the sector. However, given SA’s endemic lack of competition, this fix is probably a long way away. One thing consumers can do is switch at least some of their assets to more independent managers. If nothing else, diversifying across asset managers may help protect you from some of the costs of SA’s poor corporate governance.

SA’s endless litany of corporate failures is an economic crisis, just like Eskom, SAA, and our sovereign debt rating. Global fund managers will look at what’s been happening and decide that there are safer places to put their money. Given our thirst for capital, that’s bad news.

It’s time for us to let go of the myth that private sector executives are competent simply because they are private sector executives. We should regard corporate managers with the same suspicious eye as politicians – they must prove that they are worthy of their positions, or else they’ll quickly prove that they are not.

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