Allan Gray, Gijima AST and The Law of Unintended Consequences

Just as well that before entering the birth canal, none of us know the hand we’ll be dealt. Some have the good fortune to find themselves surrounded by wealth, others are conceived by paupers. But no matter how one starts out, when it ends all we really possess is our reputation.

Sadly, reputation is something which takes a lifetime to build but can be lost in an instant. But its destruction is rarely the result of an overnight transformation. Public personalities created by the false veneer of spin doctoring are always vulnerable. Such façades tend to be shattered at the least convenient moment. God has a wonderful sense of humour.

Then there are the victims of the Law of Unintended Consequences. Their real failing comes through not addressing perceptions that have been created, even though they acted with the best intention. The impact on reputations can be calamitous. As some top dogs at Allan Gray and the Imperial Group are now discovering to their cost.

Anyone who has interacted regularly with money manager Allan Gray will have no doubt of the firm’s integrity. You won’t see Allan Gray staffers participating in the business-generating “freebies” so favoured in the asset management sector. And over the years on the Moneyweb radio show, the firm’s leading lights Simon Marais and Stephen Mildenhall have always been brutally honest – talking straight even when it was to their disadvantage.

Allan Gray takes its fiduciary duties more seriously than most. Heavens, when expressing opinions they even insist on referring to shares not owned by the firm but “held on behalf of clients”.

That approach has been a differentiator in a marketplace wracked with spiteful rumour and competitive bile. Built on a combination of good performance and its reputation for honesty and integrity, in under a decade Allan Gray has been transformed into a R100-billion asset management giant.

But over the past fortnight, the Law of Unintended Consequences has put it all at risk.

Mildenhall, the firm’s chief investment officer, is taking the full blast. He decided a year ago in his personal capacity to take a chance on troubled technology firm AST. Based on the hope that the business would get its act together and generate decent returns from massive captive business, Mildenhall bought 5,5-million AST shares after going through the firm’s rigorous internal approval process.

His view on a possible turnaround at AST was shared by four other Allan Gray executives, who bought smaller numbers of the shares, also in their personal capacity. As AST’s profile was too small and too risky for it to be included on the list of shares which Allan Gray would “hold on behalf of clients”, there was no question of anyone being prejudiced by the personal actions of the portfolio managers.

The problems started earlier this year after AST secured the guarantee of a R116-million conversion of debt into equity from its long suffering major shareholders – who also happen to be its funders and biggest clients, but that’s another story. The release from that debt burden came with the promise of a merger with Black-owned Gijima Technologies to create an enlarged BEE-compliant group.

Virtually overnight, the skunk became, in Allan Gray’s analysis, an investment proposition. So attractive, in fact, that the firm approached AST with the offer to underwrite the other R44-million it intended raising from shareholders.

Unfortunately, Mildenhall and his colleagues did not stop to think how this would look to outsiders. In their minds, the decision to underwrite the AST fund raiser was based solely on its attractive price and improved prospects. Others saw it very differently, especially once the personal shareholdings became known. Not disclosing this conflict of interest publicly, one only imagined by Allan Gray executives but very real to outsiders, has come back to bite the firm – hard.

Predictably, competitors both here and abroad (where parent Orbis takes on far tougher foes) have found a new weapon, indignantly decrying those firms whose asset managers own shares in a personal capacity. Among the most vocal critics, ironically, is the marketing-minded CEO of Mzi Khumalo’s asset management company. Yes, the same Khumalo who scalped Harmony’s broad based empowerment groups when hijacking Simane.

Cold comfort for Mildenhall and his colleagues is that they find themselves in good company. Imperial Holdings is another victim of the Law of Unintended Consequences. Like Allan Gray, this is a company with an enviable reputation built over decades. Indeed, CEO Bill Lynch has just been voted by his peers as one of the country’s top eight business leaders for 2004. Integrity ranks high on the characteristics required for such an accolade.

Imperial’s troubles stem from last week’s announcement of a BEE transaction with Lereko Investments to complement its existing employee-focused Ukhamba deal. This time, Imperial has followed the conventional route where significant shareholding will vest with high profile individuals.

Although eyebrows were raised by the sizeable chunk to be owned by former ANC politicians Popo Molefe and Valli Moosa, most criticism has been targeted at two other members of the high profile consortium. With no capital injection of their own, this nine person grouping should end up owning 2,2% of Imperial total equity – worth R480-million at today’s market capitalisation.

The two members drawing most attention are Monhla Hlahla and Lulu Gwagwa who will together own 13% of the consortium. They are the CEO and a director, respectively, of the Airports Company of SA (ACSA), a parastatal. Their conflict of interest is blatantly obvious. Imperial has a highly visible business relationship with ACSA though Imperial Car Hire and the group’s separately listed subsidiary, tourism operator, Tourvest.

How Imperial got itself into this pickle is not yet certain. When I called chairman Leslie Boyd, a stickler for good Corporate Governance, he wasn’t aware of the details of the consortium members. But be sure he and the rest of a heavyweight board will want to know all about chapter and verse at the next board meeting. After a lifetime building his own integrity as a top executive at Anglo American, Boyd won’t want to throw it away in the twilight of his public career.

Also, allowing such an obvious conflict of interest to be created is completely out of character for Imperial CEO Bill Lynch. Surprising, too, is the involvement of Eric Molobi, whose Kagiso Trust is for many the role model of broad based BEE. Never before has Molobi’s name been among the personal beneficiaries of any such transaction. Now he appears as the owner of 5% of the Imperial-related consortium.

To further embarrass the man, details of the Imperial transaction come hard on last week’s release of the Metropolitan chairman’s report where Molobi drew wide praise for his attack on BEE transactions which led to “self-enrichment” of the “elite few”. Again, it’s so far from Molobi’s normal actions to suggest this must be a genuine error of judgement, not some newfound greed.

Whether caused through insufficient forethought or mere oversight, something went badly wrong in both the Allan Gray/AST and Imperial BEE transactions. Which ever way one looks at them, the conflicts of interest are glaringly obvious. Apart from the business risk, it threatens to stain the reputations of all involved.

Perhaps the parties affected should take a cue from South Africa’s most admired citizen. Nelson Mandela never had a problem admitting his mistakes. Doing so enhanced rather than damaged his reputation. Any apology requires humility and the risk of losing face. But it works far better than trying to defend the indefensible.