JSE CONSULTATION DOCUMENT
It takes a village to raise investor protection
Equity investors should not rely on anyone, least of all the JSE, to protect them from value-destroying corporate scandals such as Steinhoff, which left shareholders standing helplessly by as R300bn was wiped off their investments. That seems to be the message of the consultation document released by the JSE last week.
Securing the sort of protection most investors assume they have would require all the players in a complex ecosystem — what JSE CEO Nicky Newton-King calls the guardians of corporate governance — to do the right thing. The list of guardians includes directors, auditors, asset managers, pension fund trustees, regulators and analysts.
Critically, these players need to work better and work together, which is why the JSE’s consultation document places as much emphasis on them as it does on upgrading its own existing requirements.
"You can have any amount of laws but you can’t stop somebody determined to do bad things," said Newton-King — careful at all times to avoid mentioning Steinhoff and fraud in the same sentence. "Investors assume the entire governance ecosystem will prevent bad things from happening, that it will hold companies to account," said Newton-King, who describes the proposals in the consultation document as the most substantial changes to the philosophical underpinnings of JSE listings requirements since 1994, when the first King report on corporate governance was released. This year’s events have done serious damage to that assumption and the necessary trust in markets.
Piet Delport, professor of mercantile law at Pretoria University, says the consultation document highlights the reality that the JSE is a private entity subject to public oversight.
"It is run like a club. If a company doesn’t comply with its rules, the worst the JSE can do (apart from fines) is suspend its listing, which will hurt the shareholders." This reality has grim implications for shareholders seeking retribution for the loss of value of their investments, says Delport.
As things stand, the contractual relationship between shareholder and company means shareholders face a huge burden when trying to prove the company or its executives are responsible for their loss.
The good news for investors is that like all long-established clubs the JSE works well most of the time. But 2018 has not been one of those times. It’s been a spectacularly bad year for the exchange.
"SA financial markets have, over the past year, been shaken by a range of corporate scandals, rumours and innuendo," said the JSE. Nowhere in the 14-page document is there any mention of the names behind the scandals, rumours and innuendo, which may reflect the club-like environment in which the JSE operates as much as a fear of legal challenge.
But the year’s media stories tell it all. While Steinhoff hogged most of the headlines, EOH, Aspen Pharmacare, Resilient, Fortress, Ayo and Oakbay also managed to grab attention for all the wrong reasons.
And there was the near-listing of controversial loss-making IT company Sagarmatha, which is a particular bugbear of Magda Wierzycka, the CEO of asset manager Sygnia and outspoken critic of the JSE. Wierzycka says that in terms of its charter the JSE has a duty to protect investors. "I would like to see more stringent criteria applied to companies that list when they are insolvent," she said.
If it’s found that there is no responsibility then the question is whether there’s a defect in the lawMichael Katz
Chair of law firm ENSafrica
Proposals to make it tougher to get a listing turn out to be the JSE’s most substantial contribution to plans to "provide a trusted space" for investors. By making membership tougher, the JSE may hope to get better-quality applicants more inclined to abide by the club’s rules.
The proposal for a nonbinding annual general meeting vote on the corporate governance report looks like a token gesture, given the limited success with the nonbinding vote on remuneration.
Even the welcome proposal to require directors to disclose the use of their shares as collateral for loan facilities demonstrates the limits of the JSE’s authority. Delport says directors could block this on the grounds of their right to privacy.
Michael Katz, chair of law firm ENSafrica, agrees there is a need for fundamental analysis of the corporate governance situation. "Where there’s corporate failure that gives rise to shareholder loss, one needs to examine what are the responsibilities of each role player. If it’s found that there was responsibility on all or some of the role players, then enforcement is the answer.
"If it’s found that there is no responsibility then the question is whether there’s a defect in the law," said Katz, who suspects a deep analysis would reveal a failure to enforce regulations. "I would be very surprised if we need any new laws."
For Newton-King and her JSE colleagues, new laws may be easier than getting all profit-driven role players to do what they ought to do.