Large companies virtually assure executive management of higher compensation. As a result there exists a perverse incentive for management to grow the absolute size (the market capitalisation) of their companies, even if this comes at the expense of returns for shareholders. With the growth in passive investing, which tends to invest in the largest and most liquid companies, there is now an additional — yet still unwarranted — incentive for management to grow the "free float" market capitalisation because most tradable JSE indices use the shares actually available for investment to determine size. The JSE index committee is responsible for determining the free float of each company at the quarterly index rebalancing. One potential problem is that the JSE relies on annual public disclosure by the companies themselves (despite the fact that the JSE owns Strate and could use the shareholder register to verify and update company disclosure). A second potential problem is that the passiv...
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