SA may be leading the way towards a different sort of capitalism
Companies will hopefully think twice about share buybacks to create more financial value without caring two hoots about any other sort of value creation
The World Bank’s prediction that SA’s GDP could contract by as much as 8% in 2020 came just after the UN suggested Africa could lose up to half of all its jobs because of Covid-19. And then the World Trade Organisation really scared us, talking about global trade falling by as much as a third. Inevitably, the IMF weighed in with its own bit of well-researched woe, warning us last week that the world faced its steepest economic decline since the Great Depression.
Things are going to get bad, and it will be a long time before they ever get better again. Across Sub-Saharan Africa, capitalism as we know it will almost certainly never be the same again. And in poor old unequal, stagnant, mismanaged SA, without a new global compact the damage wrought by Covid-19 could be even more extreme than elsewhere on the continent.
People much cleverer and more learned than the rest of us actually have very little idea what the world’s economies are going to look like after coronavirus. But there is a new and growing consensus that they are going to be different. Indeed, that they will have to be different.
In all of this doom and gloom there might just be a glimmer of good news for SA, stemming from the fact that much of corporate SA has begun to think differently about the purpose of companies — what they stand for — before most of their peers in other countries. It was precisely because of our not-so-distant past and the legacy of inequality that came with it (plus the fact of card-carrying communists in the cabinet), that companies in this country started to embrace change. And one manifestation of that altered thinking was the emergence of something called integrated reporting.
At their most basic level, integrated reports set out to answer the question: beyond the income and cash flow statements, balance sheet and dividend declaration, what is the point of a particular business? How does a company’s strategy and leadership create integrated value — for society, for its employees and for the environment — in ways that don’t always jump out of the financials?
As lockdown wears on, companies are preparing to make fundamental, sweeping changes. They’re having another, careful look at their balance sheets and asking what they can possibly do to preserve cash. Already some big corporations have declared force majeure and the Reserve Bank has asked banks to stop paying dividends.
By the time the SA economy emerges from lockdown to venture nervously into what will certainly be a long, lousy winter, most companies will have discovered that there are many costs and functions they can simply live without. They will have to do without many nice-to-haves because their revenue streams have plummeted and are unpredictable in ways they could never have foreseen.
Regardless of how financially sound we were going into lockdown, we will all be a lot poorer coming out of it. Earnings per share and company valuations are not going to be what they were for a long time to come. So how do we value our investments in equities and how do we appraise the executive and non-executive directors tasked with creating value on our behalf?
Post-Covid-19 it’s inevitable that most of us will embrace a new understanding of what value means, that for many of us value is going to mean a lot more than share prices and dividends. The question is, to what extent — and how — is our value paradigm going to shift?
Towards the end of 2019, before the spectre of Covid-19, the Financial Times launched a campaign called Capitalism: Time for a Reset. It had taken a while for the integrated-thinking memo to get to Cannon Street, but the fact that the august pink paper, of all places, has begun to talk a different value story is encouraging to say the least.
In a world of shredded company values and earnings and of soaring bankruptcies and unemployment, it is not beyond the realms of possibility that we could soon experience the emergence of a reset sort of capitalism, one that really does begin to look at value differently because the financial value is almost nonexistent. That we experience, as the International Integrated Reporting Council puts it, “A shift from financial capitalism to one based on multiple forms of capital”. A capitalism that doesn’t spend all of its available cash on share buybacks to create more financial value without caring two hoots about any other sort of value creation.
Done properly, integrated reporting is a fascinating undertaking that can shed priceless light and value on what the business of business is really all about. The problem is that even in SA it’s not being done properly. And the reason it’s not being done properly is that senior corporate leaders are, by and large, still not practising integrated thinking. BBBEE ratings are kept in one little box and frilly add-ons such as corporate social investment and socioeconomic development in another.
A majority of JSE-listed companies make the most feeble attempt at integrated reporting, failing to go much beyond putting the word “integrated” on the cover of the annual report. And as for state-owned enterprises, well, if anyone actually read their “integrated reports”, as taxpayers we would immediately ask for our money back. With a few exceptions, today’s integrated reports offer no real insight into how companies’ business models support integrated value creation for stakeholders other than shareholders.
Since the 2008 financial crisis, public companies the world over — and to a lesser extent in SA — have stressed the links between executive remuneration and performance. But very rarely is variable remuneration tied to nonfinancial value creation or the interests of stakeholders.
Measure the pay of C suites (yes, include company chairs) by their integrated value-creation performance and we really could begin to see the emergence of a different sort of capitalism. The time to start is now, at a time when, thanks to this pestilential virus, almost nobody is going to deliver traditional, narrowly defined shareholder value.
• Delmar, a former chief reporter at Business Day, is content director of coreporting.co.za.
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