Herman Bosman. Picture: RUSSELL ROBERTS
Herman Bosman. Picture: RUSSELL ROBERTS

Hours after Momentum finally reversed its position on the nonpayment of R2.4m life insurance to the widow of Nathan Ganas, shareholders at the AGM of Rand Merchant Investments (RMI) were listening to an explanation of the group’s seemingly much less rule-bound remuneration policy. Central to that policy is a "management participation scheme" introduced this year that stands to generate tens of millions of risk-free rands for RMI executives.

RMI happens to be the single largest shareholder in Momentum, with a 26.5% stake. The holding company’s other investments include 89.7% of Outsurance, 25% of Discovery and 29.9% of UK-based Hastings. It houses Remgro’s insurance investments and was spun out of Rand Merchant Holdings (RMH) in 2011.

RMH, which holds 34% of FirstRand and 100% of RMH Property, introduced a similar management participation scheme during the year.

It turned out to be bad timing. Both RMI and RMH are trading at record discounts to their underlying NAV and some activist shareholders think it’s no coincidence. They have been engaging with the boards of the two companies — both led by chair Jannie Durand and CEO Herman Bosman — for several months in a bid to address the value destruction.

Of particular concern was the property portfolio in RMH and the fear that its growth was being fuelled by the prospect of risk-free rewards generated by the management participation scheme.

The AGMs of the two companies, held one after the other in a quiet Stellenbosch suburb, were to be the setting for a showdown.

In hindsight, it might have been rash to move the AGMs this year to Stellenbosch from Joburg, where they have been held for years with minimal shareholder engagement. Changing the location in a year in which conglomerates are falling out of favour was just asking for trouble. Joburg may have Theo Botha, but the Cape has Chris Logan, Albie Cilliers, Nick Krige and Shane Watkins.

All four headed out to Remgro’s offices in Stellenbosch, a stone’s throw from Steinhoff’s headquarters, for the two AGMs.

Logan, of Opportune Investments, started the RMI proceedings. He wanted to know why the ownership participation schemes were so stacked in management’s favour. The scheme means Bosman is given a 2.5% stake in four of RMI’s equity investments. (He is also given stakes in RMH’s property investments.) "The structure of the schemes means members of management get to share in the upside but are indemnified from any downside risk," said Logan; this not only negated the entrepreneurial spirit but "also introduces moral hazard".

Durand countered that there was much greater risk of moral hazard if management borrowed money to invest, then had to be bailed out. At a later stage, outgoing chair GT Ferreira seemed to suggest one reason for ensuring executives at RMI and RMH were exposed to risk-free remuneration was to reward them for being "intrapreneurs" rather than entrepreneurs.

"Intrapreneurs" have all the character traits of an entrepreneur except for the ego and the propensity to take risks. This means they are ideally suited for work in a large company, said Ferreira.

Logan believes the remuneration structure contributes to the discount problem and reminded the shareholders that the original thinking behind RMI/H was to co-invest with entrepreneurs.

Durand dismissed his suggestion that one way of unlocking RMI value would be to list Outsurance. Two reasons for listing, said Durand, were profile and access to capital markets. Outsurance didn’t need either.

Watkins, of All Weather Capital, also suggested the discount was linked to the remuneration policy. "I’m concerned the discount exists because investors are unhappy with the asymmetry of rewards," he said.

While the activists achieved little at the RMI AGM, other than an undertaking that the board would focus on reducing the discount, they were considerably more encouraged by the outcome of the RMH meeting, the source of much greater anxiety.

Of particular concern was RMH’s seemingly bottomless commitment to property — fuelled by the remuneration scheme — and its 43.9% investment in Steinhoff-aligned Atterbury Europe (AE). In a controversial deal this year, RMH provided guarantees for AE to buy back €360m of preference shares, held by Steinhoff, for €230m. Logan describes it as RMH’s signature deal. "RMH took all the risk but got less than half the return. The Atterbury founders and RMH management, via the participation scheme, made an untold killing."

Cilliers travelled all the way from Robertson to find out why they’d done the deal, who had benefited from the R2bn discount and, crucially, if the underlying properties were as valuable as claimed.

"The purchase of the preference shares benefited all AE shareholders; it was a windfall for the other 56% of shareholders. But it would have been worth nothing if the valuation of the AE properties wasn’t reliable," said Cilliers. He said the uncertainty around the deal wasn’t helped by the links to former Steinhoff CEO Markus Jooste.

"When I walked into the AGM I was ready to fight." As it happened, there was no fighting; instead, shareholders were provided with detailed information addressing all their concerns and an undertaking that property investments would be restricted to just R4bn.

"I was totally disarmed by the amount of information they provided and their commitment to addressing our concerns," said Cilliers. Even the almost-impossible-to-please Krige expressed satisfaction at the way the meeting addressed shareholders’ concerns. For now.