Nampak’s hear-no-evil auditor policy
In the wake of corporate failures that were not prevented by auditing firms, shareholder votes are being ignored
"Since Pa fell off the Christmas tree" was the somewhat imprecise response given by one institutional investor when asked how long he had been voting on the reappointment of auditors at AGMs of JSE-listed companies.
Remarkably, given how important the role of auditors has become in the wake of almost every major corporate event of the past three years, no-one seems to know for how long shareholders have been voting on their reappointment. Or on what grounds.
Most seemed to assume it was a requirement, although no-one could say for sure if it was a requirement of the Companies Act or of the JSE.
Piet Delport, professor of mercantile law at the University of Pretoria, thinks it may date all the way back to Britain’s 1948 Companies Act.
As it happens, there is no requirement — in SA’s Companies Act or the JSE listings requirements — to give shareholders a vote on the reappointment of auditors. Section 90 of the Companies Act requires a company to (re)appoint an auditor each year at its AGM.
The reappointment can be automatic and does not need a shareholder resolution unless the retiring auditor is no longer qualified for appointment, or no longer willing to be appointed, or has ceased serving as an auditor.
There’s no record of these circumstances ever having necessitated a vote.
André Visser, general manager of issuer regulations at the JSE, confirms there is no obligation in the listings requirements but had thought section 90 of the Companies Act was more forceful.
Whatever the history, it seems that back in 2013 Sasol decided it had had enough of all this shareholder democracy.
That was the year 99.96% of shareholders voted to support the appointment of PwC to replace KPMG. Of course, given the sheep-like way shareholders vote at AGMs, this high level of support was unlikely to have been a vote against KPMG, which had not yet been damaged by its links with the Guptas, but merely a vote in support of a board resolution.
Anyway, 2013 was the last time Sasol shareholders got to vote on the appointment of auditors. As far as the FM is aware, no Sasol shareholder was aware of this until November.
Sasol’s decision not to allow a vote on the matter is reasonable enough, given that even the Independent Regulatory Board for Auditors (Irba), which has taken a resolute position on mandatory audit firm rotation, accepts firms can be deemed independent for a period of up to 10 years.
In June 2017, after a few tense years of engagement with the industry, Irba announced its rule on mandatory audit firm rotation. It requires that all public interest entities, which include all listed companies, must rotate their audit firms after 10 consecutive years.
Since Irba launched its campaign in 2015, shareholders have become steadily more engaged on the issue.
Their interest has been sparked not just by Irba’s campaign but by the auditing industry’s existential crisis as one after another of the big four global audit firms became embroiled in a financial scandal in some corner of the world.
In SA KPMG was brought low by its links with the Guptas and was hit again by the VBS Mutual Bank scandal, while the Steinhoff implosion has done serious damage to Deloitte’s reputation.
Inevitably, four years and many scandals later, public sentiment has swung behind mandatory rotation.
To be expected, in line with that change, and the generally increased awareness, voting on auditor reappointment at AGMs has picked up significantly. At Lonmin’s 2017 AGM a record-breaking 42% of shareholders voted against the reappointment of KPMG, up from just 1.39% the year before.
Reunert and Spar Group also notched up impressive 36% votes against Deloitte. Tiger Brands, Woolworths, Astral, Aspen and Anglo American Platinum also scored high negative figures.
Barloworld, which this year celebrates 100 years of audit service from Deloitte, is skirting the 20% level.
However, none of these companies has indicated it will follow Nampak’s initiative and unilaterally terminate shareholders’ right to vote on the matter.
After 20% opposition to the reappointment of Deloitte, now in its 51st year of service to the group, Nampak decided to automatically reappoint Deloitte at its recent AGM.
Had it not been for the sharpness of shareholder activist Mike Martin of Active Shareholder, this significant development would have gone unnoticed. In a note to Active’s NGO clients, Martin said the move was deplorable — particularly in the context of the increasing scandals. He said he was unaware of shareholders ever blocking reappointments, but the vote was a useful way to indicate to management what shareholders were thinking.
As an alternative, he recommended that shareholders vote against the reappointment of audit committee members.
The group’s largest shareholders, Allan Gray and the Public Investment Corp (PIC), seem not to have been aware, partly because of the very technical wording of the proxy form and voting results.
Allan Gray referred requests for comment to Nampak while the PIC, which has taken a strong stand on audit firm rotation, seemed to think there had been a vote.
When asked for an explanation, Nampak told the FM there was no requirement to put the reappointment to a shareholder and that the audit committee had "satisfied itself that Deloitte is qualified and independent of the group".
Irba CEO Bernard Agulhas says he is aware of a few companies not allowing a vote and describes it as "disempowering and not a practice Irba would encourage".
He says it is a lost opportunity for shareholders to consider the tenure of the audit firm and the possibility of a lack of auditor independence.