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Futuregrowth's Canter on lessons learnt from SOE lending saga

Cape Town - Investors have a key role to play in protecting the governance of state-owned entities (SOEs) - and companies in general - in South Africa, according to Andrew Canter, chief investment officer of Futuregrowth Group.

He would like to see investors hold SOEs and companies to account - including Futuregrowth itself.  

Fin24 reported earlier that Futuregrowth, which has about R180bn under management, has been openly critical of how SOEs are run and announced in 2016 it would stop buying bonds of six of them. The company said earlier this month it’s still not prepared to resume lending to embattled power utility Eskom.

"We did not want to give more loans to SOEs without better governance on their side," Canter said at a smart investment seminar hosted by Old Mutual in Cape Town on Monday.

"What is real governance?" he asked.

If an entity is a lending entity (like the Landbank and Development Bank of Southern Africa), you would want to see what authority its credit committee has to grant loans.

Entities like Sanral and Transnet, on the other hand, are procurement agencies, so in their case you would want to look at who has the authority to procure.

"In general, one would want to lower the credit authority of an entity, adjusting the limits of such authority. That would be governance made real," said Canter.

"One must be aware of how things can 'creep away'. The internal audit function of Eskom, for instance, reported to Anoj Singh [the controversial former Eskom chief financial officer]. Nobody knows how that happened. If there was more transparency in reporting, alarm bells would have gone off much earlier."

After this article was published, Fin24 was contacted by Eskom to say that it is not true that the internal audit reported to the CFO. "Internal Audit reports administratively to the Group Chief Executive and functionally to the Audit and Risk Committee," said Eskom in an email. 

Appointments 

Canter said one can also look at how a board is appointed. Is there a nominations committee or - in the case of an SOE - is it in the sole control of the relevant minister?

"The board composition is supposed to bring stability. One can look at the independence of its members, the length of their terms, if there are staggered terms, as well as the behaviours of the ministers," said Canter.

"Eskom gave itself an A-grade rating for governance. But one cannot just have a tick-box approach."

In Canter's view, one should check out the board nominations committees of SOEs - and companies in general. Look at how directors got onto the board.

He said once Futuregrowth started to indicate it was not happy with the governance at some SOEs, investors started to behave like "responsible investors" and denied capital to companies they could not "clear".

"There is kind of a feeling that the King Code on governance begins and ends with the board. That is too narrow. There are many other people too who have an interested in keeping an eye on the governance of an SOE or company. These include its customers and the media."

In Canter's view, the legal protection of whistle blowers in SA needs to be fixed.

"We also need more mechanisms for those outside a company to be able to get transparency about it. One can change investor perspectives."

He said what he learnt from the whole SOE lending saga was that the "naivete" about their governance is gone now.

"We witnessed an organised and systematic attempt to corrupt and capture the state. The rule of law was undermined," he said.

"There should be consequences for deviating from the law. The web of governance must be strengthened. Improved transparency and reporting will allow the regulators, shareholders, lenders, ratings agencies and journalists to do their jobs."

*This article was updated on Wednesday 29 August. 

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