Poor governance ensures SA’s bond market remains captured

At the end of last year, South Africa’s debt-to-GDP ratio reached 55.8%.

As the graph below shows, this has declined rapidly since 2013.

National Treasury hopes to stabilise the national debt below 60% of GDP, but this may be impossible if government is forced to take on Eskom’s borrowings. In a worst-case scenario, where the state takes over both Eskom’s debt and its servicing costs, the country’s debt-to-GDP ratio could climb as high as 67.1%.

“This is the real cost of poor governance,” says Futuregrowth CEO Andrew Canter. “Whatever excuses one wants to make, the degradation of South Africa’s gross debt-to-GDP is a story of bad governance, bad administration, a lack of confidence, a lack of investment, slow economic growth, and out-of-control spending.”

From what is coming out of the Zondo commission of inquiry and previous revelations in the media, it has become obvious how dire the governance of many state-owned enterprises (SOEs) became under the Zuma presidency. Huge amounts of money – as much as 2-3% of South Africa’s current debt, according to public enterprises minister Pravin Gordhan – was stolen under the watch of compromised boards and management teams.

“But governance problems in South Africa have gone well beyond the SOEs and are touching on corporates on a weekly basis,” Canter points out. “Corporates are falling over, there is malfeasance, misrepresentation, and accounting fraud. That is all under the broad heading of governance.”

The character of a company

For Canter, this makes the case for incorporating environmental, social and governance (ESG) considerations into investment decisions patently obvious.

“They are not some ancillary thing,” he argues. “Whenever you analyse a company you should always be looking at financial statements, financial forecasts, market and competitive positioning, pricing power, leadership and management, alignment of interests, and a whole range of things.

“Why would you separately consider ESG factors as unique or outside of that? Especially governance. Governance is how you assess the character of a company.”

Canter’s view, however, is that while the King codes have been a positive step in helping to formalise and evaluate corporate governance, they do not do enough on their own.

“The King Code presumption is that governance begins and ends with board of directors – that everything funnels up to the board that is all-knowing and all-seeing,” he says. “That is a fallacy, whether you are talking about the public or private sector.”

An obvious example of its inadequacy is that the boards of Eskom and Transnet are appointed entirely by the minister. They have no nominations committees making decisions about what skills are needed, seeking suitable candidates, vetting those individuals and proposing their appointment.

No checks and balances on ministerial power

There are therefore no checks and balances on who a compromised minister can appoint to the board – or dismiss from the board. The impact of that on corporate governance has been obvious.

For Canter, governance is therefore a combination of many things, well beyond just the board. In the case of SOEs, the role of National Treasury, the minister of public enterprises and legislation such as the Public Finance Management Act also have to be taken into consideration.

In the private sector, the entire organisation and its organisational culture play a role.

“Are you telling me nobody inside Steinhoff knew what was going on?” says Canter. “Someone must have known.”

Governance is therefore also about whistleblower protection, and even creating the right incentives for people to come forward. In the US, for instance, if somebody presents the Securities and Exchange Commission (SEC) with information about illegal activity at a listed entity, and that information leads to a successful prosecution, the whistleblower is in line for a reward.

The need for transparency

Crucially, governance is also about those outside of these organisations – investment analysts, journalists and citizens.

“But we cannot do our job unless we get information,” says Canter. “That is why I am all about transparency.”

Last year the JSE brought out proposals to tighten bond market listing rules precisely because the information issuers had to make public was so inadequate. Particularly for SOEs that have listed bonds but are not listed on the stock exchange, very little disclosure needs to take place.

Just one example is what directors of bond issuers need to supply to the market.

“To be a director of a JSE-listed entity you have to show your qualifications and experience, you can’t have been debarred from entry into the profession, you can’t have committed perjury or embezzlement, and so on,” says Canter. “This is a good list. It’s what you expect from a listed capital market. But in the bond market, if you want to be a director of a listed bond, all you must have is a name.”

This is the kind of thing the JSE needs to address – and the urgency is obvious. For the ‘web of oversight’ to work, the market needs to be properly informed.

“We’ve had this systematic attempt to capture the state,” says Canter. “The bond market remains captured. It’s time for a change.”

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