South Africa has a pervasive corporate culture of not complying with the spirit as well as the letter of the law, but rather of attempting to find ways around the law.
The problem was summed up for me during a discussion on ethics last week when a lawyer, who also holds a senior position in the financial services industry, stated that there was no such thing as "the spirit of the law". Instead, he argued, there is simply the law and everyone is entitled to interpret it to their best advantage.
This attitude is plainly unethical, particularly when it leads to practices which make ordinary people victims. Laws on their own, such as the soon-to-be-implemented Financial Advisory and Intermediary Services (FAIS) Act, will not solve the problems.
We, as ordinary investors and retirement fund members, should play a far greater role in demanding a better level of ethics from corporate South Africa and particularly the financial services industry, which is the guardian of our savings.
In this context, I was interested to read a letter from John Brennan, the chief executive of the United States-based Vanguard Group, which is one the world's largest asset managers.
A year ago, Brennan wrote to the companies in which Vanguard has "a meaningful ownership interest to outline our long-standing views on the very important matter of corporate governance".
In the letter, he warned that Vanguard would be using its voting strength to ensure good governance.
Now, a year later, Brennan has sent out another letter which must be sending shivers up the spines of many business managers.
Here is an edited version of some of the things Brennan has told the companies he expects from them:
- "Auditor relationship: Over the past two years, some well-publicised lapses in auditor independence have elevated this subject to prominence. Our view is that minimising non-audit relationships between accounting firms and the corporations they audit is the best standard of care for corporations. We evaluate each case to determine whether a company has a substantial non-audit relationship with the auditor, and if so, we vote against ratification.
- "Corporate structure and shareholder rights: We think that shareholders should be able to assert their ownership rights by a majority vote and enjoy an organisational structure that is free of impediments to free-market activities. Where impediments exist (for example, poison pills), they should ultimately be subject to shareholder approval. We will vigorously support proposals that advance our interests as shareholders by eliminating these barriers." (A poison pill is a tactic used by a company threatened with an unwelcome takeover bid to make itself unattractive to the bidder.)
- "Boards of directors: We find ourselves withholding votes for directors in far more cases than before. This trend results from our decision last year to apply more rigorous standards for board independence. Specifically, we will vote against non-independent nominees who serve on audit, nominating, or compensation committees. We also oppose nominees whose committees' actions are inconsistent with our guidelines on compensation and auditor and board independence.
- "Compensation: Progress here is evident, though it's not occurring quickly enough. We believe that many companies with whom we have spoken are giving more weight to our views. Nonetheless, we're disappointed that we felt compelled to vote against nearly two-thirds of the stock option plans we evaluated during the first half of 2003 - essentially the same ratio as during the same period
last year."
In other words, Brennan is saying that if companies do not operate ethically and within the spirit of the law, Vanguard "will vote against you".
Oh, that a few big asset managers in South Africa would send out similar letters and then follow them up with action in the interests of the people whose money they manage.
You may think that, with investment houses cozying up to big business and vice versa, it is almost impossible for you to enforce ethical behaviour.
It is not. The power is in your hands. Firstly, you can avoid financial services companies that do not behave within the spirit of the law and do not take up the cudgels on your behalf. You can find out which these companies are by reading publications such as Personal Finance.
One thing asset managers should do is report back annually to individual investors on what they have done to protect our interests. As of next year, Personal Finance will start sending questionnaires to asset managers, asking them what they have done to protect your interests.
The force is with you even more powerfully if you are a member of a retirement fund. When the government rightly decreed that 50 percent of the trustees of retirement funds must be elected by fund members, this gave ordinary members of funds an enormous amount of power to clean up corporate South Africa.
Before you vote for a trustee, you must ask what the trustee intends doing to make the fund's asset managers account for how they will vote at the annual general meetings of the companies in which they are shareholders. In effect, the asset managers have your proxy vote on every issue concerning the companies in which your money is invested.
Trustees must, at least, demand an annual report back from asset managers on how they have voted. Many asset managers simply do not exercise the tremendous voting strength they have to ensure proper corporate behaviour.
Sometimes this is because the asset managers or their parent companies are not behaving too well themselves. For this reason, trustees must also monitor the behaviour of their asset managers and the parent companies. If their ethical standards are poor, your money should be placed elsewhere.
The reason for this is simple: you will end up the loser if companies and asset managers behave unethically and do not uphold the spirit of the law. Often, unethical behaviour, as we saw on an international scale with Enron and on a local scale with Fedsure, eventually leads to the companies collapsing and investors incurring major losses.
So, use the power at your disposal to pressure your retirement fund trustees.