How should investors confront bad corporate behaviour?Published by MAC on 2012-10-02
Source: Statement (2012-09-17)
A portfolio manager of UK-based Investec plc, and a South African human rights lawyer, have asked how investors should act, when confronted with a mining company that's clearly breached its socio-environmental obligations.
Should they disinvest, engage or litigate?
Although the two authors don't resolve this dilemma, they clearly set it out - using recent "tragic" events around Lonmin's platinum mine in South Africa as an example. They conclude:
"We need the investment community to be engaged, to contribute by identifying the steps needed to mitigate harm, respect human rights and develop a constructive, socially and financially relevant extractive sector in SA [South Africa]. Society expects nothing less."
Editorial comment: To get such a ball rolling, Investec's portfolio manager could do worse than look at his own fund's investments in mining.
In September 2011, it invested in South Africa's Gold One mine, where workers were attacked by police earlier this month: South Africa's gold sector goes from one crisis to another
For further information, see: http://moneytometal.org/index.php/Investec_Bank_PLC
Why are investors in the mining industry so silent?
by Malcolm Gray and Bonita Meyersfeld
Public Eye News
17 September 2012
SINCE August 16, the South African and international media have been immersed in commentary and discussion about the tragedy at the Lonmin mine at Marikana.
Almost every conceivable voice has been heard, except one: those who invest in and fund mining activity. It is for this reason that an investment manager and a human rights lawyer have decided to merge their voices.
Institutional investors are bound by their fiduciary duties to act in the best interests of their clients and to maximise profit. These were the key principles governing investment management for many years.
Increasingly, the interpretation of the "best interests of clients" is changing. Both international bodies and South African law require investors also to embrace a broader understanding of fiduciary duties and take into account material aspects that may affect value and investment decisions, including considerations related to environmental factors, social issues and good governance.
As such, a more challenging hurdle is emerging. Investors should be investing in companies ("portfolio companies") that will generate appropriate risk-adjusted returns, but they should also be thinking about risks associated with human rights and environmental violations.
Enter Marikana, which raises a provocative question: what happens when a portfolio company breaches a human right or environmental or governance standard? When institutional investors invest in a corporation that is connected to such a breach, the questions follow: are they complicit in the harmful conduct? Do investors have a legal obligation to take steps to prevent such violations?
And, if so, what are the possible steps? Screening, engagement, divestment or litigation? What should the asset owners (pension fund members or individual investors) expect from their fiduciaries?
Given the events in the mining sector in recent weeks, it is interesting to note that we have heard or read very little from the investment community - that is, the people who own these mining companies on behalf of the savers of the nation.
This silence is also symptomatic of a broader issue in the investment community (both in SA and abroad), namely, how much thought and analysis investment managers actually give to social and environmental considerations, which are key issues for a business's long-term sustainability when making investment choices.
Investment choices appear increasingly to be driven by short-term considerations, and one wonders about the value of the expensive and complex research provided by the broking community.
Is the broking community able to integrate these material considerations - material but difficult to quantify - into its assessment of corporations, and are investors able to interrogate and challenge such reports?
There similarly appear to be discrepancies between the various ratings a corporation can be awarded (including credit, social and environmental ratings) and the reality on the ground: some corporations with the highest ratings demonstrate corporate vulnerability.
The events at Marikana raise the question: is business as usual really sustainable business? This is not to be simplistic about the multitude of factors that feed profit and loss in any industry, not least of all mining.
It does, however, speak to the need for a more balanced approach to investment considerations, especially in the extractive industry, an industry with such a high emotional profile.
In our assessment (borrowing from much more detailed work over the years), this balance includes three parts: the natural capital controlled by the state (the resources themselves are owned by the state and, as such, the state acts as a key allocator of licences while extracting royalties, rents and other taxes); financial capital (equity and debt providers, with return and risk expectations, which fund the enterprise, its capital investments needed to procure, open up and exploit the resource and working capital); and social capital (the workers and communities who provide the human energy needed to extract, operate and sustain the overall operations and around which these operations are or should be traditionally sustained).
There is a need for this collective to be in balance. Interests may differ but, in the end, successful, sustainable ventures require all these parties to receive fair reward for their contributions.
And within this collective, there is the need for a binding, sustainable social contract that recognises that, without any one of these players, mining would not be possible. In our view, it appears that this social contract has been eroded in SA. Or perhaps it never really existed.
In addition, and possibly accounting for the relative silence to date, the providers of capital appear lost in the context of the politics, social disintegration, inequality and the apparent lack of true leadership. One of the reasons for this absent voice is that we do not all speak the same language.
Activists, the government, business, investors, trade unions and workers speak in different tongues. Each has a language with terms of art, jargon and emotion that others may not understand.
In many respects, we need the famous Babel Fish of The Hitchhiker's Guide to the Galaxy, which translates every language to facilitate universal understanding.
Without this, a resolution to the instability at Marikana and in the platinum belt is going to be hard to achieve.
In the coming weeks, we urge the investors and shareholders to account for their role in the events of the past weeks and going forward.
There is a deep emotional link to what, for many reasons, is increasingly considered a sunset industry.
We need the investment community to be engaged, to contribute by identifying the steps needed to mitigate harm, respect human rights and develop a constructive, socially and financially relevant extractive sector in SA. Society expects nothing less.
The strike at Marikana increasingly appears not to have been an event of random agitation but an event reflective of a longstanding, slow-burning and long-ignored demand for change and dignity.
Investors need to hear that demand and become engaged stakeholders in the emerging dialogue.
It is important that investors listen, are heard and can stand accountable as key stakeholders in the longer-term sustainability of the industry.
• Gray is a portfolio manager with Investec Asset Management. Meyersfeld is associate professor and director at the Centre for Applied Legal Studies at Wits University.