South Africa's rapid IR evolution. The FSB, College Hill, De Kock & Kerkhoff and PR Newswire are featured
To say South Africa is poised on the edge of the world stage of investment is a truism - what emerging market country is not? To say South Africa is reaching new heights of corporate governance and transparency is similarly redundant - look at the depths from which it has come.
South Africa looms large in the minds of foreigners. For so long it was out of the mainstream of the world economy. But behind the closed doors of apartheid a unique business culture was growing up as a small pool of companies became industrial giants. 'They had to grow into conglomerates because of the very nature of South Africa's closed financial borders,' recalls veteran IR man Neville Huxham, general manager of PR and IR firm De Kock & Kerkhoff and former head of communications at Anglo American and De Beers. 'Becoming the pariah of the world meant that financial opportunities were very limited and major conglomerates developed by acquisition.'
There were limited opportunities from the South African investor's point of view, too. Only thrill seekers looked beyond the handful of blue chips that dominated the Johannesburg Stock Exchange. As a result investor relations was stifled. 'What was lacking in the mix was the urgency to compete for investment funds,' Huxham goes on. 'Half a dozen companies mopped up investment as institutions put their money where it was secure in the face of a very uncertain political future. In that climate the development of IR as a science, a skill and a vocation was stunted. Before 1992, what was the point? The big companies didn't have to go out on roadshows - they just sat back and let the money pour in.'
'Companies were used to being as secretive as possible - after all, a lot of them had to live off evading international sanctions, and the less said about their operations the better,' recalls Bernard Simon, the former deputy editor of South Africa's Business Day who just moved back to Canada where he used to be the FT correspondent. 'In addition, business was very incestuous with a lot of cross-shareholdings and a very clubby sort of atmosphere. There was little incentive for companies to keep investors sweet and IR wasn't at the top of anyone's list.'
Everything changed when South Africa entered the 'real world'. But there was still a huge political question mark around the country's future. Even now the world's confidence in the country is shaky and the rand hit a new low last month. What can South African companies do against such a backdrop? On one hand there's a potentially volatile political situation; on the other they're trying to reassure investors.
Getting it right
'It's difficult to sing a comforting tune to investors when there are unanswerable political questions. Still, the country is in a far better place today than it ever was under the previous regime,' Huxham notes. 'But now we are merely another emerging market player on the world stage. And as an emerging market, we have to get everything right to get investors to pause and look in our direction.'
'Getting everything right' includes rapid advances in corporate governance and the domestic securities market. Following the UK's 1992 Cadbury report, South Africa embarked on its own review to produce the King Report on Corporate Governance in 1994. Now the King Committee is due to release the results of a major corporate governance review that will add social, health and environmental issues to its revised code. Plus, it's looking hard at the disclosure of directors' remuneration, the links between pay and performance, and making the code mandatory rather than voluntary.
The JSE, recently renamed JSE Securities Exchange South Africa, also looked to London's standards as a model for revising its own listing rules in 1994. And a major revision to listing requirements launched last summer included corporate governance and disclosure guidelines to raise the market to a level of international best practice. Part of the change is that companies will no longer have to continue the archaic practice of publishing regulatory announcements in newspapers starting in October 2002.
South Africa may be gradually getting everything right even while it faces major challenges. Government exchange controls have been greatly relaxed, but they are still obstacles to free trade. Foreign investors see that it's easy to put their money into the country, but they wonder how easy it will be to get it out. 'It's first world trading against a third world backdrop,' is how Huxham sees it.
No wonder communications professionals at South African companies find themselves having to explain political risk as they try to reassure investors. Indeed an IRO has to not only explain a company, but a whole continent. Even the arrival of world-class emerging market investors like Templeton's Mark Mobius doesn't necessarily portend well for foreign investment in South Africa. Global investors know that he targets the world's hot spots and may see his presence as a reason to stay away.
One-way street
To foreign eyes, South Africa's securities market seems protectionist - investment is welcome to come in, but few companies can go outside to list. 'Foreign investors can buy shares in all the companies on the JSE right now, with no restriction whatsoever,' disputes Gerry Anderson, head of financial markets at the Financial Services Board.
'A company listing overseas must justify it to the government because it means a lot of currency going out of the country,' Anderson continues. 'There's a fear that if exchange control is relaxed too suddenly the country will suffer. The handful of companies currently listed in London are there because they're on the FTSE 100. If a South African company can't get on the FTSE, then there's little justification to list in London.'
The situation may change as South Africa's exchange continues to modernize. It plans to follow the LSE's example and demutualize next year. Recently the JSE signed an agreement that at first glance is a simple technology deal to adopt London's Sets trading platform, but the ramifications go much further. JSE chief Russell Loubser predicts that the deal will make way for an easier dual listing process for South African companies without the JSE losing the benefits of trading volumes. This 'will effectively remove most of the reasons given for South African companies wanting to move their listings offshore,' Loubser wrote in South Africa's Sunday Times in May.
One IR consultancy that's betting heavily on South Africa is London-based College Hill. With a 15-year history in the country and offices in Johannesburg, Pretoria and Capetown, it's the market leader in advising South African companies on overseas IR. Chief executive Alex Sandberg notes the shifts in business culture that are forced on any emerging market company entering the world investment arena. 'Often they're very big fish in the local sea. Then they come north and discover that a $3 bn company doesn't necessarily get the City's attention. In South Africa, perhaps you don't always take the call when it's a journalist or analyst. Here in London you do that at your peril.'
It's not only South Africa's giants that are looking overseas. Mark Garroway, College Hill's managing director for South Africa, cites furniture manufacturer JD Group as a good example. With under $150 mn in market cap, the company is embarking on a US and UK investor relations program - 'Just to dip its toe in the water,' Garroway says. 'One reason is that JD Group is expanding overseas, and there's no doubt that just about every corporation in South Africa has the strategic objective of diversifying and internationalizing their revenue stream.' Another College Hill client is Barloworld, which has over 60 percent of its revenues coming from offshore.
A spin-off effect of this globalization process is the rapid development of investor relations. 'All the influences that you find in the UK and the US are starting to bear down on South Africa,' Bernard Simon remarks. 'Whether they like it or not, companies are starting to pay more attention to outside shareholders and regulators.'
Their progress is 'mixed' says Simon. If the US standard of IR is rated a 10, he judges some South African companies to have reached 7 while others are still languishing at 2-4. Part of the problem is that the local investment community has yet to exert much pressure on companies to communicate better. Simon also criticizes the JSE for caving in to harsh criticism of its new edict that companies must disclose the remuneration of directors, which caused the exchange to postpone the start of the regulation. 'Companies still have a lot of catching up to do,' he concludes.
Behind the scenes
One local institution reputed to be active behind the scenes is Capetown's Allan Gray, which has R27 bn ($3.3 bn) in assets under management. Stephen Mildenhall, chief investment officer, says the firm targets cases of bad governance. 'Has management done things not necessarily in shareholders' interests, and perhaps not disclosed them fully?' is how he looks at the companies in Allan Gray's portfolios. 'A good example is the revision of share incentive schemes, such as repricing options. We certainly tell companies when we don't like their behavior, and if they continue to put such proposals on the agenda at the annual meeting, we vote them down. But companies are becoming more responsive to that kind of dialogue.'
Mildenhall says the incursion of foreign institutions like Templeton has helped progress. 'Five years ago there was more investor apathy. Now there's more activism by shareholders. In addition, South African companies listing in London have to disclose more and others are following suit.'
As for the country's regulators, the JSE and the FSB are content they have revamped the market to reach a world standard of quality. Indeed they seem to have turned a blind eye to the SEC's Regulation Fair Disclosure campaign, believing their two year-old insider trading act to be an adequate safeguard against selective disclosure. 'We don't think there's any justification at this time to change our approach as far as market abuse and insider trading are concerned,' says the FSB's Anderson. 'There have been improvements in disclosure, and the revision of the listing requirements has helped a lot in this area.'
As long as investors like Mildenhall keep the pressure on and regulators enforce their high new standards, South Africa looks to be reshaped in fine form.
Crisis response
The search for good IR in South Africa turns up Standard Bank as an example. Stanbic, as it's known, 'did a magnificent job repelling Nedcor's hostile bid through canny IR and PR,' says former Business Day deputy editor Bernard Simon.
Stanbic is one of the few South African companies with a full-time IRO. Kim Howard, who joined the bank since the Nedcor defense, used to be an analyst with HSBC, and she says it's common for South Africa's new generation of investor relations officers to come from a financial background.
When the hostile bid hit Stanbic, senior executives suddenly realized they had poor or perhaps non-existent relations with their shareholders. 'So they really threw their backs into IR, run mostly by the CEO and finance director. They realized that they had to do it to survive,' Howard says.
After the bid, it was back to business as usual, and senior management hired Howard to keep up the standard of IR they had established. 'Investor are demanding more frequent contact and a lot more of management's time,' Howard comments. 'That creates the need for full-time IR.'
Like many South African companies, Stanbic has seen its public float increase enormously. This is mainly because it unbundled a significant cross-holding with Liberty Life, pushing its free float to the highest level of any South African bank. Overlooking Old Mutual's 23-24 percent stake, Stanbic's free float is around 90 percent, prompting its recent appearance on MSCI's benchmark index.
Getting the news out
The JSE and the FSB are both keeping an eye on the UK's Financial Services Authority as it reviews the UK system for companies disseminating price-sensitive information. Like the LSE's Regulatory News Service (RNS), the JSE's Stock Exchange News Service (Sens) is currently the sole channel of news dissemination. Even with a new and improved Sens 2 just launched, there is a 'rumbling discontent with Sens,' according to one observer.
In the UK the FSA is planning to open the news distribution market to let the likes of PR Newswire and Business Wire compete with the RNS. The aim is to bring down the costs to companies through competition while improving the quality of service. South Africa's Business Day has been leading the protest against Sens because it sees it as a high-priced monopoly. 'Sens has been a very small-scale, bureaucratic and not very user-friendly operation, though it has become more efficient as the JSE has put more resources into it,' says former deputy editor Bernard Simon. 'The rumor is that if the JSE could find the right buyer, it might be able to spin-off Sens as a commercial operation.'
Simon says competing providers could add a lot of value, for example by posting news on the web in addition to distributing it to news outlets. Thus Business Day has teamed up with the giant US news release provider, PR Newswire, to form PR Newswire South Africa. 'Companies would potentially get a cheaper, faster, better quality service because vendors would be able to compete,' says Mark Hynes, head of regulatory disclosure for PR Newswire in London.
Another supporter is one of the country's most respected IR practitioners, De Kock & Kerkhoff's Neville Huxham. He is non-executive chairman of PR Newswire South Africa.
But resistance to change remains strong. 'The monopolist argument doesn't wash,' says the FSB's financial markets head, Gerry Anderson. 'The JSE may own the distribution channel, but as long as the information reaches the investor then we have no complaints. If it ain't broke, why fix it?' Still, he concedes that the FSB is closely monitoring the FSA's consultation on news distribution and may consider changes, 'especially if the cooperation agreement between the JSE and the LSE get set in stone.'