Shareholders must bleat loudly

Recently the influential Economist published an editorial in praise of shareholder activism.

The writer believed corporate governance had been weakened by the rise of passive index funds which imitated the stock market's movement and were controlled by computer programs whose designers demonstrated little interest in how the underlying companies were run. A rising chunk of the stock market also sat in the hands of unit trusts, pension funds and other lazy investors who disliked becoming deeply involved in firms' management.

Historically, activists were loathed for their belligerence and opportunism, often accused of stripping cash and assets and loading businesses with debt. But on almost every market there are companies that underperform because of misallocation of capital and poor management, and current activists seek mostly to improve boards rather than sell off assets.

For the most part the dominance of a handful of large institutional shareholders on the JSE has shut the door on investor activism, allowing certain entities to escape epic blunders with impunity.

On Friday, coal, iron ore and titanium-oxide resource group Exxaro released a trading update for its financial year to the end of December 2014. Headline earnings, the number used by analysts to measure operating performance, were marginally softer, a consequence of the recent slide in commodity prices. But the real earnings figure, the one that reflects all the debits and credits processed in the company's books, reveals a far worse position. It includes a R5.8-billion write-down of a botched investment in the Republic of the Congo.

Exxaro is a fine company run by fine people. Its website contains details of awards for sustainability, corporate governance and reporting standards. What bothers me is what led the people in charge to lay out more than R5-billion - 12% of Exxaro's current value on the JSE - on an iron ore project in a foreign land and then, a few months later, abandon it after failing to secure agreements to rail and ship their production?

The impairment was no surprise to the market, but since the mining firm announced its decision to abort the investment six months ago, not one shareholder appears to have raised questions (nor has management offered an explanation) about whether the decision to fund this ill-fated adventure was clearly considered or whether the board was duped by the seller's bogus promises.

Exxaro is not alone in its misadventure into darkest Africa. In October 2012, Tiger Brands acquired a major stake in Nigeria's Dongote Flour Mills, which it judged an important step in the group's strategy to expand on the continent. It paid R1.5-billion for a 63% share in the baker and pasta and noodle manufacturer.

Two years later, Tiger Brands' management was forced to write down almost two-thirds of the investment (R950-million) after trading losses of R666-million.

So how have Tiger's executives escaped interrogation by the investment public on how a business with decades of proven competence bought a lemon?

No heads have rolled at Exxaro or Tiger Brands, but nor did they roll at Coronation Asset Managers after their abstracted purchase of African Bank shares for clients flopped, even though market forces were blurting danger.

If the magnitude of the investments were inconsequential in relation to the size of assets the houses managed or the scope of other operations in the Exxaro or Tiger Brands stables, why not dismiss Nkandla's costs as a fraction of the revenues taxpayers contribute to the fiscus?

Errors in business and on the markets are understandable. Regardless, at the first sign of trouble, it is the responsibility of stakeholders to question management's motives and ensure proper procedures and standards of governance were followed. It is management's obligation to provide apposite justification even if not confronted.