Click to edit Master title style. The Real Consequences of Weak Governance: What we ve all learned. Click to edit Master subtitle style.

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1 Click to edit Master title style The Real Consequences of Weak Governance: What we ve all learned Andrew Canter

2 Governance Click to edit Matters! Master title Turning stylethe ship? RSA Click Gross to edit Debt/GDP Master subtitle style SA Foreign currency debt/gdp = 5.3% Foreign currency debt/consolidated debt = 9.7% 2

3 Foreign Click to investors edit Master own title 40% style of SA s government bond market Change Click to in edit foreign Master ownership subtitle -style RSA Government bonds (nominal & inflation-linked bonds) 3 3

4 Click to edit Master title style One more local currency downgrade will trigger a RSA bond exit from some global indices (WGBI) SA s global index inclusion at risk considering negative ratings momentum! FC 2009 FC 2012 FC 2014 FC 09/06/17 Moody's S&P Fitch Aaa AAA AAA Prime Aa1 AA+ AA+ Aa2 AA AA High grade Aa3 AA- AA- A1 A+ A+ A2 A A Upper meduim grade A3 A- A- Baa1 FC FC 2005 BBB BBB+ Baa2 FC BBB FC BBB Lower medium grade Baa3 FC LC FC 2014 BBB- 03/04/ BBB- Ba1 FC LC FC 03/04/17 BB+ 24/11/17 07/04/17 BB+ Ba2 FC 24/11/17 BB BB Ba3 BB- BB- B1 B+ B+ B2 B B B3 B- B- LC 07/04/17 Non-investment grade (Speculative) Higher speculative 4

5 Click to edit Master title style Cost of SA borrowings has risen: Priced for the risk 5-year Click to CDS edit spreads/s&p Master subtitle foreign stylecurrency ratings 5

6 Eskom Click to bonds edit Master credit spread title style bp ES15 ES18 ES23 ES26 ES33 ES42 ESFR03 SA government raises funds for R23bn cash injection Liquidity concerns 30 Futuregrowth on corporate governance in SOEs 0 Jan-13 Mar-14 Apr-15 May-16 Jun-17 Jul-18 Source: JSE, RMB Global Markets, data as at June 2018

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13 Being a responsible investor... beyond ESG Environmental Financial Management Market/ Competitive Social The 3 C s of Credit Capacity Collateral Character Strategic Operational Governance Alignment Culture 13

14 Bondholder Click to edit Activism? Master title style 14

15 Governance Click to edit due Master diligence title style outcomes

16 Access Click to to edit capital Master markets title style Eskom no domestic bond auction since 2014 Eskom no domestic bond auction since 2014 Transnet 3 failed auctions in 2017, no access since Transnet 3 failed auctions in 2017, no access since SANRAL failed auctions in 2016, no access since SANRAL failed auctions in 2016, no access since TCTA 2018 auction cancelled lack of interest TCTA 2018 auction cancelled lack of interest 16

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18 Governance: Click to edit The Master Who title Matters style Character Click to edit Master Assessments subtitle style are the Hardest Part Lynn Browne, Minister of Public Enterprises (in charge of Eskom, Transnet and SA Express) (October 3, 2017): "When I appoint boards I hope that they are truly independent... I can go as far as determining which companies people are in whether they have qualifications whether they have criminal records. I will never be able to test who their friends are. There is the human element that I am not able to change within these boards." 18

19 Click to edit Master title style Eskom governance: what they say and what they did 2016 Eskom Integrated Annual Report 2017 Eskom Integrated Annual Report

20 Transnet Click to edit Limited: Master 1064 title Project style Locomotive Click to edit acquisition Master subtitle style zero tolerance of fraud and corruption (p2) the Board of Directors continues to act as the custodian and focal point of corporate governance and continued to act in the best interests of the Company. (p2) impeccable governance framework (p110) Locomotive infrastructure funding opportunity Market demand strategy (MDS) Strongly negotiated legal agreements 20

21 Governance: Click to edit Making Master title It Real! style / Checklists vs Upward vs Inward governance assessment / Each SOE has its own governance issues/challenges / Various founding legislation, but all SOEs have shareholder compacts Seeking disclosure of KPIs / Board Appointment Process: Nominations committee? Versus sole control of minister? / Board Composition & Stability: Independents, term length, staggered terms, behaviors of ministries / Committees Composition, Mandates, Stability, Competencies / Conflict management (e.g. recusal, policies) / Lending Policies/Procurement Policies Limits of authority/delegated authority (e.g. for loans, procurement) PEP policies Cooling off periods / Reporting on all of the above / Third party governance reviews / We did not engage in remuneration 21

22 Governance Click to edit is Master a web title of oversight style Checks Click to & edit Balances Master subtitle style Constitution Shareholders Citizens Lenders Parliament External auditors PFMA Enabling legislation Ministry Treasury JSE rules & standards Ratings agencies Press Customers SOE Mechanism of discovery: Reporting lines King Code Board Audit standards Polices & procedures Board & committee charters Company secretary Executives Internal audit Staff Insiders Reporting / transparency Whistleblowers Lifestyle audits Journalists 22

23 Landbank Click to edit amended Master title DMTN style 23 / Publication of a range of policies, charters and documents on LB website: Board of Directors Code of Ethics Politically Exposed Persons Policy Code of Ethics and Business Conduct Fraud and Corruption Prevention Policy Whistleblowing Policy Board Credit and Investment Committee Charter Domestic Medium Term Note Program Memorandum Applicable Pricing Supplements of any listed note issuance under the DMTN Programme Land Bank Governance Structure Presentation of the governance structures of the Board Procurement Policy / Agreement reached on changes that need to be incorporated into future bi-lateral loan agreements / Changes have been agreed in principle to their DMTN programme, in relation to covenants, reporting disclosures, etc / Proposal to make changes to the decision making requirements (majority vs 75%) will be made during the next round of meetings scheduled for November.

24 Click to edit Master title style SANRAL: Not cleared but implement cooling-off policy / Generally sound governance / Needs a larger board, with more varied skills / Needs a larger Audit & Risk Committee / Board terms should be staggered (5 of 8 in 3/2018) / Ministerial power to sweep away Board has been used in the past. Minister has sole right to appoint Board, CEO, Chairperson. No nominations committee. / Agreed to: Timely reporting of changes to board, committee or executive management Timely reporting of changes to board or committee mandates Timely reporting of changes to procurement policies or practices KPIs in s/h compact may be reported (?) Implement PEP policy Implement Cooling Off policy / Futuregrowth did not clear SANRAL per se, as we remain concerned about imbalances. 24

25 SOE Click Reform to edit Master title style Reform Click to themes edit Master subtitle style Consistently applied across ministries Independent-semi autonomous unit? 25

26 SOE Click Governance: to edit Master Unmasked title style Bond Click market to edit reform Master subtitle style The bond market is overdue for change and investors are ready for change Andrew Canter Futuregrowth has engaged with: ASISA Fixed Interest Standing Committee JSE National Treasury SOE Issuers to encourage them to be at the forefront of this change (viz Eskom, Transnet, Land Bank) 26

27 JSE Click equity to edit listings Master rules: title Director style disclosures 27

28 JSE Click debt to edit listings Master rules: title Director style disclosures 28

29 Umgeni Click to crisis edit Master title style

30 Disclosure Click to edit and Master reporting title style What Click should to edit be Master disclosed, subtitle when styleand how: Disclosed on SENS at the time of the event: All board and sub-committee member changes and reasons for change. New board and sub-committee appointments: details of CV, experience, any identified conflicts, results of probity checks. Current and previous director and executive dealings with the company. Annual disclosure (website, integrated annual report): board and sub-committee nomination and appointment processes and who the decisionmakers are; Board and sub-committees: charter, ToR, Mandate, Quorum, Decision-making requirements, decision-making authority levels and any changes. conflicts of interest policy and PEP policy: the application thereof, deviations, remedial action and any changes. Lending: loans made to PEPs, directors and management. Procurement: contracts concluded with PEPs, directors and management. 30

31 31 Old Mutual Income Fund

32 What Click did to edit we learn? Master title style / Click Naiveté to edit is Master gone: subtitle We ve style witnessed an organized and systematic attempt to corrupt & capture the state / Rule of law was (is?) undermined / Consequences for deviating from the law (e.g. PFMA) are non-existent / The Mosaic of Governance must be strengthened / Improved transparency and reporting allow regulators, shareholders, lenders, ratings agents, journalists to do their jobs! / Bond market requirements are pathetic / Investors have a key role to play 32

33 Disclaimer Click to edit Master title style Futuregrowth Asset Management (Pty) Ltd ( Futuregrowth ) is a licensed discretionary financial services provider, FSP 520, approved by the Registrar of the Financial Services Board to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of The fund values may be market linked or policy based. Market fluctuations and changes in exchange rates may have an impact on fund values, prices and income and these are therefore not guaranteed. Past performance is not necessarily a guide to future performance. Futuregrowth has comprehensive crime and professional indemnity in place. Performance figures are sourced from Futuregrowth and I-Net Bridge (Pty) Ltd. This document is for information purposes only and is not intended as an offer or recommendation to buy or sell or a solicitation of an offer to buy or sell a financial product or security. The recipient is advised to assess the information with the assistance of an advisor if necessary, with regard to its compatibility with his/her own circumstances in view of any legal, regulatory, tax and other implications. Personal trading by staff is restricted to ensure that there is no conflict of interest. All employees of Futuregrowth are remunerated with salaries and standard short and long-term incentives. No commission or incentives are paid by Futuregrowth to any persons. All inter-group transactions are done on an arm s length basis. Futuregrowth has comprehensive crime and professional indemnity insurance. Futuregrowth prepared this document in good faith. Although the information in this document is based on sources considered to be reliable, Futuregrowth makes no representation or warranty, express or implied, as to the accuracy or completeness of this document, nor does it accept any liability which might arise from making use of this information. 33