South African Reserve Bank Amendment Bill (B10-2010): Public Hearings Day 2

Meeting report

South African Reserve Bank Amendment Bill (B10-2010): Public Hearings continued
Ratings Afrika Submission
Mr Charl Kocks, Chief Executive Officer, Ratings Afrika, stated that he was making this submission on the South African Reserve Bank Amendment Bill (the Bill) in his capacity as a principal of his African risk analysis agency, Ratings Afrika, but also in his personal capacity as a South African citizen and as a person doing business on the continent of Africa. He clarified that Ratings Afrika had no vested interest in the disputes between the South African Reserve Bank (SARB) and some of its shareholders, or of the Congress of South African Trade Unions (COSATU). Ratings Afrika did not wish to take sides in any dispute except to the extent specifically stated in the document containing his submission.

Mr Kocks stated that the Bill showed insufficient quality. Sound corporate governance focused on considering the interest of all stakeholders. Such corporate governance was not legislated, and it was not likely that it could be legislated for as it was a set of principles. He noted that the vital shareholders in SARB were all South African citizens, international counterparts who were affected by interest rates, and Southern Africa regional entities (including the Southern African Development Community (SADC) and similar entities, and central banks in Africa. The most important aspect that must be borne in mind was the need for fair-dealing. There was undue and unnecessary haste in the whole process around the Bill, and there were many concerns.

Mr Kocks therefore noted that there was a need to follow due process and allow ample time for discussion before effecting any amendments.

Another concern was the private nature of SARB. Currently, SARB was neither a fully private nor a fully government entity, which was a fatal flaw. SARB needed to decide which it was and to embrace either a government or private role fully.

Many aspects of sound corporate governance were not contained in the Bill. He noted that according to a rating scale, SARB would probably currently receive only 50% scores, which would amount to failure. He proposed that there must be a thorough review of all corporate governance aspects of the SARB. Ratings Afrika had detailed submissions, which were contained in the document. Due to time constraints they would not be read point by point at the meeting, but he urged that consideration be given to them. There was also a linked request to extend the time available for comment by 46 days, to allow a proper period for consultation. He reiterated that there was no need to “fast-track” the Bill, and it would be detrimental if this were done.

Discussion
Mr N Koornhof (COPE) asked why it had been suggested that SARB would receive a failure score of 50%, and what criteria were used.

Mr Kocks replied that, by design, the scale was very simple, and focused on how much assurance was given to the stakeholders that their interest would be gauged paramount in whatever the institution did. The principle worked from a top rating of 95% certainty, to the fourth level of 60% percent, where the shareholders would be able to be certain that their interests were regarded as important. SARB may barely fit into the latter category.

Dr M Oriani-Ambrosini (IFP) said that Mr Kocks had emphasised three aspects. The first related to governance, and the failure of sound corporate governance was clear from the presentation and from operations that had been characterised by arrogance. There was also reference to non-disclosure and non-compliance. The third aspect was that of transparency. He asked what measure of transparency was needed in terms of a post-depression model.

Mr Kocks replied that his point around arrogance revolved around vagueness, which led to the point where, in a court action, those shareholders with access to financial resources could easily overpowering those without these resources. The problem with the extra responsibility of the SARB was that those in the operational side of the business were often under immense pressure from the legal, financial or technical sides of the business to initiate courses of action that allowed certain financial activities to occur. These activities might allow immediate gain, but create structural problems. Sometimes the effect of the action was only determinable after the action occurred. Examples of arrogance were diverse, but could not be allowed to continue.

Mr Kocks added that non-compliance referred not to legal non-compliance, but also implied that there was no expectation of how the SARB should correctly act. He suggested that there was need for a serious overhaul of transparency-related issues. Disclosure needed to become a standard practice, not in the sense that confidential matters must be made public, but rather that decisions could be scrutinised and could be raised for discussion. Shareholders had to be satisfied that their interests were considered. Although elements of this were becoming apparent through the efforts of the current SARB Governor, this could not be left up to the individual as subsequent governors may choose not to act in the same manner.

Dr D George (DA) asked if Ratings Afrika had looked at how other central banks operated and how 46 days more consultation period would enhance the Bill.

Mr Kocks emphasised that Ratings Afrika had not rated SARB, but had applied a scale to what it had seen. He added that Ratings Afrika had looked at a number of other central banks in India, Western Europe (excluding France) and the United States. Out of these, only one failed to reach the 50% score. The request for 46 more days to make submissions was being made so that Ratings Afrika could obtain comment from its constituents and combine the comments into a single position. Part of this had been done, but further work was needed. However, it was up to the Committee on whether it wished to proceed within the current time scales.

Mr D Van Rooyen (ANC) noted that it was clear that Mr Kocks did not feel that sufficient care had been taken to ensure good governance provisions.

Mr M Swart (DA) asked for an opinion on the possibility of shareholders stripping the SARB of assets in order to enrich themselves. He asked why, on a nominal value of R1 per SARB share, there was trade at R4 000.

Mr Kocks replied that no board of director should allow anything that was not in the interest of its shareholders. So, if certain shareholders requested the liquidation of assets, the board needed to resist sectional interests. However this was tempered by the fact that the shareholders could elect a new board if they wished. There were many reasons for the share prices. Either there was a non-monetary benefit seen in holding shares, such as national pride, or shares were bought in the hope of future capital return, although the dividends did not tend to support the latter possibility.

Mr B Mnguni (ANC - Free State) asked Mr Kocks whether the current Act contained sufficient provisions around the independence of SARB. He added that the main objective of the SARB was to protect the value of the currency, and that shareholders bought shares to influence monetary policy, not for profit. In light of this, he asked whether he believed that the current crafting of the Bill was offering shareholders a ‘raw’ deal.

Mr Kocks replied that he did not believe that the SARB was independent enough. This was partly because of the composition of the board, and partly due to the lack of clarity over whether the position of SARB Governor was one of a government official, and whether that person should be toeing a political line. This was coupled with old approaches taken to governance rather than the newer concepts around sound corporate governance. He finally noted that he did not think that the Bill would be affecting the shareholders, who had bought their shares based on the current Act.


National Economic Development and Labour Council (NEDLAC) submission
Mr Herbert Mkhize, Executive Director, National Economic Development and Labour Council, presented the submission of that Council (NEDLAC). NEDLAC social partners broadly supported the rationale behind the Bill. He submitted that the proposed amendments were timeous and appropriate, given the prevailing conditions. The proposed amendments would strengthen the credibility of the SARB by addressing challenges to its independence and would enhance corporate governance through the provision that NEDLAC social partners could nominate persons to the board of SARB.

He said it was internationally recognised that operational independence of central banks enhanced their credibility in many ways. Undesirable demands from a select number of SARB shareholders, driven by financial motives, threatened to undermine the credibility of the SARB. However, NEDLAC would support drives by the shareholders in matters that improved the governance of the SARB. The proposals in the Bill were welcomed as they would close loopholes that currently allowed inter-related parties to own more than 10 000 shares in the SARB. The Bill provided an appropriate counterbalance to potential abuses.

NEDLAC also welcomed the proposal to broaden the board of the SARB by including individuals nominated by NEDLAC. NEDLAC supported provisions, in the proposed Section 4A, which clarified corporate governance by outlining the powers and functions of the board. The proposed amendments would align the practices of the SARB with those of other central banks.



Discussion
Mr N Koornhof (COPE) stated that it seemed that NEDLAC was playing a watchdog role and asked for comment on why Parliament should not play a role in the appointment of the board of the SARB.

Mr Mkhize stated that NEDLAC represented four constituents and that he had some limitations in answering questions fully, as he did not have the luxury of expressing his opinion. He was giving these responses as proxy of the Council. He added that he was not qualified to talk on behalf of Parliament. However, since Parliament was the supreme body, to whom everyone was accountable, he felt that there was no necessity to explicitly mention Parliament in the Bill, as its powers were inherent.

Dr M Oriani-Ambrosini asked Mr Mkhize whether the Bill had been formally tabled in NEDLAC and asked why NEDLAC felt that it needed the power to appoint directors. He added that the importance of independence was stated as being internationally renowned. However, he also said that studies had indicated that all economic depressions were orchestrated by sudden crunches by reserve banks. He asked whether this was the type of independence Mr Mkhize wished the SARB to have, and what sorts of checks and balances supported independence models.

Mr Mkhize replied that the global recession had not started out as an economic crisis or recession, but had rather started as a financial crisis in the United States, resulting from sub-prime rate causes. Sub-prime was created by commercial banks, not reserve banks. This had then turned into a recession. It was a fact that South Africa came out of the recession better than other similar-scale economies, and with a lower casualty rate, due to rigorous SARB regulations. Several economists of note had failed to predict the recession, which meant that it was necessary to look at other measures. Countries in Europe were going deeper into recession, which meant that South Africa needed to be ready to deal with potential future problems.

Mr Mkhize said that NEDLAC dealt with Bills in three categories of high priority, low priority, and a third category where Bills would be dealt with in a Committee of Principals. This last category described had been used for this Bill.

Mr van Rooyen asked Mr Mkhize what the opinion of NEDLAC was on the differing terms of office that officials in the SARB had, and if this was of major importance.

Mr Mkhize replied that the terms of office did not worry NEDLAC, and so he had no opinion on the matter.

The Chairperson reminded Mr Mkhize that Dr Oriani-Ambrosini had asked whether the Bill had been formally tabled at NEDLAC.

Dr Oriani-Ambrosini reported that he was informed during the tea-break that it had not been formally tabled, and he was satisfied that this question had been answered.

Mr Mnguni asked NEDLAC to comment on the question of independence.

Mr Mkhize replied that the SARB was not responsible for developing monetary policy, but that government and National Treasury did so. The SARB merely implemented their decisions.

Mr E Mthethwa (ANC) assumed that NEDLAC represented business, government, labour and citizens as the previously stated four constituencies. He asked whether the submission document had also set out the position of shareholders.

Mr Mkhize replied that, in terms of corporate governance, NEDLAC was triggered by the principle that the people should govern. The current state of the SARB did not reflect this. When NEDLAC started nominating people to the Board, then this would happen. The SARB was a critical institution in the economy and if it did not get matters right, then it was possible for it to crash the entire economy. For this reason, it was very important to represent South Africans. The new board could not be judged yet, but he was optimistic.

The Chairperson stated that the issue of the short timeframe for comment on the Bill was raised as a concern in all submissions made so far, and the Committee understood these concerns.

He added that there also seemed to be a feeling from many shareholders that there was a conflict between the objectives of the SARB and the expectations of shareholders. The Committee would be looking into this further.

The meeting was adjourned.