The quality of corporate governance has come to the fore once again as the recent share price of global conglomerate Steinhoff tumbled by over 80%. In spite of our clients having near 0% exposure, we are nonetheless concerned with the quality of governance, not only in listed companies but also in passive exchange traded (ETFs) and some actively managed funds.
Allegedly, Steinhoff has manipulated its accounts by amongst others, hiding losses and moving some of its liabilities off of its books and now the chickens have come home to roost. Whether any laws have been broken or not, time will tell.
One observation we can make is that various actively managed funds have chosen to hold Steinhoff, in spite of the perceived associated risks. Whilst some passive investment managers have lashed out at the active investment firms choosing to invest in Steinhoff, we are of the view that passive ETFs that are forced to hold a company, regardless of valuation, quality of governance or associated risks, is just as bad. Last month we highlighted the inherent risky nature of passive ETFs in spite of their purported low fees. Suffice to say, investors in these types of products mostly get what they pay for.
We continuously and carefully evaluate the quality of thinking of the asset managers and investment funds our clients are invested in, in order to minimise or completely avoid similar and potentially permanent loss-making situations. One sure fire way to evaluate their thinking and to hold them accountable, on behalf of our investors, is to ask them what their corporate governance policies are, what the corporate governance criteria they use to vote on the affairs of investee companies are and, finally whether they maintain a public record of their voting.