Author: Financial Mail - LindoXulu

22 August 2012

Workers have indirect stakes in big firms through investment arms, reports LindoXulu.

The reach and influence of trade unions is growing beyond the shop floor. Through union investment firms, SA's largest trade union federation, Cosatu, and at least 10 affiliates have acquired stakes in top SA companies, making workers shareholders, albeit indirectly.

The federation's investment arm is KopanoKeMatla.

Unions with investment wings include the Chemical, Energy, Paper, Printing, Wood & Allied Workers Union (Ceppwawu); SA Commercial, Catering & Allied Workers Union; National Education, Health & Allied Workers Union; SA Democratic Teachers Union; National Union of Metalworkers of SA (NUMSA); National Union of Mineworkers (NUM), Communications Workers Union; Police & Prisons Civil Rights Union; SA Transport & Allied Workers Union; and SA Clothing & Textile Workers Union (Sactwu).

With this radical shift in power has come a new challenge: how to balance the interests of union members with being a shareholder.

Recently this came to the fore when KopanoKeMatla CE MarakeMatjila was forced to resign as nonexecutive chairman of construction company Raubex. KopanoKeMatla has a 3% stake in Raubex, which was involved in the construction of roads that were to be tolled. Cosatu was vehemently opposed to e-tolls on Gauteng highways, hence Matjila's resignation.

Apart from conflicts of interest, perceived and real, union investment companies also have to deal with issues of incompetence. NUMSA had to contend with this in 2008 when its investment arm was on the brink of liquidation.

This followed a questionable deal which involved money borrowed from a number of lenders including the Public Investment Corp (PIC). The NUMSA Investment Co (NIC) was sued for "breach of payment" on loans the company had guaranteed would be paid. Under its previous leadership the NIC had agreed to acquire an asset for which 100% funding was required.

KhandaniMsibi, the current CE, says the NIC had obtained 50% funding through debt but had failed to inform the PIC of this when applying for the remainder of the funding.

"When the deal was finalised the company had incurred 100% debt without full disclosure having been made to all its funders. When the extent of the debt was discovered and questions arose about the so-called guarantee, the matter was taken to the Cape high court," says Msibi.

He says NUMSA helped by recapitalising the company with a loan to the trust to which the investment arm reports, which in turned extended the loan to the NIC, thus effecting a turnaround.

KwandiweKondlo, nonexecutive chairman of the NIC, says the new board has focused on improving governance and accountability. The CE has been appraised and Kondlo says a performance system has been put in place. "We established governance systems which subscribe to the King 3 [codes] and the Companies Act," he says.

As with all union investment arms, the shareholding structure is simple but opaque. In most cases the seed capital comes from the union through an intermediary trust. The trustees decide on disbursements to beneficiaries.

"There's a Chinese wall between the mandate of the union and that of its investment arm," says Msibi. In the case of the NIC, which is backed by 290000 NUMSA members, their interest is held through the National Manufacturing Investment Trust, through which the beneficiaries receive disbursements. These are in the form of bursaries for tertiary education as well as "highly preferential purchasing terms on essential products and services".

"As the investment arm we account to the trust, which in turn accounts to the union members. But it would be incorrect to regard all union members as shareholders of the investment arm because it's the beneficiaries of the trust who are entitled to the proceeds of the investment company," says Msibi.

The manner in which the beneficiaries are selected is not publicly disclosed.

Selection of a union's investments can create conflict. The NIC does not have limitations on investments, but the mandate of the Mineworkers Investment Co (MIC) precludes it from investing in companies where the NUM organises workers.

Oren Fuchs, MIC's projects and marketing manager, says it cannot invest in the mining and construction sector. "This is done to avoid any potential conflicts," he says. MIC has stakes in FirstRand and Primedia, among others. Its strategy of being focused and avoiding areas of conflict appears to have served the MIC well - its net asset value stood at R2,8bn as of July 2012.

Msibi, though, argues that avoiding conflict of interest is a mirage. "The idea that you can avoid conflict is not based on fact. Union members, through their pension funds, do not always have control over how their money is invested. Nothing stops third-party fund managers from investing members' retirement funds in 'prohibited' sectors."

Msibi says while the NIC has not looked at investments in the sectors in which it organises workers, "it would be unfair for us to preclude ourselves from investing in sectors where our members are organised, especially if there is a commercial rationale".

Though it does not have a strict mandate, it would not invest in firms that deny collective bargaining to its workers, says Msibi.

Fuchs says the argument about retirement funds is academic.

Dennis George, general secretary of the Federation of Unions of SA (Fedusa), says it is not comfortable with the idea of investment arms for unions. "It creates all sorts of conflicts of interests. How, as a union with an investment arm, can you look after the interests of workers while at the same time looking at the interests of shareholders? It simply doesn't work."

Steven Hawes, a senior analyst at rating and research agency Empowerdex, says union investment arms create an opportunity to "align the interests of the unions with the employer, while at the same time creating value". Sactwu's stake in Hosken Consolidated Investments and Ceppwawu's stake in Aspen Pharmacare are examples, says Hawes.

While it could be argued that Ceppwawu's passive stake in Aspen brought rewards, critics ask just how much of that can be attributed to the union investment arm as opposed to the skill of Stephen Saad, Aspen Pharmacare's CE.

Critics say that the managers of union investment firms cannot claim credit when they hold passive stakes in firms where they have no control and all they have done is arrange the transaction.

A lack of transparency on what these professionals are paid also rings alarm bells. "It's a black box," says an analyst who prefers not to be named.

Msibi says: "While there can be greater transparency when it comes to how the investment arms operate, it should be remembered that all the companies are expected to report back to their members during each annual congress."

On managers' pay, he says: " These investment arms operate in a commercial environment. They borrow money at commercial rates and the bank covenants are not less onerous because their beneficiaries are union members. So as we discuss the issue of pay, people need to understand that they have to attract and retain the best in exactly the same way as other investment firms."