As SA’s financial markets have become more integrated with the rest of the world, the decisions that drive share prices are a "yes" or "no" to SA, rather than whether company A is expected to outperform company B. As a result, share prices move together and are affected by perceptions of the country as a whole. That has serious consequences for how business leaders need to think about politics.
Research by Daniel Polakow, a director of Prescient Securities, shows that this "dispersion deflation" of share prices has been particularly high since the financial crisis. What he calls "cross-sectional volatility" has been in decline as share price movements become more homogenised. Our companies are all in the same basket, which is moved by decisions over whether to buy or sell SA, rather than particular firms within it.
This has important lessons for company boards and management. If their job is to maximise shareholder value, then their tasks have changed. They now have to be much more political. It is no longer as important for them to focus on their company’s strategy, and much more important for them to influence the political environment in which they operate.
It is also important for them to influence the perceptions of international investors whose decisions move billions of dollars into and out of the country. Another consequence of this is that financial journalism has inevitably become more about politics than company strategies – in explaining share price movements, political factors are more important than the particular decisions of companies.
This helps explain why, following Nenegate, there was such a concerted effort by business to engage with government in an effort to influence global perceptions. The CEO Initiative was formed by about 60 of the most senior business leaders in the country to work alongside the Treasury and organised labour to turn around the world’s view of SA.
The three partners went on international road shows together, developed initiatives such as the SA SME Fund to address particular problems that were turning investors away from SA. They were on just such a road show when the current debacle began with President Jacob Zuma summoning then-finance minister Pravin Gordhan back from London in the middle of an effort to update international investors about what was happening in the country.
Since then the rhetoric from business has become far more political and strident than it has ever been, from organisations like the Chamber of Mines, Banking Association, Business Leadership SA, and Business Unity SA. When Gordhan was recalled from London Busa president Jabu Mabuza, who was on the road show too, could not hide his frustration,
"The unexpected and unexplained cancellation of the road show is, in our view, ill-timed and ill-advised."
BLSA deputy chairman Bonang Mohale in April declared that BLSA held the president directly responsible for a "breakdown in trust" between government and business, describing the cabinet reshuffle as "clumsy and ill-timed" ensuring "we got a ratings downgrade and are headed for an unavoidable recession".
Imperial CEO Mark Lamberti was quoted in the Sunday Times this weekend declaring "that we’re facing a crisis and that, unless we do something definitive around the issues of state capture, corruption, creating confidence and stimulating the economy, we are headed for disaster." Lamberti said over the past four weeks conversations between business and the ruling party have been unprecedentedly forthright.
Of course, business leaders, like anyone, have a complex set of motivations. And the current political environment is extreme with the potential to affect their lives in many different ways. But the shift in the direct incentives facing business leaders is also important. Now that SA is an open economy, with more than half of the JSE owned by foreign investors, SA is judged as a whole. And investors, from workers’ pension funds through to large insurance companies, have every reason to support company management to speak and act on political matters.
Government has very much the same set of incentives as business, though some parts of it seem not to appreciate this. It has to raise R242bn of funding from investors in order to cover the budget deficit in 2017 and similar amounts each year for the foreseeable future. There simply are not enough savings in SA to pay for this, so foreign investors are crucial. Which is why the downgrades are a massive shot in the foot for government, never mind its impact on the value of SA Inc.
Business in SA has a powerful incentive to improve the international reputation of the country, but government has similar incentives. Business might have to spend some time reminding government and the ruling party of this fact.
And the heat is increasingly focused on the president as the architect of the chaos facing the country, whose incentives are not clear to anyone.
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