by Professor Owen Skae


‘Skin in the game’—that much-loved phrase coined by Warren Buffett—refers to a situation in which executives use their own money to buy shares in the company they are running. In so doing, they pin their personal investment money to their company.


Some say this adds to their vested interest in the company’s success and hence, aligning their rewards to actual performance. Others question the truth of this, offering the example of Naspers CEO, Bob van Dijk.

He took the helm of the executive team at Naspers with its minority shareholding in the magnificently performing Chinese giant, Tencent Holdings. Naspers’ share in Tencent is now worth more than Naspers itself, raising the question as to what is happening to the rest of Naspers whilst under his watch?

Others say he has done wonderful things for Naspers, which can do no wrong if the share price is anything to go by.

So what does skin in the game really mean? And should we be concerned about too much skin in the game, where a handful of top executives have excess folds, perhaps at the expense of other stakeholders in the company?

What kind of message does Naspers’ 2017 integrated report send to its stakeholders, including all its staff, when it says its executives took home “subdued salary and bonuses” that leave many with gaping mouths or shaking heads.

Bob van Dijk took home a total of US$2 202 000 (R28 408 000) of which US$973 000 was made up of annual cash bonuses and performance-related payments. In the same period, he was also awarded 147 906 Naspers-N shares as part of his long-term incentive (LTI), with a fair value of US$10-4 million (R134 million). During this same period, the company reported a trading profit of US$2.75-billion and a loss of $379 million when Tencent is stripped out.

What does this say about corporate governance in a global environment where executive remuneration is increasingly being questioned, both in terms of performance and added value to the company, and in the context of massive disparities in salaries and rising inequality? Many shareholders are questioning this and speaking out about its mismatch with good corporate governance, but not all.

In a Business Times column, Andile Khumalo quotes Naspers Chair, Koos Bekker’s response at the Naspers AGM: “It [corporate governance] sounds wonderful. If you want to be the best soccer team in the world it is important to wash your hands after using the bathroom. But will you win?

Not unless you train the hardest, recruit the best and are merciless in your ambition. Once you have won, then you can look at things. If you lose, the best governance in the world can’t help you.”

These words might come back to haunt Bekker. Or not. Naspers might continue to be the darling of many a portfolio manager but in a climate where the actions of corporate leadership are under scrutiny, it’s unwise to cast aspersions on good governance while paying gigantic, yet “subdued” bonuses to the CEO.

In his column, Khumalo questions how corporate South Africa can claim “the moral high ground over the government when it comes to corporate governance when the Chairman of the third-largest company on the JSE has such a view on governance?”

Seeking wisdom, Khumalo asked King IV’s Professor, Mervyn King, what he thinks and his reply went like this: “To ignore governance principles and just focus on monetary gain is actually yesterday’s thinking. The question of being a responsible corporate citizen is absolutely essential for the collective mind of the board to ensure the company retains value.

“The error of leaders in the corporate world has been the focus on the maximisation of shareholder wealth, when, in fact, there should be a maximisation on the long-term health of the company. Because if we get that right, you’ve got long-term wealth for all the stakeholders including the shareholders. But if you focus just on the monetary bottom line at any cost, you could actually be destroying value to society.”

Allan Gray understands this but its questioning of Naspers’ executive salaries and bonuses as a shareholder did not go down well with Naspers and other commentators who accuse Allan Gray of using this to cover up their lack of action at Net1.

Still, the perceived response from Naspers is, at worst, don’t like it, then sell! Or at best, just trust us so we don’t need to respond to this and we won’t!

Flexing their muscles didn’t go very far for Allan Gray here but as a shareholder in Group Five, Allan Gray effected a historic board change in July this year. It is the first time an institutional investor in a large listed company has achieved such a feat since the advent of the 2008 Companies Act.

In an interview with Moneyweb Editor, Ryk van Niekerk, the Chair of the listed group RECM, Piet Viljoen, complimented Allan Gray on this significant governance intervention and positive shareholder activism by one of the few institutions that gets involved in governance.

He said that the general lack of this kind of involvement is one of the reasons that management has been able to exploit the gap between manager and owner: “There are certain instances where it seems from the provider of capital’s point of view, i.e. the owner’s point of view, that sometimes the only reason for the company existing is just to make sure that management is paid well and not much is left over for the providers of the capital.” He coins it, ‘management capture’.

He adds that company leaders too often play the ‘become big to get into the index’ game so that the index funds buy them without looking at corporate governance—it’s not one of the criteria they use to pick shares. This, despite the fact that companies with good corporate governance will outperform companies with poor corporate governance.

Viljoen believes that shareholders or capital providers should be more involved in the governance of companies, including “appointing directors to the board and taking a much more active interest in remuneration policies and so on. There are a lot of things they can do but having said that, it’s very hard to change, I think it was Warren Buffett who said if you start talking about the remuneration of management, it’s like farting at the dinner table and nobody likes that.”

The agency-principal problem is, of course, not a new one. Us academics have debated and researched this for decades. Research has generally confirmed that you have to reward but it seems that many still haven’t got it buttoned-down as to how much skin is just right or how that skin should be configured.

Perhaps a future TV reality show, ‘Skin or No Skin’ will answer this vexing question for us!

Whilst Viljoen has alerted us to this increasing phenomenon of management capture, his negative view of independent non-executive directors who have no skin in the game should be challenged. It is precisely this kind of independence, which can and should safeguard against this. If not, then those non-executive directors have no place on a board.

Also, the whole question of shareholders owning companies is being questioned. Shareholders don’t own companies, they own shares, something that boards need to inform themselves as to what this really means.

While clarifying all this, leadership would do well to consider that one of their greatest challenges is not how they deal with failure but rather how they deal with success. Using the winning/losing soccer team analogy, one can’t help thinking about Leicester City. It is only good governance that will get them back to the pinnacle of where they were. 

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