The truth about Corpcapital

Eric Ellerine
Chairman
Corpcapital Limited

Dear Eric

During the past few years, and especially recently, I have enquired into various matters that I have been deeply concerned about and are of vital concern to the company and its shareholders.

These enquiries and experiences have not lead to satisfactory outcomes which have resolved the underlying problems. Instead, sustained efforts have been made to deflect my enquiries, shift the agenda, and personalise issues often with the use of intimidatory tactics.

I advised you and the Board that I would be considering my position and that I would do so urgently. I also stated that pressure from management would not influence my decision since I do not report to them.

The decision I am taking is influenced only by one consideration, and that is my view of the best interests of shareholders. I have come to the conclusion that the differences cannot be resolved in present circumstances and I would like to explain to you why I believe this to be the case.

1. Relevant principles of listed companies
1.1 Ownership and control

Publicly listed companies operate on the principle that shareholders own the company and appoint the Board of Directors. The Board in turn appoints and controls management to ensure that the interests of shareholders are pursued.

It is therefore the Board of Directors who controls the company. Managers are stewards of shareholders' capital, and the best managers have shareholder interests at heart. In exercising their fiduciary duty, Board members have to rely on management and the auditors for the information required.

This emphasises the importance of forthrightness and candour in communications by managers to shareholders through the Board. Of vital importance is the definition of the role, functions and responsibilities of non-executive directors, and management's respect for these rights.

Harvard Business Review, July 2002, sums up the situation succinctly: "Governance starts - and ends - with the Board of Directors. The boards' overarching responsibility is to preserve and build the enterprise.

...Some boards don't have the will, or the courage, to challenge a powerful CEO who is reporting good numbers. They let him run roughshod over them, which is apparently what happened at Enron. Too many CEO's use their boards as a rubber stamp and actively discourage input or challenges from their independent directors.

I have seen CEO's orchestrate a show for the board in which they present such detailed strategies, investments, or acquisitions that there is no time left to discuss or question the risks. These CEO's are just seeking rapid approval, and that's a big mistake.

...The best CEO's respect the need for a strong board and the importance of following sound principles of corporate governance. That is how their companies achieve success.

...Numerous ideas are being proposed for new laws to control board governance. But new regulations won't solve the governance problems we're seeing today. Those problems can only be solved if independent directors step up to their legal and fiduciary responsibilities by re-asserting the proper balance of power between boards and management. Directors who aren't prepared to do this should resign.

...The first step is to establish a corporate governance committee to draft the governance principles. This committee must be composed entirely of independent directors.

...Good governance requires a balance of power between the board and the CEO, and a healthy tension between them. That requires trust, the free flow of ideas, and a board that is comfortable challenging management ...It's hard to imagine that the failures at Enron, Swissair, Kmart and other companies would have happened if they'd had robust governance systems in place."

1.2 Checks and balances

Our board situation is the one which is most common, where there is no controlling shareholder. Warren Buffett believes that in these situations "Directors should behave as if there is a single absentee owner, whose long-term interests they should try to further in all proper ways".

Thus, the Board is the ultimate check and balance, and its' true north is the interests of the "absentee owner". Buffett goes further - "if able but greedy management over-reach and try to dip too deeply into the shareholders' pockets, Directors must slap their hands".

He also believes that a Director who sees something he doesn't like should attempt to persuade the other Directors of his view. If he is successful, the Board will have the muscle to make the appropriate change. If he is not successful, he should feel free to make his views known to the absentee owner.

Buffett says that "non-executive Directors should be selected for their business savvy, interest in the job, and orientation towards the absentee owner, and not simply because they are prominent or add diversity to the Board".

Corpcapital has six executive Directors and four non-executive Directors. I have come to the view that the orientation of the six managers is to favour their own interests rather than that of the "absentee owner".

These tactics are not suited to, and have no place in, a proper functioning corporate environment. It may be coincidental that amongst management there is not a single executive Director, with the possible exception of Barry Kalkoven, who has long experience in the type of environments referred to by the Harvard Business School and Warren Buffett.

1.3 Directors' Rights

It is a fundamental right of Directors to seek independent legal advice when they deem it appropriate, and particularly when it relates to the discharge of their fiduciary duties to that company.

Responsible Boards of Directors will uphold this right, and even encourage their Directors to exercise it when such Directors themselves deem it appropriate.

I have made no secret of the fact that I am taking independent legal advice, and I would have thought in current circumstances the Board would have supported this action. However, on the contrary, I was cross-examined by Benji Liebmann at the meeting at the Saxon Hotel on Friday, 25 October 2002. Benji demanded to know not only who I had spoken to, but what I had disclosed, and that in his view I had no right to take such actions.

On my return from overseas I received a phone call from Wim Trengove wherein he told me that management had again raised the matter and requested him to take it up with me. I then received an extraordinary letter from the company, dated 14 November 2002 with an illegible signature and which did not identify the author. This letter demanded, in aggressive terms, a comprehensive explanation from me of a number of issues in relation to which I had taken legal advice.

Accordingly I wrote to the company requesting that the author be identified so that I could respond. Subsequently Benji Liebmann confirmed that he was the author and stated that his letter had been written "on behalf of and with the full consensus of the Board".

In my letter to the Chairman replying to Benji Liebmann's letter, I did not dignify the letter with any response other than to assert my right to brief counsel of my choice.

Benji's letter is a further example of the intimidatory tactics that have been employed against me in recent times to dissuade me from pursuing my rights. In that climate it is hardly surprising that I exercised my right to look outside of Company and Board structures for independent advice.

At the Board meeting on Tuesday, 26 November 2002, I asked you whether the statement by Mr Liebmann that his letter had the full support of the Board was true or not. You confirmed that it was and that a meeting of Directors had taken place the previous Thursday to discuss this matter. You further confirmed that copy of the letter had been personally vetted by Wim Trengove.

My response was that I was sorry to hear what you had said and that the Directors of the company had made a serious mistake. Mr Liebmann's retraction, stating that the Board had always upheld Director's rights to take external legal advice, but that there are other issues they do not agree with, is a hollow statement in the light of the previous accusations, intimidatory tactics, and clear interpretation of his letter. I have taken further advice on this matter from a Judge of the High Court and it is appropriate that I advise you of his view: "Is a non executive director of a public company entitled to seek independent legal advice on issues concerning the company where he feels he needs such advice in order to execute his or her fiduciary responsibilities?

Most certainly. He seeks advice in his personal capacity in order to do his duty. He is personally liable if he simply acquiesces when he knows or ought to know better. He must be encouraged to act at all times in the best interest of the Company. He is also obliged to take reasonable steps to ascertain the true facts.

Is he under any obligation to request the company's permission and/or to disclose to the company the identity of his legal advisor?

No and No.

Is such consultation covered by the normal lawyer/client confidentiality?

Very definitely.

If you would prefer not to deal with this, I will certainly understand.

I appreciate your concern but have no problem with general as opposed to specific advice to identified recipients. The answers are general and apply in all circumstances. I have no idea who may need the advice and offer it as general advice."

1.4 Co-option

As I have pursued my various enquiries I have periodically been told by management that they do not understand why I pursue these enquiries because I have previously approved the issues at the Board, was a member of a Committee which did, and have full access to the information had I required it.

These are nothing more than attempts to co-opt me so that I can drop the enquiries, and contain an implied threat that if I persist my complicity will be held against me. I want to make it clear, as I have done on previous occasions, that any Director has the right to pursue any matter which is of concern to him regardless of the history of the matter. I am sure that it would not be necessary to take legal advice on this matter.

2. The Issues
2.1 Overview

After the formation of Corpgro, we had a two-year honeymoon period. I was excited about the prospects and the management team communicated extremely well. However, immediately on the formation of Corpcapital out of the TPN cash shell, problems arose which evolved over a period of time into the present boardroom disagreement about principles of disclosure and corporate governance.

This disagreement started with the proposed award by management of a significant shareholding to themselves in Corpcapital, on its formation some three years ago. You were furious, and a meeting took place with management, which became heated and emotional.

It was the first indication that management were not going to come to terms with accepted methods of managing conflicts of interest. Since then the disagreements have broadened to cover other aspects.

As I see it, the way in which the company now operates is far removed from the principles set out in 1. above. The accumulated evidence of the past three years points to the uncomfortable fact that it is management who de facto control the company. Given the inherent conflict in such a situation, there are obvious risks that the interests of the various stakeholders are no longer aligned.

It seems to me that the company faces two very different future outcomes. At one end of the spectrum is a company controlled by management, and persuing their agenda, at the other is a programme of significant reform which reasserts the supremacy of the board, rectifies those elements of corporate governance referred to, and re-aligns all stakeholder interests.

2.2. Conflicts of Interest
2.2.1 Remuneration, pre-merger

On the formation of Corpcapital four managers, namely Jeff Liebesman, Benji Liebmann, Martin Sacks and Erol Grollman, presented you and I with a schedule containing shares that they proposed allocating to themselves in the company.

The volume of shares and the potential conflicts of interest as between Corpgro and Corpcapital caused you and I tremendous concern. The meeting to discuss this matter was highly emotional because of the aggressive way in which management pursued their interests.

Eventually you and I approved the allocation on the explicit understanding that "inequalities of the past" would never be raised again, and that no further shares in Corpcapital would be allocated to these four members.

Shortly thereafter Erol requested a meeting with you, attended by Jeff, and a proposal was tabled for a significant increase in the shareholdings of the four managers in Corpcapital.

At this meeting Erol also raised the question of bonuses and share options. You expressed strong opposition to the proposal and your disappointment that the core group had evolved into two camps, asserting that both you and I had been sidelined.

At a follow-up meeting Erol was reminded of the undertaking given regarding shares in Corpcapital. His response was "the rules have changed". In order to obtain clarity on a clearly divided issue, we agreed that I should seek outside counsel. I did so with Michael Katz and Doug Doel of the JSE, who both documented their views to us for incorporation in our deliberations.

I then wrote to Jeff on 10 May 1999 suggesting that we evolve a set of policies and principles and set up a proper Remuneration Committee. At a Board Meeting on 24 May 1999, I tabled a document on remuneration principles. Input was given by management and it was duly approved.

You were appointed to the Corpgro Remuneration Committee, and both you and I were appointed to the Remuneration Committee of Corpcapital. During the next two years, neither you nor I were invited to a single Corpcapital Remuneration Committee meeting.

If we look back at what happened during this period, the remuneration of management increased significantly and substantial restraint payments were made. In most cases the details were not disclosed to the holding company even though they were material.

Events of the early days are fully documented.

2.2.2 Remuneration at the time of the Merger

You will recall the events last year, which led to a new Remuneration Committee being appointed under my Chairmanship, following the merger of Corpgro, Corpcapital and Corpcapital Bank. You will also remember the request of the CEO, that notwithstanding the appointment of the new committee, the old committee should meet to consider a double bonus for himself, since he had missed out the year before, and also to back-date and re-price his share options.

My opposition to this is fully documented. I would like to draw your attention to my letter to you of 12 September 2001 which is highly relevant, especially as I requested that it be attached to the minutes of the Board meeting. The issues at that time of the merger are fundamentally the same as they were in 1999, and not materially different to what they are today. The pattern is the same and I do not feel that we have made much progress on these governance issues.

At the Remuneration Committee meeting, which approved executive remuneration for the year ended 31 August 2001, Wim Trengove and I favoured a full disclosure of executive remuneration to shareholders.

Management were vociferous and aggressive in their opposition to the full disclosure, both during the discussions and on many occasions subsequently, the latest being in Benji Liebman's fax to me dated 6 November 2002.

Following the disclosure of remuneration, Jeanine Van Zyl of Old Mutual contacted the CEO with queries related to the remuneration disclosure. The CEO's reply contained misrepresentations and outright departures from the facts.

I took this matter up with the CEO both in writing and face to face. Whenever the matter has subsequently been raised, the approach of the CEO has been that I have my opinion and he has a different opinion of the event.

However, the facts speak for themselves and they are fully documented. There is no grey area. This incident illustrates management's evasive and opaque approach to disclosure regarding remuneration.

Events during this period are fully documented.

2.2.3 Remuneration for the 2002 year

Turning to the series of meetings one year later, the situation worsened. The company did not perform well, but management's demands were as aggressive as ever. We were told that management no longer supported the remuneration policy and the formula for bonuses.

While it is true that they have periodically made this assertion, they have never put up alternatives as they were invited to do. The policies and procedures had been through a long and arduous process and had been approved by both the Remuneration Committee and Board of Directors. The Chief Executive had been invited on many occasions to bring his management team to the presentation and involve them. This invitation was never taken up.

At the conclusion of a meeting to approve bonuses, I was called by the CEO, thanked and complimented on the way in which I had facilitated the meeting.

Barely two weeks later at a meeting of the Remuneration Committee, I was asked to stand down as Chairman of the Remuneration Committee on the grounds that management had no confidence in me. The purpose of that meeting was to consider a share option proposal from management.

It was well known that I was insistent that the proposal should be approved by shareholders.

I also had reservations about certain aspects of the scheme itself. I am not sure whether you have read Benji Liebman's extraordinary letter to me of 6 November 2002. If you haven't, you should because point 5 in particular contradicts the entire remuneration process and policies which were approved by the Committee and Board of Directors.

Evidence of managements selective use of information can clearly be seen if we compare Mr Liebmann's statements with those of the CEO when he wrote his reply to Old Mutual on 22 January 2002. In this letter he went to pains to point out that matters were handled properly, and that there was a formula for determining bonuses and the process was determined by the Remuneration Committee after extensive consultation with PE Corporate Services.

It was this approach by Benji Liebmann which finally persuaded me that my efforts at reform were not going to be successful. It was the straw that broke the camel's back.

Fifteen months of significant effort by the Remuneration Committee were summarily negated. The pattern seems to be pretty clear. When you agree with management, you do a good job, when you don?t agree with them, you are chastised and isolated, as though Directors report to management and not the other way around.

All events at this time are fully documented.

2.2.4 Restraints of Trade

The remuneration policies manual defines remuneration as including basic salary, bonuses, share options and restraints of trade/sign-on fees. All of these issues fall within the ambit of the Committee?s deliberations and fiduciary responsibilities.

No Remuneration Committee meeting that I had previously attended had been presented with information on restraints of trade. It was for this reason that I commenced an enquiry to the Company Secretary requesting him to ensure that we were provided with a schedule of restraint payments over the previous three years.

I am sure you were as shocked as I was to discover that some R37m had been paid to management in the form of restraints of trade. This information had not been previously disclosed to the holding company Board, and no agreements had been seen by the Remuneration Committee, even though they were requested.

While it could be argued that this was a Corpcapital rather than a Corpgro issue, the materiality and potential conflict of interest indicates to me that there should have been a disclosure to the holding company Board, and indeed to shareholders.

2.2.5 Share Options

Discussions on the cash distribution to shareholders illustrate the unacceptable way in which not only conflicts are managed but also how matters are debated.

I was invited to a meeting at the CEO's office to discuss the matter before it was put to the Board. At this meeting management proposed a cash distribution to shareholders and linked it to a restructuring of their share options. Share options are significantly under water. I advised the CEO that the cash distribution was a matter for the Board of Directors and that the share option scheme should be taken to the Remuneration Committee, who would be sitting the next week.

The Remuneration Committee would decide in terms of its mandate whether to recommend the new scheme to the Board. Notwithstanding my recommendation to the CEO, he nonetheless placed both matters before the Board without taking the share option matter to the Remuneration Committee.

When discussions at the Board commenced, all four non-executive directors opposed the cash distribution for very good reasons, including quoting the reasons previously put forward by the Chief Executive in favour of the retention of cash.

The six management board members relentlessly applied pressure on the issue until one non-executive after the other capitulated. The way in which the debate took place made it difficult for non-executive directors to maintain a view different to that of management. It was the intention of management to obtain an approval in principle by the Board to the share option scheme. Effectively, this would circumvent the process of going through the Remuneration Committee and simply instruct the Remuneration Committee to implement the new proposal.

The latest development, a memorandum of 13 November by the Executives to the Board, is quite breathtaking.

Management apparently now no longer support the share option scheme devised by themselves, and approved by the Board, but since "it impairs the ability to incentivise key executives... this shortcoming will have to be addressed by the Board in some other way".

Amongst the reasons given, is a likely media attack which would detract from the special distribution. If management believe that what they are doing is right and in the best interest of shareholders, they should be willing to defend it. I do not understand why their view of the reaction from the media should determine the outcome.

2.3 Disclosure

As you know I am unhappy with the general level of disclosure to non-executive directors and with the time taken to make information available.

I sense a general unwillingness on the part of management to have some of their proposals scrutinised by non-executive directors. I have felt resented when pursuing enquiries, even when my persistence has been vindicated, as was recently proven by the independent valuer on Cytech.

As a non-executive director, I do not report to, and nor am I accountable to the executive management team. I am entitled to expect full and timeous management support and active management co-operation in satisfying my queries, irrespective of management's attitude towards those queries.

The Cytech story is not only a disclosure issue, but is perhaps the clearest indication of a value system with which I cannot identify. Having initiated the inquiry some two years ago in a proper way through the Board, little effort was made to satisfy my initial inquiries. Nonetheless, I still followed proper procedures by meeting with you and the CEO, and even followed the process suggested by the CEO.

Notwithstanding my following the process I did not receive information timeously, but received aggressive and personal letters from the CEO to boot. Eventually, when the facts were out, both you and Tom Wixley confirmed at our meeting on 29 June 2002 that none of the facts had previously been disclosed either to the Audit Committee or to the Board of Directors.

What could possibly speak stronger to the lack of commitment to transparency by management? Management must take full and sole responsibility for the unnecessary trauma that they have caused, both for me and for the company, in the way that this matter has been handled, even after my actions had been fully vindicated by the independent valuer.

This matter could have been, and should have been, handled in a much different and more professional manner, as I have pointed out on many occasions.

At the conclusion of the recent Audit Committee meeting, I proposed that, having dealt with the symptom, namely the Cytech valuation, we should also deal with the real problem, namely the underlying behaviour pattern which gave rise to the issue.

Wim suggested that we have a separate meeting, and this subsequently took place at the Saxon Hotel. The meeting which was intended to discuss the underlying problems was turned on its head by management who adopted an aggressive and offensive approach.

The night before the meeting, management submitted a 120-page response to my memorandum to the Board. This gave me insufficient time to read through before the meeting. In the time that has since elapsed I have gone through the document thoroughly.

However I do not think that the document warrants detailed comment. It appears to me that the report was prepared in haste and contains many factual inaccuracies and distortions. Despite having been vindicated by the independent valuer on my enquiry into Cytech, management still say that I am 100% wrong and that they are 100% right.

Based on my experiences there is clearly a different approach between my attitude towards disclosure to shareholders of matters I regard as material and that of management. The differences of opinion, in summary relate to the following :