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Cape Town - Futuregrowth Asset Management flagged a concern regarding the Development Bank of South Africa (DBSA) relating to a business unit head that is related to a politically exposed person.
This was revealed on Monday, after Futuregrowth confirmed DBSA’s announcement that the Old Mutual subsidiary had resumed lending to the state-owned entity (SOE).
READ: Futuregrowth lifts lending freeze on third SOE
“The 13 member board is well balanced and largely independent, but Futuregrowth notes that there are some board members who hold political positions,” it said in a statement.
Without naming anyone, Futuregrowth said one of the DBSA’s business unit heads is related to a politically exposed person. “Futuregrowth believes that currently the DBSA’s governance frameworks, including the conflict of interest policy, and the additional disclosure and reporting that the DBSA have agreed to, can adequately mitigate potential risks if consistently and appropriately applied.”
“The DBSA currently does not have a politically exposed person (PEP) policy in place to govern the risks related to lending to PEPs,” it said. “However, they are in the process of implementing a PEP policy.
“Futuregrowth will closely monitor the implementation, ongoing disclosure, appropriateness and execution of this proposed policy once implemented.”
Futuregrowth, which has about R170bn in assets, took an unprecedented decision on August 31 to halt negotiations on more than R1.8bn of debt finance to certain SOEs. It halted loans to Eskom, Transnet, the SA National Roads Agency, Landbank, the Industrial Development Corporation (IDC) and the DBSA.
READ: 'I won’t lose sleep over Futuregrowth' – Transnet CEO
The unfreezing of lending to the DBSA follows that of the Landbank and the IDC, leaving Sanral, Transnet and Eskom under review.
Confirming DBSA’s announcement on Monday, Futuregrowth said the resumption of lending is subject to mutual agreement of additional reporting recommendations, an additional legal clause to be added to new bi-lateral lending agreements, agreed changes to be made on governance policies and processes and Futuregrowth’s continued monitoring of the robustness of the DBSA’s governance processes and finances.
The objective of the engagement was to obtain a deeper understanding of the board’s independence, autonomy, decision making rights, and commitment to fiduciary responsibility as well as to confirm the shareholders' support of these goals, explained Futuregrowth.
READ: Futuregrowth lifts funding ban against 2nd SOE
“A further focus of the review was an assessment of the investment/lending process to establish the extent to which decisions are made in accord with the bank’s mandate, established processes and practices, and the requirements of applicable legislation,” said Futuregrowth. “The governance review involved deep analysis and negotiations which led to recommendations for enhanced reporting and governance.
“The due diligence revealed that the DBSA currently has an appropriately constituted board with a suitable balance of skills and experience; a positive and constructive relationship between the Board and Executive Authority; and evidenced application of policies and processes.
“Futuregrowth notes that the appointment of a new chairman and deputy chairman in 2018, as well as the possible new board appointments arising from seven current board members’ terms expiring during 2017, may have an impact on the continuity of the board or organisational culture. We will monitor the board member replacement process, and may amend our view as necessary at that time."
READ: Futuregrowth CIO recants: 'Had no idea of the unintended consequences'
Futuregrowth said it identified certain areas for governance improvements, for example tightening board quorum and voting requirements, which were discussed with and well received by the board. “Further to this, the DBSA has agreed to regular independent governance reviews,” said Futuregrowth.
DBSA CEO Patrick Dlamini said that following the suspension, the bank engaged with Futuregrowth to understand and address their concerns. “We are pleased that our relationship has been restored and strengthened,” he said.
“The due diligence process confirmed that the DBSA has an appropriately constituted board with a suitable balance of skills and experience; a positive and constructive relationship between the board and the executive committee; and evidenced application of policies and processes.
