If you were to ask the question, “What has been the most egregious example of unintended consequences of regulatory reform in modern history?”, what would that be? 

I think you would find lots of great examples, but the one that sticks out for me concerns the publication of CEO salaries and share options. The expectation was that the earnings of CEOs of large companies in particular were getting out of hand and the best thing to do was to insist that all of these extraordinary but secret packages be revealed. The result would be a shocked public, and a humbled remuneration committee, and some sense of proportion would be regained. Throw them into the light, they said. Sunlight is the best disinfectant, they said. 

The result was precisely the opposite. Compensation in the US for top CEOs of S&P 500 companies increased by 940.3% from 1978 to 2018. Salaries of higher-paid workers increased with them, but over the same period, mid-level and shop floor workers saw very small real increases. How did this happen?

Transparent pricing usually brings prices down. But in this case, something weird took place. First, there was the ratcheting effect; CEOs could now compare their packages with their competitors’ so the tendency was to level up towards the highest paid, to which recruiters and head-hunters can attest. Further, in situations where performance is critical, often the rational actor doesn’t want the lowest price, they want the highest. Would you want, for example, the cheapest heart surgeon operating on you? The phrase “if you want monkeys, pay peanuts” quickly makes the rounds.

So now, this is going to make me terribly unpopular, but there is another possibility, which is that we had been paying the CEOs too little over the years.

I know, I know. Horrors. But you know, in a hierarchical organisation, there are some crucial decisions only the CEO can make, and you want the CEO to a) make them, and b) make the right ones. It turns out that CEOs who do make the right decisions can make a huge difference to the future, and even the existence, of the company.

That doesn’t mean there isn’t lots of abuse here, such as CEOs getting huge bonuses even when the share price of the company declines, flaccid remuneration committees and complacent shareholders. But generally, I find having a great CEO is absolutely crucial and is usually worth paying a lot to secure. And doing so helps not only the CEO (obvs) but also shareholders, and weirdly, employees.

I remember the time when executive remuneration was secret and the people who opposed the publication of CEOs’ pay packages were worried that the public would totally misunderstand and that even the lives of CEOs might be at risk if people knew how much they earned (kidnappings of CEOs’ children did rise for a time in some countries, but that seems to have exited the front pages). 

The reason I’m raising this all again is that this week opposition to transparency is still irrationally rampant. Two examples of questionable efforts at hiding the truth have been highlighted in the press this past week. I find I have to struggle with my journalistic instincts here; I’m naturally biased in favour of transparency. I think in both of these cases, those trying to maintain secrecy are doing so in violation of common sense and public interest. 

Steinhoff

The first instance is the extraordinary efforts by Steinhoff to prevent the publication of a 7,000-page PwC report into the company’s collapse in 2017. An 11-page summary of the report was released, but my colleagues at amaBhungane and the Financial Mail have jointly submitted a Promotion of Access to Information Act request for the document. What remains of Steinhoff has refused to hand over the report, claiming the report is legally privileged because it was commissioned by Steinhoff’s legal firm Werksmans. 

That went to court and Steinhoff lost. Steinhoff then claimed that, since the company was registered in Holland at the time, Dutch law prevailed. Sadly for them, Dutch law seems to be very much akin to local law; privacy constraints can be overridden if there is a compelling public interest. They now claim British law prevailed. Anyway, this is all going to the appellate division sometime this year.

So the question is what is the real reason for keeping the PwC report secret? Obviously, we don’t know. The company claims, well, the story has been essentially told. But if that’s the case, what would be the harm? It’s possible some innocent people might be implicated. But if they are, they have their own legal remedies. And there is an equal possibility that some not-so-innocent people could be implicated. 

There are outstanding criminal cases and so there are sub-judice issues; and tactical issues too for prosecutors. But overall, I think it’s just that everybody is keen to draw a line under the newsflow. And also that the instinct for secrecy is very pervasive within the legal fraternity. What I would also like to know is whether Steinhoff’s owners, you know, its actual shareholders, as opposed to their hired hands who manage the company, agree with this strategy or not. I bet they don’t.

KPMG

The second example is more complicated. After the collapse of the bank VBS, liquidator Anoosh Rooplal decided to sue auditor KPMG for just under R1-billion for signing off on the transparently false 2017 audit. The parties announced this week they had settled without mentioning the nature, or more importantly, the quantum, of the settlement. 

Is there an overriding public interest in knowing what exactly the settlement was? The argument against, I suppose, goes like this: KPMG has gone to enormous effort to restructure itself and raking up these old coals just makes that process even harder. There are no shareholders here since the company is in business rescue, so arguing there is a public interest issue is less compelling. There are, however, creditors, and they have a very direct interest.

Do those reasons really stack up? I don’t think so. My guess– and I might be completely wrong here – is that the settlement is probably a fraction of what was claimed because realistically, you either settle for that or you go to court for a decade. But because it was low, KPMG doesn’t want it publicised because then it would seem the firm got away with a steal. And the liquidator doesn’t want trouble with creditors for settling for what they might consider a miserly sum.

Basically, they are all covering their arses, and that, in my experience, is a very powerful motivation, and the unstated justification for a multitude of sins. DM