Famous Brands, which includes Steers, Wimpy, Debonairs Pizza and Mugg & Bean in its portfolio of quick service and casual dining restaurants, is regularly held up as one of South Africa’s best investment opportunities. It was placed 3rd in the Financial Mail Top Companies awards in 2013 and 1st in 2012. So how does Famous Brands perform in terms of key corporate governance issues such as board independence? Not as well as you might expect.
Areas of best practice
The board meets best practice as set out in the King Code of Governance for South Africa 2009 (King Code) and the King Report on Governance for South Africa 2009 (collectively known as King III) in a number of areas. Famous Brands has four executive directors and six non-executive directors (seven if you include the alternate director), so there is a majority of non-executive directors. The roles of CEO and chairman are separated. A lead independent non-executive director has been appointed because the non-executive chairman, Mr Panagiotis Halamandaris, who is a founding member of the company, has a sizeable shareholding in the company and therefore cannot be considered independent.
Lack of board independence
Despite this, Famous Brands falls short of best practice in a number of key areas. Among these are the fact that only two of the six non-executive directors are independent, whereas the King Code requires a majority of non-executive directors to be independent. This creates problems when it comes to constituting the various board committees and particularly the audit committee, which the King Code recommends should comprise of three independent non-executive directors.
Audit committee nominations
At Famous Brands’ AGM on 25 July shareholders will be asked to approve the appointment of Bheki Sibiya, an independent non-executive director, to the audit committee. Mr Sibiya will replace Mr JL Halamandres, another founding member and significant shareholder. This is a positive step. However, the other nominees for the audit committee raise concerns. The board recommends that non-executive director Hymie Levin is reappointed as chairman of the audit committee. But the King Code recommends that the audit committee chairman is an independent, non-executive director. Mr Levin has a direct interest in 1,000,000 Famous Brand shares, which is just over 1% of the shares in issue. These were worth R96m as of 12 July, which could be deemed to be material to his wealth and therefore, as Famous Brands appears to acknowledge in its Integrated Annual Report 2013, limits his independence.
The final audit committee re-appointment recommended by the board is Mr Christopher Boulle, who is the alternate director to Mr Levin. As Famous Brands underlines in its Integrated Annual Report 2013, Mr Levin was unable to attend any of the three board meetings, three audit committee meetings or three remuneration committee meetings during the preceding financial year, so was represented by Mr Boulle. Surprisingly, giving his other commitments, Mr Levin has offered himself for re-election at the AGM. But with Mr Boulle elected to the audit committee himself at the 2012 AGM, Mr Levin’s absence from board and committee meetings not only means that the audit committee report in the Integrated Report 2013 is signed by an absent chairman, but that the audit committee meetings in the last financial year only had two appointed attendees.
Furthermore, reading between the lines of the Integrated Report 2013, it appears that there might be reason to question whether Mr Boulle would himself be considered independent by an objective outsider under the guidance set out by King III, which includes the principle that an independent non-executive director is not a professional adviser to the company or group, other than as a director. The report states under ‘Related party transactions’ that professional fees of R441,000 were paid to “a firm of which two non-executive directors are partners”. Mr Levin and Mr Boulle are the two senior partners at HR Levin Attorneys.
JSE’s listing requirements
Famous Brands says in its Integrated Annual Report that it “subscribes to sound corporate governance” and “implementation of best practices”. Famous Brands will no doubt argue that, while they do not meet the “apply or explain” recommendations of King III, the directors apply their minds independently and meet the legal requirements of the Companies Act, 2008 which gives statutory power to the audit committee. The Companies Act requires that the audit committee comprises at least three members, but its criteria for being considered independent are far less onerous that those in King III. However, on 31 January 2013, the Johannesburg Stock Exchange issued a guidance letter on corporate governance, clarifying that certain King Code principles are mandatory for issuers. These include appointing an audit committee in compliance with the King Code. So while Famous Brands might meet the criteria of the Companies Act, its recommended audit committee appointments appear to contravene not only best practice as set out under King III, but also the mandatory listing requirements. The JSE Guidance requires issuers to present a reasonable timetable for compliance.
South Africa’s QSR and casual dining firms including Famous Brands, Spur Corporation, and Taste Holdings tend to be managed predominantly by either strong family-based units or long-serving, experienced management teams. This clearly be can a strength, but as highlighted above when this feeds through to the board can also lead to corporate governance concerns. Famous Brands is not alone in its shortcomings. A recent Kigoda Consulting report found that Spur Corporation and Taste Holdings also fail to meet best practice principles. Board independence is a central pillar of corporate governance frameworks as it aims to resolve the agency problem (a conflict of interest between management and shareholders). Given its key role in maintaining internal financial controls and managing financial risks, the independence of the audit committee is now regarded as especially important.
How will they vote?
In South Africa, regulatory changes, such as the revision to Regulation 28 of the Pension Funds Act, which requires pension funds to “give appropriate consideration to any factors which may materially affect the sustainable long-term performances of a fund’s assets, including factors of an environmental, social and governance character” and voluntary initiatives such as the Code for Responsible Investing in South Africa (CRISA) have been heralded. Will the pension funds that are bound by these regulations and asset managers that have publicly supported these principles and those of the PRI Initiative demonstrate their commitment at Famous Brands AGM and encourage best practice?