A thirtysomething trillionaire at the Zimbabwe Stock Exchange

A thirtysomething trillionaire. Like Wired Magazine predicted Bill Gates would be back in 1999 [you recall how that ended!]. I do not even know how many dollars or euros or francs or rands it took, but the smiling moneychangers at the Zimbabwe - Zambia border posts had more than a few. A trillion is 10.12, a lot of zeroes!

Hyperinflation is what happens when politics believe their own hype, and command the reserve bank and treasury to print money which is not backed by real assets. It ruined the Weimar Republic in Germany in the 1920s, and Latin America in the 1980's. With hyperinflation, confidence is wiped immediately, and the irresistible force of geometric compounding swamps calculators as each unit of currency becomes worth decimals of what it once did. Zimbabwe’s president has bankrupted his country. But being better educated and able to manipulate the levers of power, Mugabe no doubt has his wealth offshore. Not in Switzerland, too close to those who hold him accountable, and as of Friday, a less secret place to stash the cash. No, his money is allegedly further east, probably in Singapore, Malaysia or Kong Kong. But also embarrassingly, Mugabe may have cash in the Isle of Man and land in the UK, according to Harvard Kennedy School Professor Rotberg who has covered the ZIM corruption since 2007.

HK is where Mugabe's daughter is getting her degree. I have never met her and she may be the nicest person. Readers may recall that HK is where his wife allegedly took around USD50k cash - straight from the ZIM Reserve Bank - to go shopping, and where she managed to be famous for punching a photographer [the media is real outside ZIM]. The obliging HK administration declined to press criminal charges. Anyway, I am surprised Mugabe's daughter did not simply have her father order the university to issue her with one. But then, having driven past the University of Harare last week, one understands the head of state’s own family choosing to study elsewhere: it was impossible to see the campus buildings through the head high grass and weeds. Perhaps the student activists who reject the presence of the dictator’s child in class may create more of a challenge to “normal” than the is possible within Zimbabwe itself. If the university is anywhere decent, it will have more freedom of expression, and more accountability, than Zimbabweans have experienced in the past twenty years.

Like opinion polls to politicians or market prices to CEOs and their bankers, a currency’s worth is a relative score on the perceived health of a political economy. Which is why for the first time one may recall, the Chinese premier called upon the US to be fiscally responsible and to guarantee its good credit over the weekend around the G20 summit. Yes, the Obama USD 800 bn rescue package has a price tag, and the low interest rates and trillion-dollar spending will lead to a weaker dollar, just not today. The Economist has its own problems with it. SeekingAlpha website covered the hyperinflation effect for the US. The mighty Swiss france has become too strong for its banking and manufacturing industries, leading the Swiss to devalue their currency by intervening in the forex market. A short term strategy that “beggars-thy-neighbour”, but the CHF is small enough to slip by for now.

So where does “responsible investment” factor into the ZIM situation? In November 2008 when I visited London I recall a furore that Anglo and Barclays were making new investment into their ZIM country operations - ZIM Barclays does have the cleanest buildings. The ZIM regime is despised in a way I would think apartheid South Africa once was. But the convoluted and conflicted behaviour at a country level within the UN system, the lure of ZIM’s mineral wealth, and Mugabe’s “street cred” among African “liberation” politics including his ability to manipulate has kept him around way past his sell-by date. But how many country screens are excluding ZIM?

Few investment policies will even reference ZIM, partly because it is dwarfed by other major investable countries, and by its southern neighbour. Burma receives much more attention in the US, for example, with Chevron [NYSE: CVX] being targeted for action this shareholder season. 

The 2009 resolution seeks greater transparency on how Chevron evaluates its human rights impact, especially in high risk countries like Burma. It calls on the company to report on its criteria for investment, continued operations in, or withdrawal form specific countries. The annual meeting is expected to take place in May 2009.  The resolution was co-filed by the following institutions: Teamsters General Fund, AFL-CIO, Ms. Adelaide Gomer, The Maryknoll Fathers and Brothers, Mercy Investment Program, Newground Social Investment, Ursuline Sisters of Tildonk and the Unitarian Universalist Association. The International Trade Union Confederation (ITUC) and the International Federation of Chemical, Energy, Mine and General Workers' Unions (ICEM) have both endorsed this resolution, as has the Canadian Labour Congress (CLC). 

The unintended consequence of Mugabe bankrupting the country is that it makes a micro-point of any global emerging markets exposure at a country level. Investors into Africa probably only have indirect exposure to ZIM by holding firms that are still ticking over in the country [see Financial Mail’s breakdown of ownership in ZIM brands].


Buy or Sell ZIM?

The investment policy for investors that integrate environmental, social or corporate governance factors [ESG] is the appropriate place to look for the response at a macro level. Major institutional investors now consider ESG factors, and CalPERS has an explicit approach to emerging markets investment. Perhaps the most well-known advocate of ESG in global investment is the Norway Government Pension Fund – Global, with NKr2.275bn [Eu258bn, USD329bn] in AUM. The Norwegian Global Fund, a sovereign wealth pension fund created from North Sea oil revenues, has a investment policy explicitly outlining ethical factors, and practices investment by having an ethical council screen investment opportunities. International investors saw this in action in the pages of the New York Times and Wall Street Journal in 2006/7 when Norway flagged Wal-Mart for exclusion, generating some diplomatic activity, and raising the profile of the ethical council. It also made a useful Harvard Business School case study, Norway Sells Walmart.Later in 2008, the fund published a report on child labour: corporate governance, children and the environment remain primary key issues. In last Monday’s FTfm the fund's "thorny path" was highlighted.

The easiest route is to disregard investment merits and divest immediately, and buy back quietly when the storm has passed. This approach only generates a better investment argument if the accompanying publicity will drag on the share price wherever it is traded. Shareholder activism is a public approach to have the company address the issue. A high profile investor when faced with a high profile problem may need to take this route – the Norwegian fund has addressed the costs of climate in a white paper in response to an NGO asking a pointed question. Environmental NGO Bellona recommended the fund exclude carbon emissions violators in a report to be submitted to Norway’s parliament 26 March. Shareholder activism is not limited to ESG factors, and in each year our experience at Sinclair & Company is that some have greater emphasis than others. In 2009, clearly executive pay has become the lightning rod – just ask Messers Goodwin or Liddey what their majority shareholders [UK or US taxpayers like you] think about fat cat salaries…

Shareholder engagement is an approach by investors “behind closed doors” approach less concerned with shareholder proxies but with suasion, and better explained in hindsight and ex-post facto. The most recent, 2007 SIF report identified increased activity in the USA covered through 31 December 2006. 

The average level of shareholder support for resolutions on social and environmental issues increased 57 percent from 9.8 percent in 2005 to 15.4 percent in 2007, a record high.  The total number of resolutions increased from 360 in 2005 to 367 in 2006.  Institutional investors that filed or co-filed resolutions on social or environmental issues controlled $739 billion in assets in 2007, a more than 5-percent rise over the $703  billion in assets counted in 2005.

Engagement works in smaller, clubby circles of capitalism, where the connection between investors and companies, and the professional circles they move in, is much smaller and the prestige of the matter carries some weight. Some of the more effective conversations have come where advisors put publicly combative parties in a room, and as people and professionals new ways forward were sought. The UK, Brazil or South Africa are examples of these smaller investment circles of influence.

The shareholder activism has practical challenges. Pauline Skypala in today’s FTfm covers the recent handwringing on shareholder rights at the UK's National Association of Pension Funds [NAPF] conference last week. NAPF has been a proponent of integrating ESG factors, and is a conference of investors with a longer-term perspective. The influential Lord Myners, himself renowned to be frank, had institutional investors expressing “a lot of this [corporate governance] is rubbish”. How long investors should stay invested, whether all investors offer the same direction to a company, and when to extract investors from a situation are all practical challenges of implementing an investment strategy that [correctly] integrates governance into the investment equation.

The momentum of actions that seek to target at the country level are unpredictable, and may succeed in direct relation to the publicity, not necessarily the weight of arguments. Tibet is overshadowed by China’s massive bulk. Burma continues to attract attention of human rights activists and the investors that map to that [see GES Investment Services' briefing on Burma this month, March 2009], while countries which also have poor human rights records may feature less. It is so that ZIM attracts almost zero attention in the US while the Sudan/Darfur issue has generated major student, media and investor action. Acolytes of the sage of Omaha, Warren Buffet, have heard him explain his position on China National Petroleum Corp. [HK:0135, CNPC] because of Sudan [see Marc Gunther's 2007 Fortune piece], and they may not even know where ZIM is on a map.

ESG research providers have made available screening products that are not expensive to build and easy to pitch which focus on countries or companies that fail criteria of certain international initiatives or agreements. EIRIS has country sustainability profiles and convention ratings, and Riskmetrics ISS Innovest offers sovereign ratings in their screening boutique. Companies' own dilemna on whether to stay or go is newsworthy material for the media: should they stay or should they go? Divestment is a fairly blunt instrument. Unfortunately for the average ZImbabwean, lovely people, their country does not warrant the attention of the world, despite the country being mis-managed into -40% GDP tailspin. Divestment is a dramatic tool, with much scope for collateral damage. The investment decision is the least of matters.