As this report aims to show, the Standard Bank Group is proudly and unshakeably committed to upholding our values and South Africa’s Constitutional order. We aim to listen carefully and respectfully to all our stakeholders, especially those who disagree with us, and learn from what they have to say. We believe that decision-making should rely on the best available evidence and expertise. We think that the best outcome usually balances several perspectives and interests. We do not believe that there are quick fixes to economic, social and environmental problems. We do believe in making progress, in measuring that progress objectively, and in accounting to society transparently.
We have been very encouraged by the steady progress made in South Africa since President Ramaphosa came to power in February last year. As I wrote in last year’s message, we knew that there would be a hard road ahead. What is impressive is how many positive steps have been taken along that road. A very incomplete list includes several strong new Cabinet appointments; the commissions of enquiry into state capture, and into the administration of the South African Revenue Service, the Public Investment Corporation and the leadership of the National Prosecuting Authority; and changes to the boards and senior management of South Africa’s critical state-owned enterprises.
We believe that further and deeper reforms are likely to follow. As a result, economic growth is likely to accelerate modestly during 2019 to 1.3%. The largest and most urgent issue to address is that South Africa’s state-owned electricity utility, Eskom, remains in a very poor financial and operational condition, posing an immediate and severe threat to South Africa’s fiscal position and prospects for faster growth. In our view, there is no alternative to a complete overhaul of both the governance and the market structure of the South African electricity industry.
Land reform is another aspect. We are confident that there will be no large-scale, state-sponsored ‘land grabs’ in South Africa. The current parliamentary and executive processes are being advised by some of South Africa’s best legal minds, leading land policy and agricultural experts and representatives of broader stakeholders in society. At long last, South Africa may be on track to implement a land reform programme that enables us to move forward as a more inclusive and prosperous society. If we are to stay on this positive track, it will be important to ensure that cynical and sometimes inflammatory rhetoric is swiftly countered by accurate data and analysis and by a constant reinforcement of our shared commitment to the Constitutional order.
Beyond South Africa, much of the political and economic landscape has been equally challenging. For example, Kenya continues to apply interest rate maxima in a way that we believe is counterproductive. The quality of the business climate and regulatory environment deteriorated markedly in Nigeria during the year, arguably under pressure from declining oil revenues. Further afield, the handling of the UK’s negotiations with the EU and the US approach to trade policy, especially with China, continue to create significant risks to global and African economies.
It is a stubborn fact of human life that law-bound and competitive markets create better economic outcomes. An equally stubborn fact is that, in addition to all the benefits they create, such markets tend to generate increasing inequality and to undervalue the natural environment. Rising inequality can make destructive populism seem attractive to voters. Insufficient attention to the negative externalities of economic growth creates the very real risk of making our planet barren and unliveable.
Therefore, sensible governments, businesses and civil society organisations should embrace the benefits of markets, but also resist their negative tendencies. In Africa, owing to the fragility of many of our ecosystems, the poverty and economic exclusion of many people, and the painful history of colonialism, extractive growth and rent-seeking, we now need to lean harder than most other regions against inequality, institutional decay and environmental degradation.
The group therefore invests money and time supporting wider access to good-quality education in South Africa, and to better healthcare in Africa as a whole. We play a leading role in developing, promoting and adhering to the principles of environmentally sustainable finance. We defend the rule of law when it is threatened. We claim no monopoly on solutions, but we do have strong opinions about the duties and responsibilities of the financial sector and about economic development. We believe it is our duty to participate in policy debates on how to make economic growth faster, more inclusive and more sustainable, and on how to improve education and training to prepare Africa’s young people for the Fourth Industrial Revolution.
Most important of all, the group is committed by our strategy to measuring ourselves not simply in financial terms but by how much social, economic and environmental (SEE) value we generate and by the potential harm we are able to mitigate.
We cannot and do not promise to achieve ‘quick fixes’ or to please everyone. The nature of our business requires us to think in years and decades, even generations, and to make difficult trade-offs every day. Here is what we do promise: under the leadership of the board, the group will be caring, thoughtful, responsive and responsible.
Responsive thinking and responsible behaviour
During 2018, we strengthened the mechanisms that we use to ensure that we are responsive to our stakeholders and responsible in our actions. The group social and ethics committee approved stakeholder engagement principles that act as a guideline for all our operations in the essential task of listening to and learning from all our stakeholders. Our supplier risk committee continued to meet to assess our relationships with suppliers and to ensure the compatibility of these relationships with our values and our social and environmental commitments.
Every year, urgent, difficult and complex questions put our strategy, values and internal systems to the test. The debate about whether the group should commit to no longer financing coal-fired power stations was among the most important of these. This debate is a useful illustration of how we think about difficult trade-offs. On the one hand, we are acutely aware of Africa’s vulnerability to the negative impacts of climate change. Further, as many civil society activists argue, financing coal-fired power stations could create ‘stranded assets’ and could gravely damage the group’s standing in society. For these reasons, we are committed to supporting a just transition to a lower-carbon economy.
However, we are equally aware that ours is the continent in most need of development, and that Africa is in urgent need of affordable energy infrastructure to stimulate economic growth and to support human development. Coal remains a critical component of the energy mix in many African countries and is a source of affordable energy for underserved communities. In many places in Africa, the trade-off is between coal-fired grid power or dangerous paraffin lamps, wood fires, and the inefficient and expensive small generators owned by households and small firms.
We have, therefore, concluded that we cannot commit in advance to a total and permanent ban on financing coal-fired power generation. Instead, we have developed coal-fired power funding guidelines, broadly in line with the OECD Export Credit Agency Coal-Fired Power Finance Guidelines. These guidelines require that we carefully consider the current energy situation in the region to be served by the plant; future energy demand; the nature of the proposed technology and the viability of alternative generation options; and the extent to which a proposed project would comply with national environmental and social laws, relevant international conventions, standards and treaties. If a proposed development does not meet these stringent criteria, we will not finance it.
During the year, we thought in a similar way about several other thorny issues. These included the balance to be found between digital convenience and online security, and between digitising the group to meet the expectations of our clients and shareholders and achieving the best possible outcomes for employees whose current skills may be less relevant in a digital business. We have also thought very carefully about the balance between sound credit management in the interests of our depositors and shareholders versus our responsibility as a corporate citizen to support the recovery of South Africa’s economically essential state-owned enterprises. A similar trade-off must be made between the interests and rights of people who are struggling to pay their home loans and those of depositors and shareholders – who are typically workers saving to realise their families’ goals and for their retirements. In South Africa, we do everything possible to avoid entering legal processes to recover debt owed on home loans, including assisting homeowners in trouble to sell their current properties and to buy homes that they can afford.
During 2018, South Africans were able to read in excruciating detail about the enormous destruction of value that has taken place, in both the private and public sectors, when leaders choose to abandon decency. You may also have read about Standard Bank’s testimony to the Zondo Commission into State Capture. I am confident that you will agree that our integrity and commitment to the law were not found wanting when put to a stern test.
Developments in governance and risk management
Highly-charged issues will of course capture the headlines. In most ways, however, the systematic work of ensuring ordinary good governance is what creates and protects value for all the group’s stakeholders.
During 2018, the board continued to focus most of its attention on two everyday issues. The first of these is ensuring that the executive team implements the group strategy as agreed. Within this, we placed particular emphasis on improving cost management and efficiency, and doing everything we can to combat cybercrime.
Second, we focused on the depth, breadth and quality of the combined assurance provided by the group’s risk, compliance and internal audit teams. The board works hard to support the independence of assurance functions and to create a culture in which they feel entirely free to raise issues of concern, and in which business units welcome these findings and act quickly on the recommendations.
To do its job well, the board needs the best-possible visibility into the large and complex organisation it oversees, combined with the broadest range of skills and diversity of experience. On visibility, the board’s annual strategy session is now structured around the group’s five strategic value drivers; as is the quarterly reporting by the business units to the board. This enables us to see and evaluate the links between strategy design and execution, and performance against the group’s value drivers and the remuneration process.
I remain satisfied that the board is appropriately balanced and contains the skills required to ensure that the group is well governed, and that the interests of our shareholders, other stakeholders and the societies in which we do business are well served.
Having reached retirement age, Mr Richard Dunne retired from the board during the course of the year. Richard served on the board for almost ten years, and for eight years as chairman of the group audit committee. Richard has been an exemplary chair of that vital committee – insightful, meticulous and exacting – and we are very grateful for his service.
On his retirement as an executive director, Mr Ben Kruger stepped down at the end of the year. Ben was an outstanding executive. His career has been marked by a series of extraordinary accomplishments and his legacy will endure. The board will miss his unmatched expertise and deep wisdom.
Although the economy performed poorly, 2018 was a year of growing hope for South Africa. If we are to realise that hope, 2019 and the years beyond must be years of steady, disciplined work, accurately measured and properly accounted for. Hard trade-offs must be made. Patience and urgency must be combined, as must idealism and pragmatism. South Africa’s trade and investment links to the increasingly dynamic and sophisticated economies of the African continent must continue to develop, and we must be at the forefront of African regional integration. Africa as a whole must continue to develop its internal links, embrace digital technology, and ensure that Africa’s people have the skills and resources needed to participate in, and benefit from, an increasingly digital global economy.
What is true for Africa as a whole is just as true for the group. We will execute our strategy with speed and discipline. We will continue to digitise rapidly to serve our clients with consistent excellence. And we will drive Africa’s growth. This report holds us accountable for achieving our goals and commitments. Please let us know what you think about our progress and about how we can do better.
Finally, I express my profound gratitude to all Standard Bankers and to the board. It is pleasure and an honour to work with you all.