With the nastiest market tornado to hit in nearly a century, local companies have seen some of their ugliest losses since the start of this crisis in September.
But it is not just the companies that have been big losers. Experts agree that their executives, who have until recently benefited from bullish market conditions, can expect some nasty falls in their own personal wealth as bonuses and share-option schemes are jeopardised by falling stock prices.
The JSE has lost over 42% of its value, shrinking from a market cap of over R6,1-trillion this time last year, to R3,5-trillion.
The country’s major indices have similarly plunged in value.
The JSE Top40, an index of the top 40 listed companies, is down 40,14% year-on-year, while the Industrial 25 is down 30,52%.
But resource companies have been hardest hit, with the Resources 20 falling by 46,35% since this time last year, while gold mining has come in second, falling by 42,22%.
Over the last month and a half, however, individual companies have seen more dramatic losses, including some of South Africa’s stalwarts, particularly in the resources sector.
According to Taquanta Asset managers, topping the ranks is Wesizwe Platinum, with a decline in share price of 72% from the beginning of September to October 27. The company’s market capitalisation shrank from R1,9-billion to R592-million over the same period.
Another company high in the ranks is steel giant ArcelorMittal South Africa, down 52,75% with its market cap declining from R39,4-billion to R19,1-billion.
Anglo American, the largest precious metal miner in the world, is down 49,24%, with its market cap shrinking from R522,3-billion to R278-billion.
Petrochemical giant Sasol has been hit by a 40,40% drop from a R253,2-billion market cap to R163,5-billion.
Diversified giant BHP Billiton has also taken a knock, falling 39,04% and shrinking to a R320,9-billion market cap – down from R504-billion.
Not surprisingly, says Stephen Roberts, joint MD at Taquanta Asset Managers, those near the top of the ranks are linked, in one way or another, to the commodity cycle.
On the back of fears of a global slowing in growth and possible recession, commodity prices have plummeted. South Africa’s biggest losers are feeling the effects of the slowdown as ”commodity prices directly impact their earnings”, says Roberts.
But shareholders have not been the only ones to lose out as companies have been whacked.
Experts say that it is very likely that executives may find their share options underwater, following the market crisis.
”Long-term incentives in many cases will be underwater or, at the very least, worth much less than they were,” says Laurence Grubb, MD of Mabili Human Capital.
A cursory glance at Cynthia Carroll, CEO of AngloAmerican, provides a case in point.
According to Anglo’s 2007 annual report, 120 773 shares were issued to her at a price of £24,91 on joining the company, while the share price rose to a high of £36,41 during the period.
She was also awarded a further 73 538 shares at £24,61 under the company’s long-term incentive plan.
But since Anglo shares have sunk to a low of £13,16 on Wednesday, Carroll has lost at least £2,4-million or R41,6-million — on paper anyway.
But, says Grubb, the crisis will not affect only executive long-term incentives, but also guaranteed packages and annual bonuses.
”On the guaranteed package, increases will start to drop to below the 10% level as inflation reduces and companies have to contain their costs.
”It will be more difficult to explain a significant increase for executives while retrenching staff,” says Grubb. In addition, annual bonuses will also decrease if they are correctly linked to performance, he says.
South African executives may be spared extreme cuts depending on how long and severe the crisis becomes, says Grubb.
”The resources and major infrastructure spending may assist in reducing the impact to some extent on South Africa.”
Similarly, David Couldridge of Frater Asset Management says that the current crises ”will focus shareholder minds more keenly on the appropriateness of incentive schemes”. Remuneration philosophy and incentive schemes are an important element in the overall system of corporate governance, he says.
”Unfortunately many of the incentive schemes that have been put in place encourage risky behaviour that is not in the interest of all stakeholders,” says Couldridge.
