Johann Rupert’s big blunder

Johann Rupert’s Remgro has underperformed for a decade, which investment specialist Chris Logan said was due to the company’s shift in philosophy.

The Rupert family has a strong hold over Remgro through its equity stake, voting rights, and board positions.

Rupert Beleggings owns 100% of Remgro’s 39 million B ordinary shares, giving them effective voting control over the company.

Johann Rupert serves as the company’s chairman, while his son, Anton Rupert Jnr, is a director on the Remgro board.

Remgro has performed poorly over the last decade. Its share price has been down 40% over 10 years, which has caused widespread shareholder unhappiness.

The company’s latest financial results stated its intrinsic net asset value per share is R251. However, it only trades at R150 per share.

Its annual report further showed that Remgro has net assets worth R139 billion. However, its market cap is only R81 billion, half of that.

Logan, the owner and chief investment officer at Opportune Investments, told Biznews that a shift in Remgro’s investment philosophy caused its decline.

He explained that Remgro’s largest holdings used to be the old RMB group, which included FirstRand, Outsurance, and RMB holdings.

Laurie Dippenaar, GT Ferreira, and Paul Harris created and ran these companies, and they performed exceptionally well.

“Inadvertently, Remgro has pivoted out of these owner-managed high-return businesses into capital-intensive, regulated investments,” he said.

Their biggest holdings now include Mediclinic and CIVH, which holds Vumatel and DFA. These businesses operate in highly regulated industries.

These companies deliver lower returns on invested capital and are susceptible to external regulatory and economic pressures.

Logan blamed Remgro’s poor performance on the decision to stop investing in owner-managed businesses, which historically performed well.

“It’s quite scary that a philosophical difference can make such a big difference,” he told Biznews’ Alec Hogg.

A lack of ownership at board level

Another problem for Remgro is that many of its board members are not big shareholders in the company – at least not directly.

Logan highlighted that Johann Rupert believes that if you want a company to perform, you should ensure that directors have a lot of shares.

It aligns with the views of Berkshire Hathaway’s Warren Buffett, who is widely regarded as the most successful investor of all time.

At the centre of Berkshire Hathaway’s success is the board, chaired by Buffett. What sets this board apart from most other companies is ‘skin in the game’.

Buffett said all board members have a significant interest in Berkshire Hathaway. Even more important is that they used their money to buy the shares.

“Any recommended director should own Berkshire stock that has represented a substantial portion of their investment portfolio for at least three years,” he said.

Berkshire Hathaway also does not pay its directors much. It is a fraction of what South African directors at big companies get paid.

This policy ensures the directors prioritise the long-term interests of shareholders over short-term gains.

Remgro board members, in comparison, are not all big shareholders, and a large percentage of their wealth does not sit in the company.

The directors also get paid well, so disrupting the boardroom is not in their interest. Basically, nod and collect your check on your way out.

Buffett warned that such a system incentivises ‘yes men’ rather than board members who will challenge the chief executive and chairman.

Remgro’s latest annual report revealed that nearly all of the company’s independent non-executive directors have very few shares.

Most of the independent non-executive directors received higher fees each year than their total shareholding in Remgro.  

Therefore, their financial interests are far more aligned with receiving fees than improving the company’s performance and share price.

It is hardly surprising that some analysts criticised Remgro for not serving shareholder interests.

The table below compares the fees and shareholding of Remgro’s independent non-executive directors.