South Africa: Sound governance is vital for SOEs
Government is gearing up for massive infrastructure expansion designed to promote economic activity and create jobs and the pivotal role of state-owned enterprises (SOEs) in implementing the programme has come under the spotlight.
“SOE compliance with codes of good governance is a fundamental aspect,” says Sandra Burmeister, CEO of the Landelahni Recruitment Group. “It is one of the most important SOE issues currently under review.”
The Presidential State Owned Enterprises Review Committee, tasked with exploring sustainable SOE business models that strike a balance between commercial, developmental and shareholder objectives, is expected to release its report shortly. This will include recommendations on shareholder oversight and governance, recruitment, selection and appointment of boards, and executive management of SOEs.
One option under discussion is the grouping of SOEs under a central authority “Should this make it possible to put in place more effective and accountable leadership and allow for a sound governance structure, it may be deserving of support,” says Burmeister. “Similarly, proposed strategic groupings of SOEs may lead to more effective collaboration between SOEs in the same industry sector, in this way avoiding replication of services and generating an improvement in efficiencies.
“The crucial issue is one of governance. A shareholder charter, which clearly defines the roles and responsibilities of the shareholder and of the board, is an essential in enabling the board to function effectively.
However, there has been a blurring of lines between the shareholders’ responsibilities and those of the board, and this has prejudiced operational effectiveness. What we have seen in the past is a case of shareholders’ delegating responsibility without authority.
“It is the shareholder’s role to appoint the board, comprising experienced, qualified and capable board members who are equipped to ensure the organisation is managed according to sound governance principles. It should be the board that nominates the chairperson and appoints – or dismisses – the CEO and other executive directors. If the board itself is not performing, government as the shareholder can remove directors, preferably at a properly-constituted annual general meeting.
“The state should not play the dual role of the shareholder and the board, since this leads to the kind of conflict of interest evidenced at SOEs such as the SABC, Telkom, Eskom and Transnet, which reached a flashpoint when the state interfered in the process of appointing the CEO.
“To run effectively, government must delegate authority and accountability to the SOE and then let the board do its job. Otherwise it may as well make the enterprise a government department and take over full control, together with the responsibility for service delivery.”
The critical issue, says Landelahni director Alan Witherden is how SOEs can be governed effectively, whether the leadership is in place to ensure sound governance, and whether sound processes are in place to mitigate against risk, fraud and corruption.
Public Enterprises Minister Malusi Gigaba has indicated he favours retaining the current arrangement where CEOs are appointed by the Minister after recommendations from the board and consultations with Cabinet. This is aligned with government’s vision of South Africa as a developmental state propelled by a state-driven capitalist economy.
“In this scenario, the board becomes accountable for the performance of the organisation under a CEO it may have had no hand in appointing and whom it is unable to replace in the case of non-performance,” says Witherden.
SOEs fall under the ambit of the Public Finance Management Act (PFMA), in addition to the Companies Act, which distinguishes clearly between board and shareholders. The King Report on Governance (King III) is also relevant for SOEs. In terms of King III, it is the duty of the board to ensure that the company complies with all governance requirements. “When the state is involved, adherence to standards in executing such duties is even more critical,” says Witherden.
“The shareholder charter should set out a clear framework outlining the state’s expectations aligned to strategic government policies. It should define deliverables and specify the delegation of authority to the board. The CEO employment agreement should reinforce the view that the CEO is accountable and must report to the board.
“This would go a long to ensuring SOEs begin to fulfil their potential in infrastructure expansion aligned to the country’s economic development programme.”
