Presidential report on SOEs – state continues to pull strings

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The presidential review committee report on state-owned entities (SOEs) has
stopped short of resolving the critical issues of board independence and continuity
and CEO appointments.

This is the view of Alan Witherden, director: board services of Amrop Landelahni.
"The report is exemplary in setting out many of the parameters for operational
excellence, such as the need to develop a standardised framework for the
appointment of SOE board members.

"However, it perpetuates the process whereby the appointment of the CEO is
done by the minister in agreement with cabinet, at the recommendation of the board.
This is the very practice that has bedevilled organisations such as SAA, the SABC,
Eskom and Telkom over the past few years. It reflects the committee’s uneasy
balancing act as it attempted to reconcile commercial and developmental
objectives.'

The report acknowledges that the CEO has a strong - albeit indirect - reporting
line to the minister. "To a large extent, this makes him a political appointee, rather
than an independent executive appointed by and accountable to the board,' says
Witherden.

"In this scenario, the board becomes responsible for the performance of the
organisation under a CEO it may have had no hand in appointing and whom it is
unable to either direct or influence. The employment agreement should state that
the CEO is accountable and must report to the board,' says Witherden. "The board
should appoint - or, the case of non-performance, dismiss - the CEO and other
executive directors.'

One of the key drivers of success in achieving SOE reforms, the report states, is
that "SOEs should have sufficient operational independence distinctly articulated in
the shareholder compact'.

However, some national SOEs indicated that they prefer not to submit
shareholder compacts since this enables them "to accommodate the preference of
the oversight ministry for fluid deliverables, changeable whenever required by the
minister concerned'. "This strikes at the heart of the question of the independence
of boards,' says Witherden.

"In the past there has tended to be a blurring of lines between the shareholders’
responsibilities and those of the board and this has prejudiced operational
effectiveness.

"Political interference has arisen because roles have not been clear. This is
crucial for state-owned enterprises since, unlike their counterparts in the private
sector, they have to deal with a mix of developmental, political and social pressures.
Clearly specified requirements and controls will avoid the conflict that has arisen
when shareholder expectations are out of sync with those of the board.'

"The shareholder compact 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 appointment and rotation
of directors should be staggered to ensure stability and continuity. If the board is
not performing, government as the shareholder has the right to remove directors, at
a properly constituted annual general meeting.

"As the presidential review committee report indicates, we require a formal,
transparent and structured process for sourcing and appointing appropriately skilled
and experienced board members who are qualified to do their job of guiding the
organisation and can be held accountable for results.

It’s not possible to attract good people to boards, or retain them, unless there a
clear framework in place as a basis for sound decision-making.'

The Presidential report relies heavily on the corporate governance requirements
introduced by the King III, but indicates that state-owned entities should be treated
differently from commercial operations because of their complexity and function as an
organ of the state.

"This is open to a myriad of interpretations,' says Witherden. "When the state
and public money is involved, adherence to governance standards is even more
critical. How SOE’s operate reflects directly on government and impacts on the ability
to raise funding and partners for large capital projects.

"To enable them to run effectively, government must delegate authority and
accountability to the state-owned enterprise and then let the board do its job in
accordance with stringent governance principles. We should embrace proven models
as practised by leading companies and SOEs globally. This would go a long way to
ensuring SOEs begin to fulfil their potential in infrastructure expansion aligned to the
country’s National Development Plan.'

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