Presidential report on SOEs is insufficient

 Alan Witherden, an executive if leading research firm Amrop Landelahni, has punched holes on the presidential review committee report on state-owned entities (SOEs). He has suggested that the report is insufficient in dealing with corporate governance issues which have caused leadership instability in a number of SOE’s recently.

In a statement released yesterday Witherden said the report has stopped short of resolving the critical issues of board independence and continuity and CEO appointments. His comments can be seen to be speaking to the recent board explosions in a number of SOEs including the South African Airways (SAA), and the South African Broadcasting Corporation (SABC).

The director of board services at Amrop Landelahni, Witherden, said “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.”

He said 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 fulfill their potential in infrastructure expansion aligned to the country’s National Development Plan.”

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