1
William Gumede
Associate Professor
Graduate School of Public and Development Management (P&DM)
University of the Witwatersrand, Johannesburg
Tel: 27 11 717 3533
Mobile: 27 82 088 1615
Fax 27 86 547 7577
E-mail: williamgumede@yahoo.com
June 2012
South African State-Owned Enterprises:
Boards, Executives and Recruitment
South African Presidential Review Committee on
State-Owned Enterprises (PRC)
Final Version
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William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
June 2012 Final Wits P&DM
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Index
1.
2.
3.
4.
5.
6.
7.
8.
9.
Introduction ............................................................………………………………………………………………..3
Corporate Governance and SOES: The Principle Agent Paradox......………………………………………..4
Role of Boards in Corporate Governance: The Special SOE Challenge ......................................10
The Challenge of Building Effective SOE Executive Managements and Boards...……………………13
4.1. Clarifying the governance role ....................................................................................13
4.2. Nominating and selecting board members for SOE.....................................................18
4.3. Board composition of SOEs..........................................................................................20
4.3.1 The Board Nomination Process in Sweden (Figure) ……………………………………………….22
4.4. SOE Board Professionalism ..........................................................................................22
South African SOEs: Ineffective Boards, Executives and Recruitment Procedures ...……………..23
PRC Questions.........................................................………………………………………………………………..22
6.1. Is the Recruitment and Appointment of Boards Codified? .........................................25
6.2. Is there general compliance with legislation?..............................................................27
6.3. How is the Board recruited and appointed?................................................................28
6.4. If not legislated how is Board recruitment regulated?.................................................29
6.5. Roles of Minister, Cabinet, Parliament in Board appointments...................................30
6.6. Do SOE board members undergo security clearance?.................................................31
6.7. Do departmental officials sit on SOE boards?..............................................................31
6.8. Is SOE board terms of office codified?.........................................................................32
6.9. Is SOE board composition aligned to mandates?.........................................................33
7.10. Are boards balanced? …………………………………………………………………………………………...33
7.11. Are board appointments Gazetted? ………………………………………………………………………35
Executive Management and Boards within SOE governance framework ……………………………….36
7.1. Enabling legislation and Articles of Association ............................................................36
7.2. PFMA and Treasury Regulations....................................................................................37
7.3. The New Companies Act................................................................................................38
7.4. Shareholder/Cabinet Roles ...............................................................................………….38
7.5. Protocol on Corporate Governance………………………………………………………..………………….41
7.6. Parliament ……………………………………………………………………………………..…………………………45
7.7. King III ……………………………………………………………………………………………………………………….48
7.8. JSE Listing Requirements ……………………………………………………………………………..…….……..49
7.9. ANC Deployment Committee……………………………………………………………………………………..49
7.10.
Non-Formal Oversight………………………………………………………….………………………52
7.11.
Public Service-wide Governance Practices …………………………………………………..53
Recommendations and Conclusion ………………………………………………………………………………………….57
8.1. General lessons from SOE reforms in comparable countries ……………………………………..57
8.2. Streamline Recruitment and Appointment Process……………………………………………………58
8.3. Making SOE board appointments merit-based…………………………………………………………..59
8.4. Differences between SOE governance Codes, Legislation ………………………………………….61
Annexure 1: SOE Executive Management and Board Recruitment and Appointment
Legislation, Composition and Make-up ……………………………………………………………………………………65
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1. Introduction
Well-managed and efficient State-owned Enterprises (SOEs) that deliver on their
developmental mandates are crucial if South Africa’s going to meet its ambitious agenda of
building an effective democratic developmental state. In successful developmental states
effective SOEs spearheaded economic development and growth. SOEs 1 played a key role in
the post-Second World War industrialization strategy of the Nationalist Party governments,
which used SOEs to expand the key infrastructure industries, such as rail, air, sea transport,
telecommunications, water, coal-based synthetic fuels, and nuclear energy also the iron and
steel. Furthermore, the apartheid state also viewed these industries as key instruments for
industrialization, employment creation and economic development, albeit based on racial
segregation lines2, with white South Africans the main beneficiaries.
In South Africa’s post-1994 period there have been great expectations that SOEs would
deliver effective public services, would be at the core of economic development and provide
the bulk of economic growth. Collins Chabane, the minister of performance management
and evaluation said: “SOEs importance lay in their ability to help sustain job creation, skills
development and transformation”3. When President Jacob Zuma announced the
1
In the period after the Second World War many developed and developing countries created SOEs either by
nationalizing existing companies or creating new state-owned companies. These were done either for ideological
reasons, based on the argument that only state-owned enterprises can serve the broader public interests; or for
pragmatic reasons of market failure or to provide essential public goods, such as electricity provisions or
telecommunications, that are too costly for the private sector to roll out (and too difficult to establish competitive
markets). In the cases where SOEs were set up on pragmatic reasons to redress market failure or to provide
essential public goods, governments expected from SOEs to provide a ‘reasonable return’ (Heath and Norman
2004, p.11) on investment as well as the required social objectives. The social agenda of SOEs in the latter category
were set out by states as [Heath and Norman 2004, p.11; Ramanadham 1991, pp. 76-81; Lewin 1982, p.53-58]: (1)
Bolstering macro-economic strategies , where SOEs were required to meet specific fiscal targets, and to pursue
counter-cyclical spending, maintain and create employment during recessions – to ‘smooth out the business cycle’,
to secure full employment through job creation projects and soaking up excess employment capacity, and to meet
monetary policy objectives, by assisting in inflation control through setting wage and price controls; (2) in
industrialization through boosting national industries through providing subsidized goods and services for
domestic firms and give preferential procurement to local companies. Furthermore, SOEs are expected to invest in
sectors that have been identified as national priorities within a country’s industrialization strategy, or to support
the incubation of newly identified industries. Industries prioritized as in the national interest and security was
generally put in state hands; (3) SOEs were also used to achieve redistribution goals. For example they had to
provide the same services for the same price across the country. Postal services are a good example. They were
also used to spearhead regional development, through channeling specific investments in underdeveloped areas,
or directly subsidizing services in underdeveloped or poorer regions, such as providing subsidized transport to rural
or remote areas; (4) SOEs were created to reduce negative externalities. For example, state-ownership was
encouraged in industries that may cause harmful environmental externalities, such as the nuclear industry,
uranium mining and so on; (5) SOEs were also expected to set the trend in being model corporate citizens. They
were expected to treat their employees well (for example job security, training, decent wages), adhere to
affirmative action policies and use their procurement policies to developed small business according to the overall
national industrial and development policies.
2
See Thabethe, Elizabeth (2010) Speech by the Chairperson Of The Portfolio Committee Energy During The
Occasion Of The Debate Of The State Of The Nation Address, National Assembly, Cape Town, February 15
3
Terreblanche, Christelle (2010) SOEs faces test. The Sunday Independent, October 13
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appointment of the Presidential State-Owned Enterprises Review Committee, he said: “We
have to ensure that while they remain financially viable, the SOEs, development finance
institutions, as well as companies in which the state has a significant shareholding, must
respond to a clearly defined public mandate, and help us to build a developmental state” 4.
In many developing and developed countries SOEs, have in spite of good intentions,
generally been less efficient than private firms 5 – this has, with exceptions generally been
the case in South Africa also. This trend has been bucked in some of the successful East
Asian developmental states and Scandinavian democratic welfare states. Although forming a
significant part of South Africa’s economy, with inputs such as electricity, public transport
and telecommunications being dominated by SOEs, their performance have generally
disappointed. In post-apartheid South Africa, SOEs have struggled on a number of key
objectives. These include lack of effectiveness in public service delivery, meeting the
transformation needs of society – skills transfer, job creation, and playing the catalyst role
in broader industrial development and expanding economic growth. Yet, unless SA’s SOEs
become more efficient, they will not be able to spearhead economic development and
industrialization expected from them.
2. Corporate Governance and SOEs: The Principal-Agent Paradox
4
Zuma, Jacob (2010) Presidency Budget Vote Debate. National Assembly, May, 12, Cape Town
In the 1960s in Western European left-of-centre governments there was a wave of nationalization of private
companies. This was based on the idea that the private ownership and the profit motive was at the heart of the
failure of companies to not focus on broader social imperatives. This wave of nationalization was not specifically
because of market failure or because private sector companies had monopolized these specific industries or
because of the ‘public goods’ argument, but specifically to get these companies to follow social objectives (Heath
and Norman 2004, p.12). By the 1970s these SOEs have suffered huge financial losses (Boardman and Vining
1989), while failing at the same time to deliver on the states’ social goals (See Stiglitz 1994, p.173). Some for
example, when they were supposed to reduce negative environmental externalities, were actually the biggest
polluters, and state-owned nuclear reactors among the most unsafe, for example in the US (Stiglitz 1994, p.250). In
France, oil SOEs for example practiced predatory pricing towards domestic consumers, speculated against the
national currency and opposed state directives to channel deliveries to foreign customers in times of global
shortages (Feigenbaum 1982, p.109). Many of these left-of-centre governments in the 1970s introduced
‘commercialization’ of the entities that are located in competitive industries: running them on business principles
and maximizing profits (Ferner 1988). These happen in Canada, Spain and France among others. In most cases
following ‘commercialization’ the social agenda responsibility was removed from the SOEs. Joseph Stiglitz (1994,
p.173) argues there were in many cases not difference between BP (mixed private-state owned), Petrofina (stateowned) and Texaco (privately owned). However, the ‘commercialization’ process did not improved on either
sustainability or reaching their social goals objectives. By the 1980s conservative governments in industrial nations,
under neo-liberalism, launched a wave of privatization of SOEs. [Heath, Joseph and Norman, Wayne (2004)
Stakeholder Theory, Corporate Governance and Public Management: What can the history of state-run enterprises
teach us in the post-Enron era? Journal of Business Ethics 53, pp247-265; Stiglitz, Joseph (1994) Whither Socialism?
Cambridge, MA, MIT Press; Boardman, Anthony E. and Vining, Aidan, R. (1989) Ownership and Performance in
Competitive Environments: A comparison of the Performance of Private, Mixed and State-Owned Enterprises.
Journal of Law and Economics, 32, p.1-33; Feigenbaum, H. (1982) Public Enterprises in Comparative Perspective,
Comparative Politics, 15, p.101-122; Ferner, Anthony (1988) Government, Managers and Industrial Relations.
Oxford, Basil Blackwell]
5
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William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
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This essay will look at the corporate governance in SOEs from the vantage point of
stakeholder theory6 of the firm, which argues that shareholders, employees, customers,
suppliers and communities are all stakeholders of a firm and have a stake in the success or
failure of a firm7. In this context the assumption is made that the firm, board and
management “have special obligations to ensure that the shareholders receive a ‘fair’ return
on their investment; but the firm also has special obligations to other stakeholders, which
go above and beyond those required by law”8. Stakeholder theory is not a “theory per se,
but ‘the body of research which has emerged in the last 15 years by scholars in
management, business and society, and business ethics, in which the idea of “stakeholders”
plays a crucial role”9.
A key focus of corporate governance is to regulate the relationships between the main
actors - boards, management, shareholders and stakeholders of a company, whether,
private or SOE10. Adam Smith (1776) in his Wealth of Nations11 raised the issue of corporate
governance when he pointed to the possible hazards of the “diffusion of stock companies by
the lack of incentives for both the owners and managers to manage and control the
enterprise efficiently and effectively”12. Berle and Means (1932), in their seminal work The
Modern Corporation and Private Property 13 came out with a theory that separates the
ownership and control of a corporation, which they argue may frequently be in conflict.
Their theory – of separation of ownership and control is at the heart of corporate
governance.
Berle and Means (1932) argued that although a company is an economic entity with equity
which is owned by its shareholders, however, the effectiveness of its management “may
well be determined by incentives, which were independent of and frequently in conflict with
those of the owners”14. Crucially, the key problem of this separation of ownership and
control in a corporation is what is called the ‘agency problem’ arising from the “high cost of
6
Stakeholder theory stands in contrast to the neo-classical or classical notions of the firm, for example, espoused
by Milton Friedman, which argues the only “social responsibility of business is to maximize profits” [Friedman,
Milton (1970) The Social Responsibility of Business is to Increase its Profits. New York Times, Sept. 13
7
Donaldson, T. and Preston, L. (1995) A Stakeholder Theory of the Corporation: Concepts, Evidence, and
Implications. Academy of Management Review (20)1; Freeman, Edward (1984) Strategic Management: A
Stakeholder Approach. Boston, Pitnam; Gibson, Kevin (2000) The Moral Basis of Stakeholder Theory. Journal of
Business Ethics 26, pp 245-257; Stiglitz, Joseph (1989) The Economic Role of the State. Oxford: Basil Blackwell;
Ramanadham, V.V. (1991) The Economics of Public Enterprise. London, Routledge; Holmstrom, Bengt and
Milgrom, Paul (1991) Multi-task Principal Agent Analysis. Journal of Law, Economics and Organization 7, pp. 24-51
8
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
9
Jones, T., Wicks, A. and Freeman, R.E. (2002) Stakeholder Theory: The State of the Art, in: N.Bowie (ed) Blackwell
Guide to Business Ethics. Oxford: Blackwell, 19
10
Sari, A. Synthia et al (2006) The Roles of Board of Commissioners within the Corporate Governance of Indonesian
State-Owned Enterprises. Paper presented to the 14th IRSPM Conference, University of Bern, Switzerland, 7-9 April,
p.3
11
Smith, Adam (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. University of Chicago Press,
Chicago, IL.
12
Quoted in Kakabadse, Nada, K., Yang, Hong, and Sanders, Richard (2010) The Effectiveness of Non-Executive
Directors in Chinese State-Owned Enterprises. Management Decision (48)7, pp. 1063-1079
13
Berle, A.A. and Means, C.C. (1932) The Modern Corporation and Private Property. Harcourt, Brace&World, New
York, NY
14
Quoted in Kakabadse, Nada, K., Yang, Hong, and Sanders, Richard (2010) The Effectiveness of Non-Executive
Directors in Chinese State-Owned Enterprises. Management Decision (48)7, pp. 1063-1079
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writing and enforcing contracts between owners and managers” 15. Berle and Means argued
that “shareholders of a company with a dispersed shareholder base have less incentive to
monitor managers”16, which gives rise to conflicts of interest between shareholders and
managers17. The issue is how to minimize this ‘agency problem’ and the costs associated
with it18. In principle-agent theory the Principal (shareholders) wants to induce the Agent
(directors and management) to perform tasks that are in the principal’s interests, but not
often in the interest of the agent 19. This can either happen through providing incentives or
through moral persuasion20.
In the principal-agent theory McCubbins and Schwartz (1984) says the challenge is
therefore to ensure that the agent does not act opportunistically and pursue its own
interests at the expense of the principal (agency shirking)21. The agency problem is
particularly relevant in the context where there is information asymmetry between the
principal and the agent: the Agent has the relevant information or expertise about a
problem/issue/situation than the Principal, who needs the information or expertise of the
Principal. In a company, the shareholders are the Principal and the directors and
management the Agents. “A company’s Board of Directors and the management that
reports to it, may be similarly assumed to have far greater specific knowledge than the
company’s shareholders (and other stakeholders) about the state of a company’s
operations, its finances, its organisation, its position in various input and output markets, its
potential for growth in the industry it is a part of, and so on.”22
In such asymmetries of information23, managers/boards may use their inside knowledge to
enrich themselves at the expense of shareholders 24. When the Agent has multiple tasks, it
15
Quoted in Kakabadse, Nada, K., Yang, Hong, and Sanders, Richard (2010) The Effectiveness of Non-Executive
Directors in Chinese State-Owned Enterprises. Management Decision (48)7, pp. 1063-1079; Solomon, J. (2007)
Corporate Governance and Accountability. John Wiley & Sons, Chichester
16
Quoted in Kakabadse, Nada, K., Yang, Hong, and Sanders, Richard (2010) The Effectiveness of Non-Executive
Directors in Chinese State-Owned Enterprises. Management Decision (48)7, pp. 1063-1079; Berle, A.A. and Means,
C.C. (1932) The Modern Corporation and Private Property. Harcourt, Brace&World, New York, NY
17
Quoted in Kakabadse, Nada, K., Yang, Hong, and Sanders, Richard (2010) The Effectiveness of Non-Executive
Directors in Chinese State-Owned Enterprises. Management Decision (48)7, pp. 1063-1079; Berle, A.A. and Means,
C.C. (1932) The Modern Corporation and Private Property. Harcourt, Brace&World, New York, NY
18
Sari, A. Synthia et al (2006) The Roles of Board of Commissioners within the Corporate Governance of Indonesian
State-Owned Enterprises. Paper presented to the 14th IRSPM Conference, University of Bern, Switzerland, 7-9 April,
p.3
19
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
20
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
21
McCubbins, M.D. and Schwartz, T. (1984) Congressional Oversight Overlook: Police Patrols versus Fire Alarms.
American Journal of Political Science, 28, pp. 165-179
22
Roy, Sobroto (2006) Corporate Governance and the Principal-Agent Problem. Conference on Corporate
Governance, Kolkata, May 31
23
Such opportunistic use of inside information can be seen in the cases of ‘moral hazard’, where the Principal
cannot fully observe the Agent’s action, whether wasting resources, taking too much risks and so on; or cases of
‘adverse selection’, where the Agent has “some private information, prior to entering into relations with the
Principal”, here for example, the Agent may not have the skills to do the job, but pretend to have .[ Heath, Joseph
and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management: What can the
history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247-265]
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William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
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becomes much more difficult to incentivize the Agent to improve performance 25. If tasks are
complementary it may not present huge problems 26. However, in the case of substitutes,
when putting effort on one task, raises the ‘marginal cost of investing in another’ 27,
problems arises, unless trade-offs are made28. More problems may arise if one task can be
monitored better than the other/s. Even if better incentives are designed for such tasks, it is
likely that managers would “tend to invest a disproportionate amount of energy into
performance of that task”29. Some theorists have argued that because of this multitask
problem that say middle managers should receive a flat salary30.
Heath and Norman (2004) argues that there are even more problems if the Principal does
not have adequate information to decide how to balance the different tasks against each
other31. If such a scenario, the Agent is given the discretion to decide on how to make the
selection “then accountability becomes almost impossible”, because the “Agent can always
explain poor outcomes in one task as a necessary consequence of better outcomes in
another”32. The idea of the bottom-line, provides for common standards to measure
management performance across a range of key indicators as well as the “broad boundaries
24
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
25
Laffont, Jean-Jacques and Martimort, David (2002) The Theory of Incentives. Princeton, NJ, Princeton University
Press, pp.203-226
26
In such cases putting effort on one task, reduces the marginal costs of another. For example, “in manufacturing
with economies of scale, increasing market share may lead to increases in productivity”. [Heath, Joseph and
Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management: What can the history
of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247-265]
27
For example, if in the retail industry, “‘cannibalization’ of sales may mean that increasing market share leads to
decreased in productivity”. [[Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate
Governance and Public Management: What can the history of state-run enterprises teach us in the post-Enron era?
Journal of Business Ethics 53, pp247-265]
28
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
29
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
30
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265; Williamson, Oliver (1985) The Economic Institutions of Capitalism. New York, Free Press; Holmstrom, Bengt
and Milgrom, Paul (1991) Multi-task Principal-Agent Analysis. Journal of Law, Economics and Organization 7, pp.
24-51
31
Managers can hide information of bad management; but it is also costly, time-consuming and energy sapping for
shareholders to hold management account. In cases of diffuse ownership, the effect on individual owners of
wrongdoing is small, and the costs to take action against wayward management may be high in comparison
[Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265]
32
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
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William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
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on the tradeoffs that managers can make between shareholder return and other objectives,
such as growth or product quality”, 33to hold management accountable.
Furthermore, multiple Principals also provides problems, with each Principal may attempt to
get the Agent to focus on its tasks, rather than the other Principal’s tasks 34. Generally this
agency problem is dealt with through the shareholder’s ability to hire and fire senior
management, compensation, and the threat of a decrease in the stock value and hostile
takeover – which is not the case in the case for SOEs. In SOEs agency problems
compounded by giving SOEs broad social goals mandates as well as a return on capital
invested. There is a deep-seated perception that agency problems are generally more
pervasive in SOEs than in private sector companies. These have to do with a number of
factors.
Firstly, the ownership structure of SOEs has peculiar features, which makes them
susceptible to poor accountability problems. If a private company fails, shareholders will
withdrew – with little regard for the social consequences 35. Notwithstanding poor
performance, even threat of ruining the fiscus, governments will rarely allow SOEs to go
bankrupt. This means that managers may feel little compunction about losing money in
SOEs. In some cases they may even run losses with the aim of securing more funding from
the state36. Governments often fail to hold executive managements of SOEs effectively
accountable and to ‘enforce’ discipline37. In the private sector, shareholders could use the
threat of bankruptcy, closure and hostile takeovers to discipline poor performing managers.
In the past, the public sector pays less - which meant that the quality of managers SOEs
recruit appeared to be generally poorer. However, recent now show that executive
managers and boards and SOEs are increasingly getting the same, if not more than their
private sector counterparts38. Furthermore, political appointees to SOEs may also bring
poorer quality managers to these entities. In the private sector, incentives such as
remuneration, share options, bonuses and the like, are often used to get managers to
increase performances. SOEs cannot offer managers stakes in the companies. On another
level, the ways in which social objectives of SOEs “are defined through the political process
and then ‘transmitted’ into the enterprises” often meant the objectives that SOEs are meant
to pursue are “confusing, changeable and often mutually at odds”39.
33
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
34
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
35
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
36
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
37
Ferner, Anthony (1988) Governments, Managers and Industrial Relations. Oxford: Basil Blackwell, p.30
38
For example research done by the SA Institute of Race Relations (2011) showed that public sector salaries in SA
are now at least 44% higher than those in the private sector. [South African Institute of Race Relations (2011)
Employment Survey. February 1]
39
Ferner, Anthony (1988) Governments, Managers and Industrial Relations. Oxford: Basil Blackwell, p.30
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The ‘multi-tasking’ of SOEs gives particular accountability problems, and makes it very
difficult for the shareholder to evaluate the performance of managers. In the private sector
the over-riding objective is for companies to make a profit. Many researchers argue the
multiple social objectives of SOEs – and the often vague or contradictory articulation of
these objectives by the shareholders, makes it more difficult to hold them accountable. The
“ambiguity of objectives provides the managers (of SOEs) further discretion to pursue their
own interests”40. Joseph Stiglitz (1989) says SOE executives could “always claim that the
reason they are losing money is not that they are inefficient or incompetent, but that they
have been pursuing other (social, job creation or development) goals. And it is virtually
impossible for an outsider to judge the validity of those claims”41. For another, trade-offs
between different social objectives can always be explained away as a necessary
consequences for pursuing another objective. Losing revenue could for example be
explained away as a consequence for maintaining jobs, and so on.
In order to deal with the issue of multiple social objectives, the shareholder should clearly
determine or provide a scorecard how various social objectives should be balanced,
evaluated, and how they should be prioritized. Because of the asymmetry of information
between the Principal and the Agent the information to measure the management of the
SOE is often difficult to secure by the shareholder. Furthermore, it is difficult to measure the
true effectiveness of SOEs, because of the lack of competition. In the private sector
competition normally not only provides the benchmark for how good companies are doing,
but also provides the incentives for managers to perform better. In private firms the profit
objectives offers a central standard for how firms are doing as all managers aim to make
their companies profitable in similar economic environments 42.
But SOEs often also have the problem of multiple principals also43. In some countries SOEs
are accountable to different ministries. In other countries SOEs are either accountable to a
single department, a holding company or number of different departments. While the SOE
may be accountable to the single department or holding company, they may also be
accountable to a board. Or, if accountable to a central holding company, the single holding
company may have representatives from different departments and stakeholders 44.
Managers could play off one stakeholder against the other to avoid accountability. In some
countries SOEs have representatives of stakeholders 45, whether employees, government or
trade unions, either on the boards or on the central SOE oversight agency. Such
40
Stiglitz, Joseph et all (1989) The Economic Role of the State. Oxford: Basil Blackwell, p. 32
Stiglitz, Joseph et all (1989) The Economic Role of the State. Oxford: Basil Blackwell, p. 32
42
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
43
Freeman, Edward (1984) Strategic Management: A Stakeholder Approach. Boston, Pitnam, p.xx
44
For example, initially in Spain, the central holding company to which SOEs were accountable had
“representatives of the ministries of finance, commerce, industry, public works, agriculture, as well as the
ministries of the army, navy and air force, on its board of directors” [Ferner, Anthony (1988). Governments,
Managers and Industrial Relations. Oxford, Basil Blackwell, p.31] This made the system of accountability very
opaque.
45
Off course in most cases, some stakeholders are not very organize to put forward a representative, for example
consumers, who would suffer from poor products or services, or who suffers the consequences of price increases
caused either directly by the SOE setting higher increases, or price increases that was passed on say, through
inflationary wage increases of employees at the SOE. In theory then some critics will argue for those consumers
not represented, the government representative represent them also. Yet, it will be silly to argue that because
government represents specific stakeholders, it would automatically defend the needs of those stakeholders.
41
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representatives may often attempt to dominate the management of the SOE or they may
act in the interests of the sponsor, rather than in the interests of the SOE as a whole.
The aim of good corporate governance is to avoid agency shirking in whatever form 46. Good
corporate governance would then be to develop adequate incentives for boards and
executive managements of corporations to reduce the ‘agency problem’47, given the fact
that the separation of ownership and control “generates the potential for significant freerider problems between managers, (boards) and shareholders” 48.
3. Role of boards in Corporate Governance: the special SOE
challenges
Boards are at the heart of corporate governance in both private sector companies and
SOEs49. In most of the corporate scandals were due to a “breakdown of the governance
relation between shareholders, the board, and the senior executives” 50. Since the global
financial crisis there have been renewed efforts to strengthen governance aspects in the
form of new regulations and corporate governance codes 51. Furthermore, there has been a
renewed focus across the globe on increasing the performance of boards to increase the
performances of SOEs; and to boost the accountability of management to boards and
shareholders52. “A strong board participates effectively in company strategy and provides
46
Sari, A. Synthia et al (2006) The Roles of Board of Commissioners within the Corporate Governance of Indonesian
State-Owned Enterprises. Paper presented to the 14th IRSPM Conference, University of Bern, Switzerland, 7-9 April,
p.3. Generally the shareholders, managers and employees of a company have a common interest in making sure
that a company is successful. However, individuals can secure a personal advantage from working against the
common interest of a company. Shirking would be where individuals invest less work, but enjoy the benefits of
higher effort of others. The challenge is to secure the kind of collective action – even between shareholders,
boards and managers - that will make galvanize stakeholders to work for the collective good. The potential
conflicting interests between specifically shareholders, boards and managers is the basis of the principal-agent
relationship [Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public
Management: What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business
Ethics 53, pp247-265]
47
Sari, A. Synthia et al (2006) The Roles of Board of Commissioners within the Corporate Governance of Indonesian
State-Owned Enterprises. Paper presented to the 14th IRSPM Conference, University of Bern, Switzerland, 7-9 April,
p.3
48
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
49
Edwards, M and Clough, R (2005) Corporate Governance and Performance: An Exploration of the Connection in a
Public Sector Context. Corporate Governance ARC Project (1), Canberra
50
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
51
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
52
Heath, Joseph and Norman, Wayne (2004) Stakeholder Theory, Corporate Governance and Public Management:
What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics 53, pp247265
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proper incentives for management, maximizing value, while taking into consideration the
policy objectives of the enterprise”53.
The demands on SOE boards have become increasingly complex – beyond just the
traditional focus on examining the annual financial statements and budget. These days
“boards must consider increasingly difficult technical issues including risk and risk
management, financial instruments, financial reporting, systems of control … corporate
responsibility”54. Furthermore, they must also be able to anticipate future events,
uncertainties and risks – more often than not with the ‘same available resources’ 55. In many
developing countries the cultures of SOEs mirrors of the public sector in general: if
governance in the public sector is generally poor, this would be reflected in SOEs also 56.
Most of the SOE board reforms in developed and developing countries – which have brought
efficiency gains57 - since global financial crisis have focused on making boards more
professional, and providing them with greater powers and independence to exercise their
authority. Reforms have focused on the composition of boards, making sure they have the
right balance of skills. Furthermore, reforms have emphasized making board members more
independent, in terms of their actions, and introducing more effectively board performance
evaluations. Reforms have also focused on minimization of the politicization of SOE boards.
Research shows that more effective boards “seem(s) to protect governments from
operational missteps, political fallout, and allow them to better gauge and manage the risks
of operating an enterprise in a commercial environment.” 58
Although the SOE boards must like private company boards “account for legal requirements
and legitimate stakeholder concerns”59, generally, SOE boards operate in a more
challenging and complex environment than their private sector counterparts – and this
traditional role of the board is often compromised, with boards often bypassed by
governments as shareholder. Since the state is the main shareholder and the SOEs have
special social objectives and mandates “the ‘interest’ of the shareholders and the company
may be different in SOEs than in private sector companies” 60. Since government is the main
shareholder, government intervention in the affairs of the SOE happens frequently.
Government intervention per se is off course not always the problem, but the manner in
which it takes place may undermine the oversight role of the board and the efficiency of the
SOE. In benign, in terms of corporate governance, interventions, intervention “is informed
and considered, takes into account the SOEs objectives, goes through the proper channels
53
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.23
54
OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris, p.9
55
OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris, p.9
56
OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris
57
See OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris
58
OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris, p.8
59
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.23
60
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.23
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(including the board) and is not driven principally by political needs” 61. In malign
government interventions, which “can take the form of a directive in response to a
government need, and may override the needs of the SOE”, may put the SOE board in
“untenable positions, torn between their duty of loyalty to the SOE and the need to act on
behalf of the owners and the state”62.
The World Bank’s (2006) report on corporate governance lessons from emerging markets
argue that “a key difference between private sector and SOE boards is the relationship
between the board and its controlling shareholder and the relative authority of the two” 63.
For example, in many countries, including South Africa, the state as owner, often has more
authority than the board – this is often even codified in law. For example, South Africa’s
Protocols on Corporate Governance in the Public Sector, stipulates that the board “has
absolute responsibility for the performance of the SOE” however, in the same breath it says
it is the executive authority which is responsible for the oversight that chooses the CEO, in
consultation with the board. Boards traditionally appoint the top management.
The problem is in SOEs, “almost all the key functions” of an SOE board “may be performed,
or at least heavily influenced”64 by the shareholder or executive authority. For example, the
power of SOE boards to decide on financial, investment and employment decisions may be
limited, requiring shareholder approval or restricted. Since the day-to-day management of
the SOE rest with the management, the board may be left with little to do 65. Furthermore,
in many cases governments may in effect run SOEs directly “through the influence of its
board nominees and the objectives and directives given to the SOE” 66.
This situation – of over-influence of the shareholder (the state) and the restricted role of the
board leaves the SOE management often with wide discretionary powers. However, this
situation “makes board accountability essentially meaningless because there may be little to
be accountable for”67. In combination, the emasculation of the SOE boards and the undue
influence of the shareholder “reduces transparency” as the management of the “enterprise
bypasses formal mechanisms of control”68. William Mako and Chunlin Zhang (2004) argue
that “SOE management with little accountability and lacking ownership and a long-term
interest in the performance of the company has engaged in asset stripping and other
serious abuses”69.
61
OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris, p.10
62
OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris, p.10
63
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.24
64
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.24
65
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.24
66
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
67
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
68
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
69
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
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4. The Challenge of Building Effective SOE Executive
Management and Boards: Comparative SOE reforms
4.1. Clarifying the governance roles
A number of countries have recently moved to reform SOEs to improve their performance,
effectiveness and to raise the quality of public services, in the context of decreasing
government financial support. The focus of many SOE reforms in both developed and in
developing countries recently have been on clarifying, simplifying and streamlining the roles
of the state as owner, SOE ownership entities, boards and management 70. These reforms
focused on reorganizing the ownership function of the shareholder. Some countries have
established specific shareholder ownership units.
In many OECD countries it appears that establishing a single, well-resourced centralized
agency, to manage the state’s shareholding function in SOEs is increasingly becoming a
trend71. Other reforms include formulating specific SOEs and guidelines which clearly sets
out the mandates of SOEs. Many countries have also introduced changes to the recruitment
procedures of SOE boards, executives; and their performance evaluation and remuneration.
Other reforms have included changing the accounting and auditing processes governing
SOEs.
The OECD guidelines on Corporate Governance on SOEs 72 proposed a three-layered
governance structure with distinct roles for SOEs in its member states: a state ownership
function responsible setting ownership policy and objectives for the SOEs; a board which
oversees the development – and monitoring of implementation thereof - of a strategy to
meet the state’ objectives for the SOEs; and an executive management which proposes
strategy and are accountable to the board for implementing it.
SOE state ownership structures varies across developed and developing countries. SOE
ownership structures can generally be classified into centralized, dual and decentralized 73.
In the centralized ownership, one government body is the ownership entity. A number of
countries have established special purpose vehicles (SPVs) or centralised holding
companies for their SOEs, for example China, Singapore, Thailand, Vietnam,
Malaysia and Finland. Examples74 of these include that of Singapore, where the holding
entity Temasek, is the ownership entity for all SOEs. Temasek is fully owned by the Ministry
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February
70
OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris, p.9
71
Forfas (2010) The role of State-Owned Enterprises in Ireland. Dublin, p.5
72
OECD (2011) Enhancing the Role of the Boards of Directors of State-Owned Enterprises. OECD Corporate
Governance Working Paper No.2, OECD Publications, Paris, p.11
73
World Bank (2006) Held by the Invisible Hand: The Challenge of State-Owned Enterprise Corporate Governance
for Emerging Markets. New York, World Bank Publications, p.11
74
Other examples of centralized ownership structures include, Jordan, where the ownership function rest with the
Jordan Investment Corporation; in Chile, the Chilean State Owned Enterprise System, which though not the direct
owner of SOEs, is the agency that performs the ownership function; and Indonesia, where the Ministry of StateOwned Enterprises performs the ownership function [World Bank (2006) Held by the Invisible Hand: The Challenge
of State-Owned Enterprise Corporate Governance for Emerging Markets. New York, World Bank Publications, p.11]
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of Finance. In Norway, the government is owner, policy maker and regulator. In the
case of Norway’s Statoil, where the state owns the oil resources, the Ministry of
Petroleum and Energy performs the owners function and sets resources policy and
monitors that the oil company follows such policies in its operations. The
Norwegian state is the largest shareholder with 67% shares. Statoil’s primary
listing is on the Oslo Stock Exchange and it follows the corporate governance
practices of the Norwegian company law and stock exchange. It is also subjected
to the New York Stock Exchange listing rules, because it is registered in the US as
a foreign private issuer with the US Securities and Exchange Commission.
Listed SOEs which follows listing rules and company law appear to perform better
on corporate governance, and Statoil is a case in point. Importantly, in legal terms
“the state has no power over Statoil other than the shareholder rights its
exercises at annual general meetings … the directors and chief executive of Statoil
have a fiduciary duty to the company and all shareholders and are individually
liable for any damage caused to the company” 75. In Singapore, Temasek, must
adhere to the company law, is governed by a board that is “commerciallyorientated” and must “earn a reasonable return on investments” 76.
In Sweden, the Ministry of Industry, Employment, and Communications, serves
the ownership role for its large SOEs. Within the ministry there is a specialist unit,
the State-owned Enterprises division which administers the shareholding function.
Swedish SOEs follows the country’s companies’ act, like any other company. This
means that the board is empowered to provide oversight and the strategy of the
SOE. “Some matters, such as company closures and dividend policy, are
considered part of normal administration and within the prerogatives of the
government and – by extension – the SOE board. Other matters – such as changes
in SOE ownership or capital – would be considered a disposition of state property
and require consultation between the government and parliament”77.
In the dual structure one ministry or agency performs the ownership function for all
enterprises, but other functions are rest with different ministries for different SOEs. South
Africa is an example78 of a dual structure, where in many cases one department serves the
75
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.6
76
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.8
77
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.6
78
Other examples of the dual ownership structure for SOEs is in India, where SOEs are overseen by specific
ministries, the department of Public Enterprises providing the guidelines, and a number of other departments
have oversight roles or advisory roles; in Brazil and Mexico, different line ministries oversee SOEs, but the Finance
Ministry is responsible for financial performance and asset management. In Turkey again, legal ownership of SOEs
rest with the Treasury and Privatization Administration, but other relevant sector ministries share ownership.
[World Bank (2006) Held by the Invisible Hand: The Challenge of State-Owned Enterprise Corporate Governance
for Emerging Markets. New York, World Bank Publications, p.12]
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ownership function, while another serves the policy function, and the Treasury also plays a
financial oversight role. In New Zealand, the Finance Ministry and the specific Sector
Ministry wherein the SOE operates are sharing ownership.
In New Zealand all SOEs since 1986 are limited liability corporations, proclaimed
in the State-Owned Enterprises Act of 1986. The commercial aspects of SOEs were
separated from the social obligations aspects. The shares of the SOEs are held by
two ministries – Ministry of Finance and Ministry of State-Owned Enterprises (setup in 1986). In addition, a State-Owned Enterprises Committee and Crown
Company Monitoring Unit (CCMAU) monitor SOEs performance. Members of the
CCMAU come from the non-state sector. They review the SOE performance on
behalf of the shareholding ministries. Importantly, the CCMAU functions almost as
a private consulting business and is operationally independent, although it is
owned by the Treasury. The head of the CCMAU is appointed by the Treasury. The
CCMAU is separate formal agreements with the two shareholding ministries,
outlining their specific advisory roles. Furthermore, the CCMAU’s main role is to
balance “profit maximization goals against broader social goals”.
The New Zealand SOE Act specifies that SOEs every year must prepare a public
statement of corporate intent, which must be approved by these two ministries,
setting out 3-year performance targets, “the level of dividends to be paid, and any
compensation the SOE expects to receive from Government for pursuing noncommercial objectives”. Audited financial statements must be presented to the
two shareholding ministries and to parliament. The CCMAU provides “shareholding
ministers with comments as to whether a board’s proposed performance targets
are consistent with relevant statutory requirements; the robustness of the board’s
proposed strategy and plans for achieving its proposed targets; whether the
board’s proposals on strategic issues (e.g., scope of business, balance sheet,
dividend levels) serve the best interests of shareholders; whether the board is
meeting its performance targets; and, if not, what action the shareholding
ministries should take to hold the SOE board accountable.”
Similarly, in South Korea, the Ministry of Finance and Economy is the custodian of
the state’s shareholding in SOEs. However, the sector ministry in which the SOE
operates may play that role in consultation with the Ministry of Finance and
Economy79.
In the decentralized ownership structure, different SOEs are overseen by different ministries
and the relationship of SOEs with different departments varies on a case by case. China is
the perfect example of this. Here ownership of SOEs is performed by a designated state
shareholder department. The central State-Owned Assets Supervision and Administration
Commission (SASAC) oversees some non-financial SOEs, the local SASAC at the provincial
or municipal level oversees local non-financial SOEs80. But in both cases other state entities,
such as the pension fund, are also key shareholders to both. In development finance SOEs
and banks, the ministry of Finance and/or local finance bureau are the designated
shareholders.
79
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.6
80
World Bank (2006) Held by the Invisible Hand: The Challenge of State-Owned Enterprise Corporate Governance
for Emerging Markets. New York, World Bank Publications, p.11
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In France SOEs have multiple owners. In France, the Ministry of Economy and Finance takes
responsibility for SOEs81. The Treasury Department is responsible for ownership functions.
The Budget Department oversees financial assistance to SOEs. The Price Department, in
consultation with the line ministries determines the setting of prices. There is a special
Economics and Social Fund82 – with a board which is chaired by the Ministry of Economy and
Finance, and situated within the Budget, which manages the government’s SOEs investment
strategy. In France it is required that executive authorities annually provide Parliament with
a “list of SOEs, and their audited balance sheets and profit and loss statements”83.
In Brazil SOEs have multiple ownership – ministry of planning, ministry of finance, the line
ministry and the Presidential Staff Office. An Interministerial Corporate and Federal
Government Management of Participations Commission determines the ownership structure,
set the policies and strategies for SOEs, criteria to evaluate SOEs, criteria to Board
members appointed and guidelines for Board performance 84. In Brazil, SOEs are required to
follow the rules and laws of private companies 85. They must adhere to the strictures of
regulatory authorities such as the Securities and Exchange Commission, the Stock Exchange
and the central bank86. In Brazil there are clear criteria and obligations for Board members
– who have the same level of accountability than those of listed companies87.
Petrobas, the Brazilian oil SOE, complies with the General Accepted Accounting Principles, a
requirement for companies listed on New York Stock Exchange – where it is listed. Petrobas
consists of a board with between 5 and 9 directors, which terms are restricted to one-year,
with the option to stand for re-election, this to “prevent entrenched directors from
promoting their interests”88. Holders of non-voting shares (preferred shares) can elect one
board member89. It is compulsory for directors to disclose all details of other company
81
P.45 World Bank (1997).China’s Management of Enterprise Assets: The State as a Shareholder. New York, World
Bank Publications, p.45 In France SOEs are divided chiefly between competitive and non-competitive sectors. The
SOEs operating in the non-competitive sectors are called ‘public establishments’ and operate in electricity,
railways, natural gas, postal services, and so on. Such ‘PE’ utilities are fully owned by the state, must provide equal
access to services to all customers. However, subsidiaries can be created in which the private sector has joint
ownership. The state’s exercises direct control through line ministries. PPC’s (competitive sectors) can be fully or
partially state-owned and corporatized – joint-stock companies, with the state acting as it was a private investor.
The state, through its representative (Ministry of Economy and Finance) appoints the board. It approves the
enterprise’s financial accounts, distribution of earnings and strategic plan. The state also decides increases in share
capital, the amount of debt the SOE can issue, and merger and acquisition decisions.
82
P.45 The fund’s board consists of line ministries, senior civil servants and representatives from financial
institutions.
83
P.45
84
Pontes, Luciana (2010) Ownership policy and SOE autonomy: Presentation at the 2nd meeting of the OECD Global
Network on Privatization and Corporate Governance of State-Owned Enterprises. March 2-3.
85
Pontes, Luciana (2010) Ownership policy and SOE autonomy: Presentation at the 2 nd meeting of the OECD Global
Network on Privatization and Corporate Governance of State-Owned Enterprises. March 2-3.
86
Pontes, Luciana (2010) Ownership policy and SOE autonomy: Presentation at the 2 nd meeting of the OECD Global
Network on Privatization and Corporate Governance of State-Owned Enterprises. March 2-3.
87
Pontes, Luciana (2010) Ownership policy and SOE autonomy: Presentation at the 2 nd meeting of the OECD Global
Network on Privatization and Corporate Governance of State-Owned Enterprises. March 2-3.
88
Musacchio, Aldo and Flores-Macias, Francisco (2009) The return of State-Owned Enterprises: Should we be
afraid? Harvard International Review, July 31
89
Musacchio, Aldo and Flores-Macias, Francisco (2009) The return of State-Owned Enterprises: Should we be
afraid? Harvard International Review, July 31
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involvement90. Norway’s Statoil has been listed on the Oslo and New York Stock Exchanges
since 2001, with some researchers arguing that “increased accountability provided by stock
prices, which rise or decrease in value according to the performance of the firm” 91, helped
the firm to become a better corporate citizens. Similarly, in Brazil, Petrobras, the oil
SOE and Vale (Companhia Vale do Rio Doce) the multinational diversified metals
and mining corporation are listed on a number of stock exchanges, including New
York. They are guided by company law and listing requirements and rely on “normal
shareholding meetings, director appointments, and board procedures to exercise
governance”92.
India has also multiple SOE ownership. The various ministries under which SOEs fall
exercise ownership rights and policy and in some cases (not all) in consultation with the
legislatures. Approval for board members and CEO rests with the shareholder ministries.
The Department of Public Enterprises sets the governance guidelines, which includes board
and executive appointments and salaries.
China has two separate central ownership entities – one for its non-financial SOEs,
and the other for its development finance institutions. China in 2003 set up the
State Asset Supervision and Administration Commission to oversee, monitor and
improve the performance, and to curb corruption and wastages at the key large
SOEs93. The SASAC manages China’s non-financial SOEs. The SASAC appoints
executives and boards of SOEs, approve of key long-term operational strategies,
although it does interfere into the day-to-day operations and decisions.
Institutional oversight of China’s development finance institutions (DFIs) is
different – and more diversified.
China had a banking crisis in 2003 because of an unregulated credit system and
conflicts between the two main DFI oversight institutions, the Ministry of Finance
and the Peoples Bank of China, the central bank. The crisis led to a restructuring of
the oversight institutions of DFIs. Before the crisis, the Peoples Bank of China held
the shareholdings of China’s main DFIs through the Central Huijin Investment
Corporation. The Peoples Bank of China also had a regulating arm for foreign
exchange, the State Administration of Foreign Exchange (SAFE). There were
continuous battles between the Peoples Bank of China and the Ministry of Finance
over ownership control of DFIs.
In 2007, China set up a sovereign wealth fund, the China Investment Corporation
(CIC). The Central Huijin Investment Corporation was sold off to the CIC 94. Control
90
Musacchio, Aldo and Flores-Macias, Francisco (2009) The return of State-Owned Enterprises: Should we be
afraid? Harvard International Review, July 31
91
Musacchio, Aldo and Flores-Macias, Francisco (2009) The return of State-Owned Enterprises: Should we be
afraid? Harvard International Review, July 31
92
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.8
93
Berger, Bernt and Berkofsky, Axel (2010) Chinese Outward Investments Agencies, Motives and Decision-Making,
CASCC, Briefing Paper, p. 13
94
The transfer of the Peoples Bank of China’s investment arm, the Central Huijin Investment Corporation, was
done through the CIC buying control from SAFE, the Peoples Bank of China’s regulating body for foreign exchange
[Berger, Bernt and Berkofsky, Axel (2010) Chinese Outward Investments Agencies, Motives and Decision-Making,
CASCC, Briefing Paper, p. 11]
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of the key DFIs – the Bank of China (BOC, the commercial bank95), the Industrial
and Commercial Bank of China, the China Construction Bank and the Agriculture
Bank of China, were now firmly put under the Central Huijin Investment
Corporate, under the auspices of the CIC. The CIC is directly overseen by the China
State Council – which is China’s Cabinet, and is not controlled by any individual
ministry. The restructuring was aimed at cleaning up poor corporate governance in
China’s DFI system and to shift the investment focus of DFIs towards more
commercially orientated96.
4.2. Nominating and selecting board members for SOEs
In most countries the nomination or selection of a SOE board depends on whether the SOE
is wholly or partially owned or whether the company is listed or not. In the wholly owned
SOEs boards the state has much greater say in the composition of the board, which is not
the same for listed SOEs.
Internationally there is no one common approach for SOE board recruitment. Most genuine
SOE reforms in developed and developing countries acknowledge the necessity to
strengthen the role of boards. South Africa’s Corporate Governance Protocols (2002)
emphasized the need to give SOE boards’ real muscle. However, “establishing an effective
board capable of independent judgment can be more difficult for an SOE than a private
sector company”97. The first major problem is that since the majority shareholder of SOEs is
the state, the problem of political appointees and political interference in the run of the
board becomes acute. Furthermore, SOE boards “can include elected officials and political
appointees, civil servants, and employee representatives, all of whom have agendas that
conflict with the interest of the company”98.
In many countries the process of nominating and appointing board members and SOE CEOs
are often opaque and not very transparent99. In most developing and developed countries
the government either directly appoint most of SOE board members, including this of listed
SOEs. In China for example, 76% of the SOE board members of listed companies are
appointed by the state100. In India, SOE board members are recommended by the Public
Enterprise Selection Board, which is an independent body 101. The final decision whether to
appoint individuals to the SOE board rests with the Appointment Committee of Cabinet,
95
The Bank of China Limited is a wholly state-owned commercial bank. It was demutualized in 2003 and listed in
2006 on both mainland and Hong Kong stock exchanges.
96
Berger, Bernt and Berkofsky, Axel (2010) Chinese Outward Investments Agencies, Motives and Decision-Making,
CASCC, Briefing Paper, p. 11
97
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
98
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
99
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
100
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
101
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
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which consists of ministers. Appointments are subject to clearance by the Central Vigilance
Commissioner102.
The Indian system has a specialized Enterprise Selection Board, where is an independent
body, which makes the initial recruitment. It takes it to Cabinet, where a specialized
committee, the Appointment Committee, consisting of different ministers either endorses or
rejects the proposed SOE board candidates. However, in reality, it is the individual
ministries that “make the final choice for certain board members and the chief executive –
through which they exert substantial influence – and can also issue directives to and veto
major decisions of SOE boards”103.
In Singapore the Ministry of Finance appoints the chairperson and the members of
the Temasek board. The Ministry of Finance sits down with the board to agree on
corporate plans and performance. It annually reviews the audited financial
statements, and the Ministry regularly meets with the board and executive
management to evaluate whether the corporate plans are being implemented and
performance are being maintained. However, the Ministry of Finance has a handsoff approach, allowing the SOEs to implement strategies the way they see
appropriate, as long as they meet the performance targets.
In New Zealand for example, the relationship between the shareholder (the state) and the
SOE board is codified in special legislation, called the SOE Act. SOEs in New Zealand report
to two shareholding ministers. The ministers are accountable to parliament. The two
ownership ministries signed a Statement of Intent between the shareholder and the SOE, in
which it clearly stimulate what the SOE must deliver. The SOE directors are legally
compelled to act in the SOE’s interest 104. At the same time, the relationship between the
board and the executive management of the SOE follows strictly private sector practice. The
board appoints the CEO and senior executives. Furthermore, the board “determines
strategy, takes decisions on large investments and dividend changes, ensures that the State
of Corporate Intent complies with existing regulations, sets the management compensation,
and approves financial statements”105.
In New Zealand, the special unit, which acts on behalf of the shareholders (government),
the CCMAU is charge with recruiting and appointing SOE board directors. They develop
short-lists for SOE boards, and hand the final short-list to the shareholding ministers for
selection and approval106. The CCMAU identifies the skills mix that a SOE boards needs and
102
Reddy, Y.R.K. (2001) The First Principles of Corporate Governance in Public Enterprises in India: The Yaga
Report. Standing Committee on Public Enterprises and Yaga Consulting, New Delhi
103
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.13
104
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.5
105
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.5
106
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.7
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make recommendations to the shareholder ministers on the basis of this107. Government
officials and management of the SOEs do not sit on the SOE boards.
In Sweden, the CEO of a SOE cannot be the chairperson. Furthermore, in Sweden,
the CEO is excluded from the SOE board. Furthermore, in Sweden, the convention
is that less than 5% of all SOE boards are politicians or former politicians 108. In
India SOE board members are recruited by the Public Enterprises Board, which is
an independent government board. Their recommendations are forwarded for
approval to the Cabinet Appointment Committee, which is made up of Cabinet
Ministers. The Cabinet Appointment Committee makes the final decision. The
appointments are vetted by Central Vigilance Commissioner 109.
4.3. Board composition of SOEs
In many countries, when board members are nominated, “skills and ‘fit’ of the candidate are
rarely the main considerations, and the board and chairman are not always involved in the
process”.110 In many cases “board positions tend to be considered as a reward for a political
supporter or current or former company executive” 111. In Poland for example, prospective
candidates for SOE board appointments must undergo specialized board entry
examinations112.
Generally, SOE boards “can include elected officials and political appointees, civil servants,
and employee representatives”113, outside representatives with specialized skills, and
minority shareholder representatives, in cases where there is a minority private sector
shareholder. In some cases government is represented by civil servants from the executive
authority114 – who can often wield extensive influence. In Mexico, 50% of SOE boards are
state representatives, including the chairman. In Turkey 100% of SOE boards are appointed
by the state.
107
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.7
108
Frederiksson, Lars Erik (2010) Board composition and nomination – reflections from a practitioner. Presentation
to the 2nd meeting of the OECD Global Network on Privatisation and Corporate Governance of SOEs, March 2-3,
Paris
109
Reddy, Y. R. K. (2001) The First Principles of Corporate Governance in Public Enterprises in India: The Yaga
Report. Standing Conference on Public Enterprises and Yaga Consulting
110
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
111
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
112
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
113
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.25
114
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
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In many cases the boards of SOEs tend to be large, which “reflects the tendency to see
boards as a kind of ‘parliament’ where a range of groups are represented, rather than as a
body to direct the company”115. In such cases SOE boards are often paralyzed and the “true
direction” may “instead come from the ownership entity”116. Sweden has board
composition policy which says that SOE boards must consist of between 6-8
members. Boards are compelled to have a succession policy in place. In Sweden
the remuneration of SOE directors is less than 50% of the levels in the market or
to comparable listed companies117. In Sweden, the chairperson of the board is
independent from the public service.
Boards are also required to have balanced competencies, experiences, gender,
background and age. SOEs boards in Sweden has an average 48% women
representation, 33% female chairpersons, and the average time for people serving
on SOE boards is 3.4 years for women and 3.9 years for men 118.
The Swedish government implemented sweeping reforms during the period 1998
to 2001, to clean-up the executive management and boards of SOEs in a bid to
boost the performance of ailing corporations. New more transparent rules were
introduced to board and executive appointments, in order to get better quality
candidates. Most importantly, as part of the clean-up non-executive directors were
empowered, given overall responsibility and power for the oversight of an SOE.
The Swedish government replaced 75% of SOE board chairpersons, 85% of nonexecutive directors and 50% of the CEOs119.
115
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
116
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
117
Frederiksson, Lars Erik (2010) Board composition and nomination – reflections from a practitioner. Presentation
to the 2nd meeting of the OECD Global Network on Privatisation and Corporate Governance of SOEs, March 2-3,
Paris
118
Frederiksson, Lars Erik (2010) Board composition and nomination – reflections from a practitioner. Presentation
to the 2nd meeting of the OECD Global Network on Privatisation and Corporate Governance of SOEs, March 2-3,
Paris
119
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.6
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4.3.1 The Board Nomination Process in Sweden
[From Frederiksson, Lars Erik (2010) Board composition and nomination – reflections from a
practitioner. Presentation to the 2nd meeting of the OECD Global Network on Privatisation
and Corporate Governance of SOEs, March 2-3, Paris]
4.4. SOE Board professionalism
Giving an overview of SOE boards in emerging markets, the World Bank (2006) concluded:
“Finding the right board members, proving the proper incentives, and ensuring that the
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board maintains high ethical standards for themselves and the enterprises as a whole are
critical challenges”120. In most countries, the chairman, as non-executive member, sets the
example121, in terms of professionalism, ethical behavior and standards of accountability for
the rest of the board. In Poland, government representatives, who work in the public
service, and who are nominated by the government as shareholder, to serve as board
members of an SOE must write an examination122.
Surveys have shown that “none-executive members independent of the government are a
potentially important source of both expertise and oversight for an SOE” 123. Independence is
generally a problem for government or other stakeholder representatives such as
employees, on the boards of SOES in many countries. Many board members nominated by
the shareholder or other stakeholder representatives think they are obliged to defend the
interests of their sponsors, rather than the interests of the SOE and its mandate. Members
of SOE boards often do not “think and act independently”124, once appointed to boards.
Pat Mahoney (2009), the CEO of the Mauritius Institute of Directors, when assessing the
most meaningful criteria for board membership, says at the core must “firstly, competence
and good judgment, and secondly, unqualified ethnics” 125. Board evaluation, whether
internally or by an independent outside entity, is often absent in poorly functioning SOEs.
Yet, consistent evaluation of boards, both individually and collectively, are crucial to
improve the professionalism of SOE boards. In Brazil, Petronas, the oil SOE has introduced a
yearly evaluation of individual board members. For reappointment board members have to
‘pass’ the evaluation. The results have been clear: Petronas has become much more
effective as an SOE because of a much more effective board.
5. South African SOEs: Ineffective
Recruitment Procedures
Boards,
Executives
and
In South Africa, there is general a lack of clarity over the objectives, mandates and
oversight of SOEs. There is often no clearly set-out requirements to be a SOE board, little
transparent and objectives board recruitment procedures, and no specific procedures for
evaluation of the performance of board members. Given the lack of clarity over the roles of
SOEs, their governance and management they easily “become fertile ground to advance
personal interests and agendas”126. The muddled SOE governance structures have open the
space for political and self-interested meddling in the appointment of boards and senior
executives. Appointments of board members and CEOs are often mired in allegations of jobs
for pals and political appointees without the appropriate skills. This has meant that many
SOE boards – supposedly at the heart of good corporate governance – and executive
120
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
121
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
122
OECD (2005) Comparative Report on Governance of State-Owned Assets. Paris, OECD
123
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
124
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
125
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
126
Ramano, Mashudu (2010). What is the matter with SA’s State-Owned Enterprises. Business Day, March 24
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management are insecure, unstable and ineffective. Boards are in this scenario unable to
focus on looking after the wider interests of the SOE and hold management accountable.
In other instances boards are left dysfunctional because of infighting among board members
and between boards and CEOs – which in the end of the day renders SOEs ineffective.
Former Communications Minister Siphiwe Nyanda once had to reprimand the SABC board to
“focus on their mandate and avoid turning the SABC (into) a playground for factional
interest”127. There are no core legislation, frameworks and guidelines “outlining the process
and criteria of board appointments, their terms and how they should be remunerated”128.
Furthermore, there are no clear guidelines “what the role of the board should be and how it
should relate to subsidiary and associate companies”129. Furthermore, the composition of
SOE boards is not always consistently aligned to the mandates of SOEs; neither are they
are they balanced, in terms of skills, gender, race, experience and so on. To quote Ramano:
“One person may be told that you are not eligible for appointment to the board because you
hold too many directorships, while another person in the same situation gets appointed to
another board”130.
Many SOEs lack stable boards and management. The conflict between the PMFA and the
Companies Act has specific implications - for SOEs boards – which make it difficult for
boards to effectively oversee SOEs. According to the PMFA government as the shareholder
can appoint and dismiss an SOE CEO. Because the shareholder is empowered through the
PMFA to appoint and dismiss the CEO, the board’s role in holding the CEO account for
managing the business, finances and public service delivery obligations of the SOE 131. This
conflict between the PMFA and the Companies Act in relation to boards obscure the role of
boards vis a vis government as shareholder and create the perception that government as
shareholder has the ultimate decision-making powers above boards in holding the CEO
accountable132. In 2009, the Eskom board asked CEO Jacob Maroga to resign. However,
government as shareholder appeared not to endorse the Eskom board’s decision. The
Johannesburg High Court also ruled that Maroga’s dismissal by the Eskom board was unfair.
Eskom board chairperson Bobby Godsell resigned because he argued the board was
undermined133.
Appointments of board members and CEOs are often mired in allegations of jobs for pals
and political appointees without the appropriate skills. In other instances boards are left
dysfunctional because of infighting among board members and between boards and CEOs –
which in the end of the day renders SOEs ineffective. Former Communications Minister
Siphiwe Nyanda once had to reprimand the SABC board to “focus on their mandate and
avoid turning the SABC (into) a playground for factional interest” 134. The inability of SOE
boards to hold SOEs accountable had led to Vytjie Mentor, the former chairperson of
parliament’s public enterprises committee, call for the scrapping of SOE boards and for their
functions to be taken over by government departments 135. “It may be that boards can be
127
SAPA (2010) Body to Review Pay of SOE board. October 17, Johannesburg
Ramano, Mashudu (2010). What is the matter with SA’s State-Owned Enterprises. Business Day, March 24
129
Ramano, Mashudu (2010). What is the matter with SA’s State-Owned Enterprises. Business Day, March 24
130
Ramano, Mashudu (2010). What is the matter with SA’s State-Owned Enterprises. Business Day, March 24
131
See Lund, Troye (2009) Huge bailouts for state firms. Fin24. Nov 26, Johannesburg
132
See Lund, Troye (2009) Huge bailouts for state firms. Fin24. Nov 26, Johannesburg
133
See Lund, Troye (2009) Huge bailouts for state firms. Fin24. Nov 26, Johannesburg
134
SAPA (2010) Body to Review Pay of SOE board. October 17, Johannesburg
135
Mentor, Vytjie (2009). Comments to the parliamentary finance committee hearings on Eskom. November 10,
Cape Town
128
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done away with and the mandate given to departments” 136, Mentor said. As Mentor
comments indicate, there appear to often be a misunderstanding – in government and
oversight bodies such as parliament - of government’s role vs the boards of SOEs. Following
Eskom’s executives presentation to parliament’s public enterprises committee in November
2009, Mentor commented: “I do not understand this political interference thing … How does
that work in terms of the fact that the state gives state-owned enterprises cash injections,
loans and guarantees? … Our (government’s) right should not be contained at certain
points”137.
Furthermore, parliament, as oversight body, does not regularly interrogate SOE boards and
management about their activities. Such interrogation is often ad hoc.
In 2009, a leadership crisis at Eskom resulted in both the chief executive and the board
chairman leaving the SOE after clashing over how to run the electricity utility. Former SAA
CEO Khaya Ngqula left SAA under a cloud following allegations of mismanagement. Boards
and management at South African Airways, logistics group Transnet, arms manufacturer
Denel were also enmeshed in internal battles. Former SAA CEO Khaya Ngqula left SAA
under a cloud following allegations of mismanagement.
A High Court judgment in Fisheries Development Corporation of SA v Jorgensen and
another; and Fisheries Development Corporation of SA v AWJ Investments and Others 1980
(4) SA 156 (W) clearly sets out the role of a director as accountable to the company, not
the shareholders. The judgment reads: “A director is in that capacity not the servant or
agent of a shareholder who votes for or otherwise procures his appointment to the board …
The director’s duty is to observe the utmost faith towards the company, and in discharging
that duty he is required to exercise independent judgment and to take decisions according
to the best interests of the company as his principal. He may in fact be representing the
interests of the person who nominated him, and he may even be the servant or agent of
that person, but, in carrying out his duties as a director, he is in law obliged to serve the
best interests of the company to the exclusion of the interests of any such nominator,
employer or principal. He therefore cannot fetter his vote as a director, save in so far as
may be a contract for the board to vote in that way the best interests of the company, and,
as a director, and he cannot be subject to the control of any employer or principal other
than the company”138. Pat Mahoney, the CEO of the Mauritius Institute of Directors, argues
that if a director is accountable to a company, he or she is “accountable to all stakeholders
– creditors, customers, lenders, employee’s et al”139.
6. South African SOES Boards, Executives, Recruitment:
PRC Questions
136
National Treasury (2009) Response to a parliamentary question. Parliament’s Select Finance Committee.
November 26, Cape Town
137
Mentor, Vytjie (2009). Comments to the parliamentary finance committee hearings on Eskom. November 10,
Cape Town
138
High Court of South Africa (1980). Fisheries Development Corporation of SA Ltd v Jorgensen & another;
Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) and Others 1980 (4) SA 156 (W)
139
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
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6.1
Is the recruitment and appointment of the Board codified
and legislative and if so, by what legislation?
There is no generic legislation that governs the recruitment and appointment of the Board of
South African SOE’s. The PFMA empowers the Executive Authority140 to provide oversight
with particular reference to the corporate plans, shareholder’s compacts and quarterly
reports. It is assumed that the authority derived from this also extent to the recruitment
and appointment of SOE boards. The PFMA is not does not specifically set out who should
appoint the board and chairperson, but set out the responsibilities of the board. The PMFA
does however focus on the accountability and code of conduct of the board. 141 In many
cases specific enabling legislation of an SOE give the Executive Authority and/ Shareholder
the power to appoint and dismiss the Chairperson and CEO of an SOE.
Where there is no enabling legislation, the SOE’s articles of association or even the
shareholder compact signed annually between the Line Minister/Executive Authority and the
SOE board, may codify the recruitment and appointment of Boards. For example, for
Telkom and the SABC, the articles of association set out the recruitment and appointment
procedures. Where specific enabling legislation is absent, and the policy department and the
executive authority/line ministry are two different ministries/departments, conflict could
arise between the two over who should recruit and appoint board of the SOE, or over the
specific candidates for Chairpersons/CEOs and board members; unless the recruitment and
appointment process is clearly codified in the articles of association or the shareholder
compact between the line ministry/executive authority and the SOE board.
The Protocol on Corporate Governance in the Public Sector states that the board appoints
the CEO and that the CEO is accountable to the board 142. The Protocol also states that the
board should appoint one of its members, preferably an independent non-executive director
(unless otherwise agreed by the shareholder) as the chairperson 143. As it stands the Line
Ministry/Executive Authority is generally in charge of the appointment of the boards, CEOs
and Chairpersons of SOEs. In some cases there are explicit enabling legislation that set out
the process of the appointment of the CEO/Chairperson and boards, for example in the
cases of the DBSA and Transnet. In other cases, again it is not stated explicitly in the
enabling legislation that the main shareholder of an SOE – the line minister/executive
authority should appoint the CEO, chairperson and boards. If this is the case the assumption
generally is that the line minister/executive authority does so.
For SOEs that are listed, such as Telkom, that also have other shareholders, than
government, JSE listing requirements also codifies the board recruitment and appointments
of the SOE. But for listed SOEs the requirements of the King III Code on Corporate
Governance has much more currency, than it would be for non-listed SOEs. In the case of
140
Executive Authority is defined (in PMFA) as The Executive Authority of Parliament is the Speaker of the National
Assembly and the Chairperson of the National Council of Provinces, acting jointly.
141 PriceWaterHouseCoopers/IDOSA http://www.iodsa.co.za/downloads/documents/1007132_StateownedcompaniesPFMAandKingIIIperspectiveFinal.pdf
142
143
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.3, p.15
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.2.1, p.13
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Telkom, its articles of association, its shareholder compact and the JSE Listing Requirements
codifies recruitment and appointment of the board. For example, Telkom appoints four nonexecutive directors are appointed at the company’s annual general meeting or by the board
and are considered to be independent, as set out in the prescripts of the JSE Listing
requirements and the King III Code on Corporate Governance 144.
Government as the shareholder appoints five non-executive directors including the
Chairperson. Government is classified as the Class A shareholder. Government is the
significant shareholder with 39.8% of the issued ordinary shares. Black Ginger, the nongovernment shareholder is classified as the Class B shareholder. Black Ginger, as the Class
B shareholder, appoints one non-executive member of the board. In terms of the articles of
association, the non-executive directors appointed by government as the significant
shareholder (Class A) have a fixed term of three years; and may be re-elected to the board
by the shareholder (Government, the Class A shareholder).
The Chairman appointed by government (Class A shareholder) is appointed for one year,
and can be re-elected by government for the ensuing year. It is not very clear in the articles
of association who should appoint the CEO. The board appoints the CEO, but government by
virtue of being the largest shareholder has the most significance say. However, the lack of
clarity has been responsible for long periods of instability because of conflict over who
should appoint the CEO145. The four independent non-executive directors are subject to
retirement by rotation and re-elected by shareholders at least every three years in
accordance to the articles of the association and JSE Listing Requirements.
6.2. Is there general compliance with the legislative dictates on
Board appointments?
There has been no official audit by the Department of Public Enterprises or other
departments of general compliance with the legislative dictates on board appointments.
Firstly, the fact that the recruitment and appointment of the board is in many cases not
codified and legislated makes oversight – and compliance - very difficult, because there is
no framework to comply to. In some cases the executive authority/line minister as the
shareholder because of the roles are not clearly codified and legislated play a dual role as
both the shareholder and the board. And in such cases SOEs boards may have the
responsibility, but not the authority.
Because the roles, rules and responsibilities between shareholder (line ministry/executive
authority) and the SOE boards over who is responsible for board and executive recruitment
and appointments is in some cases not explicitly codified and legislated, undermines the
operational effectiveness of SOEs, because in such instances there is no framework to
formally comply to – and to hold SOEs accountable to. It opens the space for political and
self-interested meddling in the appointment and recruitment of boards and executives. In
144
See http://telkom.investoreports.com/telkom_ar_2010/sustainability/corporate-governance/
See Department of Communications (2011) Statement by the Ministry on the Appointment of Telkom SA Ltd
CEO. March 17
145
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other instances, it appears to be often a case of rules and legislative dictates in place, but
little monitoring by the Executive Authority/Line Minister, or other oversight bodies and
stakeholders. And if discrepancies are found – there appear to be little accountability.
6.3. How is the Board recruited and appointed in SOEs?
There are no generic/standardized rules for all SOE’s. The Protocol of Corporate Governance
in the Public Sector sets out a process – but because it is not compulsory, this appears to be
rarely followed. The Protocol on Corporate Governance in SOEs states that the Executive
Authority/Line Minister should establish a Nomination Committee. The Protocol prescribes
that the executive authority invites all the chairpersons and CEOs of SOEs to sit on the
committee, and to recommend “the best qualified people for each SOEs board positions” to
the executive authority, “taking into account the specific needs of each SOE” 146. The
Protocol states that the Nomination Committee “should provide the Executive Authority with
a list of candidates suitable for board membership, which list may include names of retiring
directors. The shareholder is, however, not obliged to appoint a candidate proposed by the
committee”147.
However, the current convention appears to be that the CEOs/Chairpersons of SOEs
(particularly those falling under the Public Enterprises Department) are recruited and
appointed by the line minister/executive authority. In some cases the line
minister/executive authority directly recruits and appoints candidate/s – rather than the
boards, and then consults with the board, and Cabinet, before making the appointment. The
line minister/executive authority minister, would, it appears, normally also present his/her
choice to the ANC’s deployment committee for endorsement. In this scenario the names of
potential candidates could come from a shortlist coming from within the line
ministry/shareholder department themselves, or from the SOE board, or from the ANC’s
national executive committee, either proposed by one of the ANC’s structures, leaders or
affiliates. Within the ANC’s own structures, its deployment committee is the party structure
which officially proposes/endorses a candidate148.
On some occasions the process of proposing the names for recruitment/appointment for
CEOs/Chairpersons are initiated by the boards. The SOE boards than make proposals to the
line minister/executive authority, who, if agrees with it, consults with the ANC’s
NEC/deployment committee, if endorsed there, presents it to Cabinet for endorsement.
There is currently no formal Nominations Committee within the public enterprises
department, or within any other executive authority/line ministry as set out in the Protocol
on Corporate Governance in the Public Sector. According to interviews with senior managers
146
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.12.3.1, p.
24
147
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.12.3.1, p.
25
148
See Trevor Manuel (2011). Comments at the launch of the National Development Report of the National
Planning Commission. November 13, Pretoria
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in the Public Enterprises Department the process of nomination within the department is
rather informal – rather than a formal, rule-based approach, with names circulated or
suggested informally on ad hoc basis149.
6.4. If the Board recruitment process is not legislated, how is it
regulated and documented?
The recruitment and appointment of SOE boards are in many cases not regulated nor
documented. If the board recruitment process is legislated, it is through the enabling
legislation of the SOE. Alternatively, like for example in the case of the South African
Broadcasting Corporation, it is outlined in the articles of association and in the annually
signed shareholder compact, signed between the line minister/executive authority and the
board.
Note the following comments made by Ayanda Shezi of the DPE: “… (Barbara) Hogan
(former Minister of Public Enterprises), as the shareholder representative on behalf of
government, is responsible for the appointment of the SOE board members, including
chairpersons. She recommends appointment of these board members to the Cabinet.
“The criteria for appointment will vary depending on the specific needs of the SOE and
various factors are considered, including the SOE’s mandate, government's strategic intent,
skills and demographic composition of the board. The candidate that best meets the criteria
and the relevant factors affecting that particular SOE is appointed, and once appointed, is
given the required support to best effect the job.”150
Generally, SOE board recruitment and appointments should be compliant with the specific
SOE enabling legislation, King III code of corporate governance, the PMFA and the New
Companies Act. Whether in the presence and absence of SOE board recruitment and
appointment legislation the onus is on the shareholder, through the executive authority/line
ministry, the policy ministry (in cases where it is different ministry than the line
minister/executive authority), the Cabinet, the board, parliament, stakeholders of an SOE,
including civil society and the media, to regulate and document recruitment and
appointment process. Unfortunately, in some cases oversight institutions often lack the
authority, the capacity – if the authority is there, or are unclear about their roles and
responsibilities because of the lack of adequate and clear regulatory regimes.
In reality, in many cases, it is that the line minister/executive authority that regulates and
documents board recruitment and appointment. Cabinet regulates by endorsing or declining
line ministry/executive authority recruitment decisions. Parliamentary portfolio committees
under which the specific SOE falls also regulate and document the process because
recruitment decisions are interrogated by parliament through the designated committees.
The ANC’s structures - deployment committee/ANC national executive committee and other
affiliate structures – in some ways also serves as regulatory mechanisms in that they can
149
Interviews with senior managers in the Department of Public Enterprises who wants to remain anonymous
during the period of this research (March 2011 to February 2012).
150“Hogan
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veto a recruitment decision or influence it in other ways. Other stakeholders, such as trade
unions, could also serve as regulatory and documentation mechanisms, as well as civil
society, and the media who may scrutinize recruitment and appointment decisions, either
before or after appointment.
6.5. What role does (a) Minister, (b) Cabinet, (c) Parliament or
others play in the appointment of Board Members?
To start with SOEs are governed by various specific legislative requirements, which set out
specifics regarding the governance structures and duties of those structures within the
SOEs:




The Constitution, as over-arching law;
PFMA, as financial management law;
Any other enabling legislation that established the specific SOE; and
The Companies Act, 2008
As discussed before the Line Minister/Executive Authority plays a direct role in appointing
the board members. Such powers are either set out in the specific enabling legislation of the
SOE or in the absence thereof have over time become the norm. Ministers are a part of the
Cabinet (together with the President and the Deputy President). The line minister/executive
authority presents SOE board appointment decisions - whether the decisions were made by
the SOE board or the Line Ministry/Executive alone or in consultation with each other - to
Cabinet and the President for endorsement or rejection.
Section 92 of the Constitution of the Republic of South Africa provides for the
“Accountability and responsibilities” of the Deputy President and Ministers, as follows: (1)
The Deputy President and Ministers are responsible for the powers and functions of the
executive assigned to them by the President; (2) Members of the Cabinet are accountable
collectively and individually to Parliament for the exercise of their powers and the
performance of their functions; (3) Members of the Cabinet must- (a) act in accordance with
the Constitution; and (b) provide Parliament with full and regular reports concerning
matters under their control.
Those powers and functions include: Section 85 (2) The President exercises the executive
authority, together with the other members of the Cabinet (Deputy President and Ministers),
by:
(a) implementing national legislation except where the Constitution or an Act of
Parliament provides otherwise
(b) developing and implementing national policy;
(c) co-ordinating the functions of state departments and administrations;
(d) preparing and initiating legislation; and
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(e) performing any other executive function provided for in the Constitution or in
national legislation.
The functions of state departments for which Ministers are responsible, include the oversight
of SOEs. Most SOEs are incorporated in terms of the Companies Act of South Africa of 2008
and have as shareholder the relevant Line Minister/Executive Authority. If we consider all
the responsibilities described above, it can be construed that the ultimate responsibility for
SOEs rests with the relevant Line Minister/Executive Authority. However, section 49 of the
Public Finance Management Act, 1999 (PFMA) establishes the accountability for purposes of
the PFMA on the board (being the accounting authority). It should be noted that the PFMA
focuses primarily on aspects of financial management, while the New Companies Act, 2008
and other enabling legislation govern other responsibilities as well.
The majority of the provisions of the New Companies Act which apply to a public company
will apply to a SOE. However, the Line Minister/Executive Authority can specifically exempt
the SOE under its jurisdiction from adhering to aspects of the New Companies Act. Also,
prescribed by legislation specific to the SOE can also exempt the SOE from adhering to
aspects of the New Companies Act. These two provisions are significant weaknesses of the
SOE corporate governance universe.
Parliament, through the portfolio specific to the SOE, plays an oversight role. The
Constitution of South Africa empowers the National Assembly and Provincial Legislatures
with an oversight role over their respective Executives. Section 42(3) of the Constitution
empowers the National Assembly with the power to scrutinize and oversee the executive
action. In addition, Section 92(3)(b) of the Constitution requires that Members of the
Cabinet must provide Parliament with full and regular reports concerning matters under
their control. The challenge facing members of Parliament is to improve the capacity of the
policy/parliamentary Committees to hold Departments and SOE’s to account for their
performance, using their strategic plans, budget documents and annual reports as the
basis.151
6.6. Do SOEs and Board Committee members undergo security
clearance prior to being appointed?
There is no standardized policy to do so – it all depends on the individual SOE or
shareholder department. For example, for appointment to the Development Bank of
Southern Africa prospective candidates specifically undergo security clearance. This is not
the same for example for the South African Broadcasting Corporation.
6.7. Do departmental/municipal officials sit in SOE Boards? Also,
describe the legal provisions for such appointments
151
Governance Oversight Role over State Owned Entities
http://www.treasury.gov.za/publications/other/soe/Governance%20Oversight%20Role.pdf
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32
Once again this is dependent on the type of SOE. In some instances, there are provisions
for representation from the line ministry/executive authority or even other departments. For
example, at the SOE’s enabling legislation stipulates (South African Transport Act Services
Act No 9of 1989) that one of the members of the Board shall be an officer in the
department of transport, one of the members of the board shall an officer in the department
of finance, and so on. Other SOEs like Eskom do not specify this. Yet, for others again,
although not specifically set out so in the enabling legislation, the convention has been the
line minister/executive authority appoint a senior official/s of the line minister/executive
authority on the board to ‘represent’ the line minister/executive authority. Often provision is
also made for the Treasury to appoint an official from the Treasury for the same purposes.
6.8. Is SOEs Boards’ terms of office codified and if so, by which
legislation? And how many terms can each board member
serve?
The PMFA, the Companies Act of 2008, the specific enabling legislation of the SOE guide
SOEs boards, King III and the 2002 Code of Corporate Governance for the Public Sector
guides SOE boards. The PFMA does not explicitly state SOE boards’ terms of office – and
therefore does not codify SOE boards’ terms of office. The Line Minister/ Executive Authority
can exempt SOEs from sections of the Companies of 2008. The enabling legislation
establishing an SOE can also exempt an SOE from sections of the Companies Act of 2008.
The 2002 Code of Corporate Governance clearly stipulates that each SOE director should be
appointed to a maximum period of 3 years. The shareholder may, at its discretion, subject
to the terms and conditions the employment contract, remove a director prior to the
completion of his term of office152. As was argued before, the 2002 Code of Corporate
Governance for the Public Sector is unfortunately rarely implemented.
There is no legislation governing how long board members serve. Not even the enabling
legislation of SOEs codifies the terms of office of the boards. Eskom’s articles of association
stipulate that the term of non-executive directors is a maximum of three years. Because the
terms of office of SOE boards are not codified and legislated, terms of SOE board members
vary from SOE to SOE, depending on the line ministry/executive authority. For example, the
public enterprises minister Malusi Gigaba stated in 2011 that the new departmental policy
would be that board members of “SOEs are appointed on the condition that the minister
may review their continued membership annually at the (SOE) AGM” 153.
In general though, the convention appears to be, although not codified, for board members
to serve for a period of 3 to 5 years, which can be renewed. For example the Media
Development and Diversity Act, the enabling legislation for the MDDA, states [Section 4
(1)(b)] that board members serve for five years. Section 13(1) read with 13(8) of the
Broadcasting Act of 1999, provides for 4 years terms of appointment for boards of the
152
153
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.6.2, p.19
Department of Public Enterprises (2011) Board Changes at Eskom and Denel. Press Statement, June 10
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SABC. In cases where the terms of office for SOE boards are not codified clearly in their
founding legislation, board terms can vary depending on the executive authority/line
ministry.
6.9. Is SOEs Board composition aligned to their mandate, i.e.
Number of Board members?
The PFMA does not say how many board members should appointed to an SOE board – and
does not set guidelines for the size of SOE boards, linked to their mandates. There appears
to be no convention that says the larger the balance sheet, assets, the more complex
mandate, the larger the board should be. It appears that relatively small SOEs often to
appear to have the same numbers of members on their boards, than larger ones.
The Protocol on Corporate Governance in the Public Sector says the board should have a
majority of non-executive directors154, but does not specify how many in total, in relation to
the mandate of the SOE. In terms of King III SOEs must have a minimum of one director.155
In some cases the enabling legislation of the SOE states the number of members that the
board should have. For example, the Transnet enabling legislation, states that the
“Corporation shall be managed by a board of control of not more than 11 members
including the chairman, who shall be appointed and dismissed by the Minister”156. The
Development Bank of Southern Africa Act (No.13 of 1997) says the board “shall consist of
not fewer than ten and not more than fifteen directors”.
The articles of association of some SOEs state the number of board members. Telkom’s
articles of association state it should have a unitary board compromising 12 directors157. The
Telkom Articles of Association also set out in detail the internal composition of the board.
See above discussion.
6.10. Are Boards balanced, i.e. Representation in terms of race,
gender, skills, and experience, industry, political and
ideological, etc?
The Protocol on Corporate Governance in the Public Sector says the “board should also, on
an annual basis, review and evaluate its required mix of skills and experience and other
qualities in order to assess the effectiveness of the entire board, its committees and the
154
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.6.2, p.19
155
Dr JW Hendrikse “The Impact of the New Companies Act on Business and Legislation on Boar and Directors- Responsibilities
and Risks.”Paper for CIS Corporate Governance Conference on 10 to 11 September 2009Pg17
156
157
Legal Succession to the South African Transport Services Act No.9 of 1989. Section 1.
Telkom (2003) Memorandum of Association. January 16
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contribution of each individual director during the entire term of office” 158. Furthermore the
Protocol on Corporate Governance in the Public Sector says the board should have an “ongoing skills identification process” 159 which should be done by the Chairperson and the
nomination committee, in consultation with the Executive Authority. The PFMA does not say
anything about representatively. The enabling legislation and articles of association of some
SOEs emphasis that boards should be balanced in terms of representatively and have a mix
of relevant skills. For example, Eskom states that all the “non-executive directors are
independent directors … drawn from diverse backgrounds and reflect South Africa’s
demographics”. Transnet similarly note: “The Transnet board of directors consists of
individuals from diverse racial, gender, and business, professional, financial and cultural
backgrounds”.
Statements of intent off course do not always reflect reality. Strides clearly have been made
in bringing to SOE boards racial diversity, with most of the SOE boards reflecting SA’s
demographics in their make-ups. For example when changes to the Transnet board were
announced in December 2010, the Black Management Forum welcomed it this way: “We are
particularly pleased that the diversity as per the requirements of the Employment Equity Act
has been observed”160.
Slower progress has been made in other areas. People with disabilities are underrepresented on SOE boards. For example, a survey161 by the Businesswomen’s Association
released in 2011 showed that women chairs of state-owned enterprise (SOE) boards
increased only marginally from 33.3% to 35% (representing seven women chairs) between
2009 and 2011. The percentage of SOE directorships held by women decreased from 39.9%
in 2009 to 31.9% over the same period. However, SOEs still did better than JSE listed
companies in number of women on their boards with 94.1% having more than 3 women
directors while JSE listed companies have 13.5%. Furthermore one-third of SOEs have
women chairs of boards, compared with 4.6% of JSE listed companies.
A big criticism of SOE boards has been that they do not adequately reflect the country’s
ideological, political, appropriate skills available in the country, ideas, industry diversity.
Some criticisms have been raised that South African SOE boards are selected from a very
narrow skills, ideological and experience pool. The ANC deployment committee process has
been criticised for sidelining potential board members for having views critical of
government policy162. The South African Institute of Race Relations have pointed out the
dangers of “making loyalty to the party a key criterion for appointment” 163 to SOE boards
158
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.1.11, p.12
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.7.1, p.19
160
Black Management Forum (2010) BMF statement on the new Transnet Board. December 9
161
The Survey was done by consulting firm, Grant Thornton, July 11, 2011 [See BBQ (2011) Breaking the Glass
Ceiling. July 11
162
See South African Institute of Race Relations (2011) Research and Policy Brief: South Africa – finding a way
forward. March 28 [http://www.sairr.org.za/sairr-today-1/research-and-policy-brief-south-africa-finding-a-wayforward-28th-march-2011]
163
See South African Institute of Race Relations (2011) Research and Policy Brief: South Africa – finding a way
forward. March 28 [http://www.sairr.org.za/sairr-today-1/research-and-policy-brief-south-africa-finding-a-wayforward-28th-march-2011]
159
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and other public institutions. Finance Minister Pravin Gordhan has criticised what he calls
“cadre deployment”. Gordhan said: “Now ... when I grew up as an activist, a cadre was a
term reserved for the best qualified, the most committed, the most politically clear, the one
who was willing to sacrifice the most, the one who was willing to be the most selfless and
was the most reliable,” Gordhan said. “That’s the real meaning of cadre in the ANC history
books. There is a big difference between cadre deployment and deployment of friends and
family,”164 Gordhan said.
Civil society and community organisations also often complain that they are not sufficiently
represented on SOE boards. It appears that the same ‘approved’ individuals are often being
recycled to different SOE boards. It appears that ideologically, black economic
empowerment business leaders who cut their business teeth through the political-business
route dominate, rather than entrepreneurs or black business leaders with operational skills,
dominate on boards. It also appears that business individuals are appointed to boards that
are primarily looking for tender opportunities for their own businesses or theirs of their
associates.
Furthermore, many SOE board members also sit on numerous others boards, making it
virtually impossible for them to play their oversight role. For example, on 14 March 2012, in
a discussion about Public Enterprises Minister Malusi Gigaba’s presentation to Parliament’s
standing committee on public accounts, one MP pointed out that Peter Malungani, a
Transnet Board member, sat on the boards and trustees of 63 others 165. The Congress of
South African Trade Unions has warned about individuals sitting on too many boards as a
form of income166.
In addition, it appears that established (white) industry leaders with a more narrow AngloSaxon capitalism outlook, rather than those with a broader stakeholder capitalism approach,
are also the preferred mainstream business candidates for directorships in SOEs.
Unfortunately, for these criticisms it is very hard to find ‘hard’ evidence – or to get people to
say this on the record. This means that such observations will necessarily be more opinionbased than survey base.
6.11. Are appointments Gazetted?
Board appointments of SOEs appear to be generally gazetted. For example the appointment
of non-executive board members of the SABC with effect from 3 June 2011 and ending on 9
January 2015 was gazetted (Gazette No. 34383 – Notice 410).
164
Pravin Gordhan answering questions about his Budget Speech to Parliament’s Finance Portfolio Committee. 23
February 2012, Cape Town
165
See The Times (2012) Gigaba clamps down on parastatal bosses. 13 February
166
Congress of South African Trade Unions (2011) Joint Submission Cosatu and NUM on the Skills Development
Amendment Bill. Submitted to the Portfolio on Higher Education and Training, Parliament, Cape Town, November
9
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7.
Executive Management and Boards within the SOE governance
framework
7.1. Enabling legislation and articles
Executive Management and Boards
of
association
and
SOE
All of the SOEs have enabling legislation and articles of association, depending on the form
of the SOEs, which are legally binding. The enabling legislation usually prescribes the SOE
mandate, purpose and other details to do with the activity of the SOE. A typical enabling
legislation would be along the lines: Development Bank of Southern Africa Act [No.13 of
1997] Government Gazette, Vol. 382, No 17962, 25 April 1997167; or the Public Investment
Cooperation Act 2004, for the PIC. The enabling legislation, nor other legislation, or the
articles of association, goes into detail how to appointments to SOE boards should proceed
and the board recruitment process in SOEs, except to say that the Minister appoints the
Board. For example, the DBSA Act says the “directors of the Bank shall be appointed, in the
manner determined in the regulations, by the minister and the shareholder”.
Eskom’s articles for example stipulate that the shareholder [Executive Authority – Public
Enterprises Department] will, after consulting the board, appoint a chairman, chief
executive and non-executive directors. The remaining executive directors are appointed by
the board after obtaining shareholder approval. The Land and Agricultural Development
Bank Act 2002168 says the Minister must appoint a board of directors to manage the
business of the Bank; and whenever it is necessary to appoint a member of the Board the
Minister must by notice in the Government Gazette as well as in other appropriate media
and by written invitation to the relevant parliamentary committees, call for the
nomination of persons who are not disqualified in terms of section 10 to serve on the
Board.
Another typical example, would be enabling Act of Transnet, Legal Succession to the South
African Transport Services Act [No.9 of 1989], which says the affairs of the Corporation
shall be managed by a Board of Control of not more than 11 members including the
chairman, who shall be appointed and dismissed by the Minister. Finally, another example
would be the 2006 Communications Act (ECA, which effectively repealed the
Telecommunications Act of November 1996, which provided for the partial privatisation of
state-owned telecommunications operator Telkom SA Limited. Telkom listed on the New
York Stock Exchange and Johannesburg Stock Exchange in 2003. Its shareholding consists
of: 38.8% Government of South Africa; 33.6% Free Float; 15.6% Public Investment
Cooperation; 7.2% Elephant Consortium and 3.8% Telkom treasury stock. According to the
prescriptions: “The appointments of the board are made by the Government of South Africa,
Telkom's Class A shareholder holding 39.8 percent of the issued share capital as at 31
January 2011.”169
167
http://www.info.gov.za/acts/1997/act13.htm
http://www.info.gov.za/view/DownloadFileAction?id=68049
169 Statement by the Ministry on the appointment of Telkom SA Limited CEO - 17 March 2011
http://www.doc.gov.za/index.php?option=com_content&view=article&id=491:statement-by-ministry-on-theappointment-of-telkom-sa-limited-ceo&catid=88:press-releases
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37
7.2. PFMA and Treasury Regulations governing SOE Executive
Management and Boards
The Public Finance Management Act was promulgated in 1999 and became effective on 1
April 2000. The PFMA put into the effect the provisions of the Constitution, no.108 of 1996,
relating to financial management in national and provincial governments. The PFMA
introduced the term ‘national government business enterprise’, and refers to ‘national public
entities’. Individual directors and the Board as a whole of the SOE, both executive and nonexecutive, carry full fiduciary responsibility in terms of the PMFA and the Companies Act.
Chapter 6 of the PMFA, as well as sections (1-4, 66-77), 83-86 and 92-95) apply to SOEs.
Furthermore, the 2005 amended Treasury Regulations (15 March 2005) are also key to SOE
governance. The National Treasury regulations were updated to conform to King II
recommendations. In cases of conflict between PFMA and any other act, the PMFA takes
precedence [section 3(3) of the PFMA] 170.
Some of the key functions prescribed for the board by the PMFA and Treasury regulations
includes that the board shall ensure the succession, and approve the appointment, of senior
executives. Furthermore, the board shall monitor the activities of the executive
management, and ensure that the executive management implements the SOEs strategy. It
says the board must annually (Treasury regulation 29.2) in consultation with its Executive
Authority conclude a shareholder’s compact, which documents the mandated key
performance measures and indicators to be attained by the SOE as agreed between the
parties.
The Board must also produce an annual Budget and Corporate Plan (Section 52 of the PFMA
and Treasury Regulation 29.1) which shall be submitted to the accounting officer for the line
department, as designated by the responsible minister and the national treasury at least
one month or another period agreed with National Treasury, before the start of the financial
year. Such a Budget and Corporate Plan must include the projection of revenue,
expenditure and borrowings for that financial year in the prescribed format; and a
prescribed format covering the affairs of the SOE for the following three financial years,
and, if it has subsidiaries, also the affairs of the subsidiaries.
Furthermore, the board must submit the audited statements within 5 months after the
financial year-end to the Executive authority, National Treasury and the Auditor-General.
The board must take effective and appropriate disciplinary steps against any employee of
the SOE who [Section 51 (1) (e)] contravenes or fail to comply with a provision of the
PFMA; commits an act which undermines the financial management and internal control
system of the SOE; or manes or permits an irregular expenditure or a fruitless and wasteful
expenditure. Furthermore, the directors shall, in the exercise of their powers, use their best
endeavors to achieve the objectives of the SOE as set out in the memorandum of
association and as conveyed to them by the Executive Authority. The PFMA and the enabling
legislation allows for the chairman of the board and the CEO to be appointed by the
shareholder or executive authority. King III below allows for the board to make these
appointments. The Companies Act also allows for the board to make these appointments.
170
The PMFA focus mostly on financial management in public entities, whereas the Companies Act goes beyond
just financial management in public and well as the private sector [IODSA (2010) State-Owned Companies:
Companies Act, PFMA and King III in Perspective. Public Sector Working Group: Position Paper 1
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7.3. The New Companies Act
Management and Boards
of
2008
and
SOE
Executive
The new Companies Act was signed by the President on the 08th April 2009 and gazetted in
Gazette No. 32121 (Notice No. 421). This Act is called the Companies Act, Act no. 71 of
2008. The date that the Act comes into operation must still be fixed. The
Companies Act introduced the term ‘state-owned entity’. Of significance, is that the previous
Companies Act did not specify that SOE’s had to comply with the Act. The current one does.
SOE’s are referred to as State-owned Companies and should be reflected as SOC Ltd. The
majority of the provisions of the Act which apply to a public company will apply to a stateowned company unless specifically exempted by the Minister. This means that the
shareholder/executive authority can actually exempt an SOE from some of the New
Companies Act provisions – which is a major flaw in the governance structure.
Nevertheless, SOEs must now comply with some of the following rules which apply to
public companies, and which (SOEs) has not always been adhered to. A director, prescribed
officer and a member of a board committee may be held liable for indiscretions including,
any loss suffered by the company; for a breach of fiduciary duty, or acquiescing to the
company carrying on business in ‘insolvent circumstances’. A public company is obliged to
comply with the additional transparency and accountability requirements of Chapter 3 of the
Act, which include maintaining certain records for seven years (s24), and implementing a
reporting process for whistleblowers (s159(7)). The audit committee in terms of the current
Companies Act is appointed by the board of directors and not by the shareholders.
The Companies Act (s66, s69, s70) says a person is disqualified to be a director of a
company if a court has prohibited that person to be a director, or declared the person to be
delinquent, or the person has been removed from an office of trust or convicted of certain
specified crimes. A company’s Memorandum of Incorporation (MOI) may set out minimum
qualifications to be a board member. The board (s71) may remove a director whom it has
determined is ineligible, disqualified, incapacitated, negligent or guilty of dereliction of duty.
Noting (in the Act) prevents a director who has been removed from suing for damages.
Some critics have argued that the grounds for disqualification as board member are
limited171. Furthermore, the Companies Act sets out what “disqualifies persons from being
appointed as directors, but nowhere does the Act mention what qualifies a person to be a
director”172.
7.4. Executive Authority/Shareholder Minister/Cabinet role in the
appointment of SOE Executive Management and Boards
The executive authority has three roles in relation to SOEs: they are simultaneously the
owner/shareholder, policy maker and regulator 173. SOEs report to an executive authority –
171
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
172
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
173
Government’s role as a regulator will not be fully discussed in this essay. As regulator, the executive authority
regulates the industry in which the SOE operates in. These would include industry matters, consumer interests,
pricing, and so on. The relationship between the regulator and the SOE should be objective, independent and non-
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the line minister/department. The executive have oversight over whether SOEs implement
policies and deliver services and products according to their mandates or executive policy
directives. The line minister acts as shareholder, and is responsible for ensuring the SOEs
meets the service delivery requirements. Oversight is concerned “with the reviewing,
monitoring and overseeing of the affairs, activities, behavior and conduct of the SOE, in
order to be satisfied that the SOE’s affairs and business are being conducted in the manner
expected and in accordance with all normal commercial, legislative and other prescribed or
agreed norms”174.
The executive authority, as the shareholder of an SOE, “whose activities represent a fully
commercially viable and profitable enterprise and operation”175, is concerned with “a return
on investment”176. This involves making sure that the SOEs “strategic and business plans,
as well as its actual operations, delivery and performance are met and are achieving any
expected and agreed levels of return on investment and/or return on asset” 177. This involves
interrogating whether these – strategic and business plans, business operations, reporting
and accounting thereof - are effectively managed by the SOEs executive management and
staff of the SOE178.
The executive authority’s responsibility is to ensure that “from the board of directors
downwards, and also in respect of accountability of the board upwards to the shareholder,
all the necessary and appropriate corporate governance structures, procedures, practices
and controls and safeguards, are established, properly implemented and operate effectively
in the SOE”179. The executive authority is also concerned with the “effectiveness of the
organizational structures, administrative and management procedures and practices within
the SOE”180.
The executive authority carries out its oversight through the prescriptions of the PFMA. The
PFMA gives specific oversight powers to the executive authority in reference to four core
reports: annual budgets plans, the shareholder’s compact between the owner/shareholder
(the executive authority) and the 3-year corporate plans181 and quarterly reports to the
collusive. In practice this is not easy as the regulator is a government agency, while the SOE is also government
owned. Furthermore, the government sets also sets policy for the SOE, while at the same time regulating the SOEs’
operations and operating environment.
174
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.6
175
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.6
176
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.6
177
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.6
178
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.6
179
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.6
180
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.6
181
PFMA Section 52
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Executive Authority from the accounting authority of the SOE. The PFMA182 requires the
boards of SOEs to provide annual budget183 and corporate plans184 to the line
minister/department. The corporate plan – which should cover a period of 3 years - must be
submitted to both the line minister and the treasury 185. The corporate plan covers a period
of 3 years and “covers the affairs of that public entity or business enterprise for the
following three financial years”186.
The SOE must also sign187 an annual shareholder’s compact188 with the line
minister/department. It is an agreement between the shareholder and the SOE, of the
expected performance of the SOE – and the behavior of both to make possible meeting the
performance targets – and to which both must sign off. The shareholder’s compact and the
corporate plan are complimentary. “The shareholder’s compact must document the
mandated key procedures for quarterly reporting to the Executive Authority in order to
facilitate effective performance monitoring, evaluation and correction action” 189.
As owner/shareholder the executive watch over the financial viability of an SOE, and ensure
returns on investments190. The Treasury provides financial oversight. The PFMA empowers
the treasury to provide financial oversight over the SOE 191. Treasury regulations [Treasury
Regulation 30.2] prescribes that a SOE provide quarterly reports to the executive authority.
182
Section 52 of the PFMA
Which should provide a projection of revenue, expenditure and borrowings for that financial year in the
prescribed format [Section 52 of the PFMA]
184
For public entities listed as Schedule 2 and 3B. The corporate plan must include: strategic objectives and
outcomes identified and agreed on by the executive authority in the shareholder’s compact; strategic and business
initiatives as embodied in business function strategies; key performance measures and indicators for assessing the
entity’s performance in delivering the desired outcomes and objectives; a risk management plan; a fraud
prevention plan; a materiality/significant framework, referred to in Treasury Regulation 28.3.1; a financial plan
address: projections of revenue, expenditure and borrowings, asset and liability management, cash flow
projections, capital expenditure programs and dividend policies [National Treasury (2005) Governance Oversight
Role over State-Owned Entities. Pretoria, Government Printer, p.8]
185
Treasury regulation 29.1
186
PFMA Section 52
187
Treasury regulation 29.2.2
188
The shareholder’s compact also has its roots in the Protocol of Corporate Governance for State-Owned
Enterprises, but it is also anchored in the corporate and business plans of the SOE.
189
Treasury regulation 29.2.2
190
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.5
191
In terms of financial performance, the Executive Authority expects the SOE to have: appropriate and effective
planning and budgeting processes in place (PFMA Section 52); the financial management and control structures
and processes must provide accurate, timeous and reliable recording and reporting of all financial transactions
takes place (PFMA Section 51); that appropriate financial management systems and controls are in place (PFMA
Section 51); that the financial affairs and performance of the SOE is consistent in terms of the corporate plans and
shareholder compacts (PFMA Section 52 and Treasury Regulations 29.1) [National Treasury (2005) Governance
Oversight Role over State-Owned Entities. Pretoria, Government Printer, p.6]
183
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The National Treasury also plays its financial oversight roles as the “protector of the
Financial Revenue Fund”192.
The second role of the executive, in terms of SOEs, is its policy maker role. Cabinet is
vested with powers to make policy, which is executive by the line minister or department of
the SOE. After the Cabinet sets the policy, the policy is issued through a policy directive to
the relevant department/minister, which then passes it on to SOE. The department/minister
then has to monitor, oversee and review that the implementation is taking place. The policy
department must make sure that the service delivery of the SOE is “consistent with the
expected outputs and represents delivery of the policy”193.
In some cases the line minister is not necessarily responsible for making the policies
governing the SOEs. This arrangement obviously brings with it potential governing
challenges. For example, in the case of Eskom, the line minister/department is the
Department
of
Public
Enterprises
[the
shareholder/owner].
However,
the
minister/department that sets the policies governing the SOE is the Department of Minerals
and Energy. Furthermore, “policy directives many impact on the viability of the SOE, which
affects the financial performance and shareholder monitoring by the Executive Authority” 194.
The executive authority (line minister/department) has the power to dismiss (as well as the
power to appoint, off course) the SOE board for non-performance. Unfortunately, it is only
recently that line ministers incorporate delivery targets [KPI’s] in annual shareholders’
compact agreements between a specific SOE and the Executive authority.
7.5. SOE Protocol on Corporate Governance and SOE Executive
Management and Boards
In 2003, Cabinet adopted the Protocol on Corporate Governance 195 and all SOEs were
required to follow its precepts. However, the Protocol on Corporate Governance has
not been legislated. The Protocol is based on the King II recommendations of good
governance but also addresses the unique mandates of SOEs of having to pursue social
objectives. The Protocol describes the relationship between a SOE and that of the executive
authority, as similar to that between a holding company and its subsidiaries. In the protocol,
the executive authority/line minister, as outlined in the PFMA, represents the shareholder,
and the Finance Minister and National Treasury, focuses on financial oversight.
In the protocol the boards of SOEs are fundamental in corporate governance. It sets similar
responsibilities for boards of SOEs as those in the private sector. The boards of SOEs, like in
192
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.9
193
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.7
194
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.7
195
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. Pretoria,
Government Printer
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the King Code196 have a charter outlining its responsibilities. The charter should at least set
out the board’s “responsibility for the adoption of strategic plans, monitoring of operational
performance and management, determination of policy processes to ensure integrity of the
SOE’s risk management and internal controls, communication policy, and director selection,
orientation and evaluation”197.
Taking its cue from the PMFA, the Protocol states that the relationship between the
executive authority and SOE boards should be governed by a shareholder’s compact. The
shareholder compact is cobbled together jointly by the shareholder and the SOE board 198.
The Protocol emphasized that the “shareholder should describe in as much detail as is
reasonably possible the role and responsibilities of the board as a whole and of individual
directors in the shareholder compact”199. Within the social compact, the shareholder should
“include any requirement to meet explicitly stated Government socio-economic
objectives”200.
It says boards “constitute a fundamental base of corporate governance in the SOEs”201. The
Protocol (5.1) states that “each SOE should be headed by an effective and efficient board”.
It emphasized that the “performance of the SOE depends on the capabilities of its board” 202.
It says that the majority of the board should be non-executive, to increase their objectivity
and independence. Board composition must also take cognizance of the diverse background
of South Africa’s population. The board should “always maintain the highest standard of
integrity, responsibility and accountability”203. Furthermore, the board should comprise of
“individuals with integrity and accountability, competence, relevant and complementary
skills, experience and expertise”204. It lists the transgressions that may disqualify a board
member: legal disability, insolvency, misconduct requiring or justifying removal from the
office of trust, and a criminal record.
It says the board should “on an annual basis, review and evaluate its required mix of skills
and experience and other qualities in order to assess the effectiveness of the entire board,
its committees and the contribution of each individual director during the entire term of
office”205. The board must make sure there are “appropriate and effective induction,
education and training programmes offered to new and existing board members”206. It says
the board has “absolute responsibility for the performance of the SOE”, should give
196
King II prescribed a board charter, setting out the board responsibilities. These should be published in the
annual report. The charter should at least make the board responsible for: strategic plans, monitoring operational
performance, monitoring performance of management, determining policies and procedures, risk management,
internal controls, communications policy, director selection, induction of directors, evaluation of directors [King II
Report on Corporate Governance (2002) Code of Corporate Practices and Conduct. 2.1.4 9(q)
197
National Treasury (2005) Governance oversight role over state-owned entities. Pretoria, Government
Printer.p15
198
S5.1.14.1
199
S5.1.13.1. This must be done in such as way that it takes into account the potential conflict of interest between
the shareholder’s regulatory responsibilities as government, on the one hand, and shareholder responsibilities, on
the other. [S5.1.13.1]
200
S5.1.13.1
201
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. Pretoria,
Government Printer, p.5.1.
202
S5.1.6.1
203
S5.1.1.13
204
S5.1.6.1
205
S5.1.1.11
206
S5.1.1.12
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“strategic direction”, and must “retain full and effective control over the SOE and monitor
management closely in implementing board plans and strategies”207. Board members are
appointed and removed by the shareholder208.
Importantly, the protocol says the board should “in concurrence with the Executive
Authority appoint the chief executive officer and ensure that an effective succession plan for
all directors and key executives is in place”209. Another section (S5.1.3) of the Protocol is
much more explicit stating “the board should appoint the chief executive officer whose role
should, preferably, be separate from that of the chairperson”. It says the board should
“consult with the shareholder about its preferred candidate for the position of Chief
Executive Officer and provide sufficient time for the shareholder to consider the candidate
and respond prior to an appointment being made” 210. It says the CEO is accountable to the
board211.
The board should ensure that the performance of the chief executive officer is appraised on
an annual or other more frequent basis as the SOEs circumstances may demand, either by
the chairperson himself or a sub-committee appointed by the board” 212. Furthermore, the
“board should appoint one of its members, who should preferably be an independent nonexecutive director (unless otherwise agreed by the shareholder), as the chairperson of the
board”213. The protocol (5.1.1.11) says the “board should appraise the performance of the
chairperson on an annual or such more frequent basis as the board may determine”.
Furthermore, the board “should ensure that a confidential board and director appraisal is
conducted on an annual basis and establish an appropriate mechanism for reporting the
results of the board assessment to the shareholder” 214.
Although there is no distinction in law between executive and non-executive directors, the
Protocol spells for operational purposes the roles of each. It stipulates that executive
directors are “directors who, in addition to their board duties, also perform management
functions for the SOE”, and for which they receive separate remuneration 215. The
employment of executive directors should be approved by the shareholder, and be limited to
a maximum of three years, which may be renewed 216. It says the “day-to-day management
of the SOE should be delegated by the board to the executive directors who should, in turn,
ensure that the strategic decisions of the board are implemented effectively and
timeously”217.
Crucially, the protocol states the executive authority should effect remedial action, when
SOE boards fail to meet their objectives and performance targets. The Protocol recommends
the establishment in every SOE board of audit, remuneration, nomination and risk
management committees. The financial statements of SOEs must be comprehensively
207
S5.1.1.2
S5.1.14.2
209
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. Pretoria,
Government Printer, S5.1.1.1
210
S5.1.3
211
S5.1.3
212
S5.1.2.2.6
213
S5.1.2.1
214
S5.1.1.11
215
S5.1.5.1.1
216
S5.1.5.1.2
217
S5.1.5.1.3
208
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44
internally audited. An external audit218 must be performed annually by the Auditor General
or a person registered in terms of Section 15 of the Public Accountants and Auditors Act,
1991. The independent auditors of SOEs must say in the audit report whether the SOE has
complied with the Protocol on Corporate Governance and the PFMA. Furthermore, the
financial statements of SOEs must be audited SOE boards must follow the disclosure
requirements of the JSE Securities Exchange SA listed rules219.
7.5. Parliament and SOE Executive Management and Boards
The constitution empowers the National Assembly and provincial legislatures to hold the
executive (government departments) accountable220, maintain oversight over their
implementation of policies and legislatives mandates, and to scrutinize their actions. 221 The
Constitution222 requires the executive to provide parliament with comprehensive and regular
reports of all the activities (which include SOEs) under their jurisdiction. Parliament
scrutinizes the annual reports of SOEs. However, it has been a challenge for members of
Parliament to “improve the capacity of the policy/parliamentary committees to hold
departments and SOEs to account for their performance, using their strategic plans, budget
documents and annual reports as the basis”223.
Before 2000, Parliament had not focused on non-financial service delivery performance of
departments and SOEs. Until then departments only tabled financial statements and audit
reports – not annual reports224. Since then, the enactment of the Public Finance
Management Act and reforms to the Public Service Act225 has made the annual report – in
conjunction with financial and audit reports - a powerful tool for Parliament to perform their
oversight roles of executive authorities (government departments) and SOEs. The Public
Finance Management Act, which was promulgated in 1999 and became effective on 1 April
2000, requires the Minister of every Department, who is the executive authority of an SOE,
to table an yearly report to Parliament within six months after the end of the financial
year226. The PFMA (Section 65) requires the Executive Authority to table the annual reports
of SOEs under their jurisdiction by 30 September – six months after the SOEs financial
year-end227.
218
5.2.19.1
S5.1.15.1
220
Section 55 (2)
221
Section 42 (3)
222
Section 92 (3)/(b)
223
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.2
224
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.3
225
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.3
226
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.3
227
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.3
219
44
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Parliamentary committees228 play key roles in the actual Parliamentary oversight of
departments and public entities. The National Assembly’s portfolio committees oversee the
specific national department. The Standing Committee on Public Accounts (SCOPA) is the
specialized committee that plays oversight over public money. Both Public Accounts
Committee and Portfolio Committee review whether a SOE has met the objectives of their
mandates229. SOEs submits their annual reports to the Executive Authority (shareholder
ministry/department); and to both the Public Accounts Committee and the portfolio
committee230. The Public Accounts Committee interrogates whether Executive Authorities
and entities have complied with the PFMA, Treasury Regulations, Audit Committee and the
management report of the accounting officer231.
The Public Accounts Committee specifically reviews the audit reports of the Auditor General.
It also interrogates the corporate governance performance of department, SOEs and other
public entities and constitutional institutions232. The portfolio committees review the nonfinancial information – the service delivery performance - in the annual reports of SOEs233.
Off course, in order to have a holistic view, they must also look at the financial performance
of an SOE. Every SOE is expected to put together a corporate plan for the Executive
Authority in which they set out their service delivery targets. How the SOE has performed in
terms of the corporate plan is reported in the annual report.
The Auditor-General, which is accountable to Parliament, is also a key oversight body.
Section 188 of the Constitution empowers the Auditor-General to audit and report on the
accounts, financial statements and financial management of all departments – national,
provincial and municipal – and other public entities, including SOEs. The Auditor-General
submits these audit reports to the legislatures. The Public Accounts Committee specifically,
and the portfolio committees – investigation the circumstances that led to financial
underperformance and the impact this had on service delivery and the measures taken by
management to rectify this, interrogates the audit reports of the Auditor-General234. “Ideally
the oversight process (Standing Committee on Public Accounts, the Portfolio Committee
interrogation process and the Auditor-General’s audit report) should provide a complete
picture of a SOEs performance, encompassing its finances, its systems, its human resources
and its service delivery performance”235.
228
Parliamentary committees were established to facilitate the National Assembly’s oversight role, since it would
be difficult for the National Assembly to interrogate all public departments and entities. [National Treasury (2005)
Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer, p.3]
229
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.5
230
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.4
231
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.3. The Accounting Officer in a Constitutional Institution/Public Entity/SOE is the CEO; in a National Department,
the Director-General; in a provincial department, the head of department; and a municipality, the municipal
manager [National Treasury (2010) Public Sector Risk Management Framework. Pretoria, Government Printer,
p.10]
232
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.4
233
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.4
234
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.5
235
National Treasury (2005) Governance Oversight Role over State-Owned Entities. Pretoria, Government Printer,
p.4 and 5
45
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In some SOEs, such as the SABC236, the specific parliamentary portfolio committee is
involved in the appointment of the board. The communications portfolio committee of
parliament in 2010 asks for public nominations for board membership, shortlists the
candidates and proposed the final list to the executive authority, Cabinet and President. The
President appoints the chair of the board. The SABC board recruits – in practical terms since
2009 - the CEO with the approval of the Executive Authority.
In the case of the SABC, the communications portfolio committee acceded to requests from
civil society groups to have the shortlist interviews public. Civil society, stakeholders and
the broader public were actively involved in the nomination process. The enabling of the
Media Development and Diversity Agency (MDDA)237 also provides for the National
Assembly through the portfolio committee to appoint board members through a public
nomination process, the publication of the shortlist, interviewing the shortlisted candidates,
and passing the final list to the President for approval. This SABC model of recruiting
SOE board members through a parliamentary process, managed by the portfolio
committee, and the board recruiting the CEO, has much potential for the
appointment of boards of other SOEs also. The model can be tweaked by the
board, also appointing the chairperson, rather than – in the case of the SABC – the
President/Executive Authority/Cabinet appointing the chairperson of the board.
The problem has been that Parliament238 has recently come under fire for not adequately
holding the Executive to account 239. Some ministers have refused to account to parliament
when ask to do so by portfolio committees. Others again have refused to answer questions
from parliamentarians. Some ministers has even dismissively told parliamentary portfolio
committee members they are ‘not available’ for either answering questions or to appear
before the committees240. For example, South African Airways CEO Siza Mzimela angered
MPs when he and senior managers fail to appear, without giving an explanation, before a
scheduled meeting of the public enterprises portfolio committee 241. Mzimela was supposed
to explain allegations that SAA with other airlines fixed higher ticket prices during the World
Cup. In August 2010, Defence and Military Veterans Minister Lindiwe Sisulu rejected a
request by the defence portfolio committee to hand over two reports, saying the committee
should “get over it”242. Lindiwe Sisulu said ‘executive privilege’ prevents her from handing
over the documents to parliament243.
In South Africa’s electoral system members of National Parliament, Provincial legislatures
and Municipalities are chosen by their parties, rather than constituencies – which make
them accountable to the party leadership – who can recall them, rather than
236
In terms of the Broadcasting Act (No 4 of 1999).
237
Section 4 of the MDDA Act of 2009
238
In part to respond to criticisms that it is shirking its oversight duties and are too deferential to the
executive, Parliament has cobbled together a new set of proposals to strengthen its oversight ability.
[Parliament of the Republic of South Africa (2010) Oversight and Accountability Model: Asserting Parliament's
Oversight Role in Enhancing Democracy. National Assembly, Cape Town]
239
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October, p.57
240
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October, p.
241
Kgosana, Caiphus (2010) No-show SAA bosses cheeses MPs, Business Report, March 10
242
Kgosana, Caiphus (2010) MPs dodge final decision on Sisulu. The Times, August 17
243
Kgosana, Caiphus (2010) MPs dodge final decision on Sisulu. The Times, August 17
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constituencies244. The ANC’s deployment committees vet nominees to parliament, provincial
legislatures, municipalities and senior appointments in the public service and SOEs. Often
ministers are perceived to be more senior in the party than MPs. In some cases SOE CEOs
and Chairpersons also appear more senior in the ANC as party - than MPs. There is often an
expectation that MPs should defer to ministers – this undermines the oversight role of
parliament. In the beginning of 2011, Deputy Speaker Nomaindia Mfeketo and ANC Chief
Whip Mathole Motshekga in a workshop to induct new portfolio committee chairpersons to
go ‘easy’ on ministers, directors-general and CEOs and chairpersons of SOEs who appear
before them,245and treat them with more respect.
Since 2009 there have been a number of conflicts between the portfolio committees and
ministers. After the 2009 national elections ANC general secretary Gwede Mantashe said
parliament would become an ‘activist’ parliament, rather than a ‘rubber-stamp’246.
Mantashe said: “We are expecting an activist parliament, a parliament that is robust with its
oversight role, a parliament that will actually force the executive to account.”247 Mantashe
then said the ANC had decided to deploy senior ANC national executive members to chair
committees, because senior party would not be fearful of taking on ministers, senior
government officials and SOEs executives and boards 248.
For another, some senior ANC MPs have recently also complained that the caliber of ANC
deployees to parliament has not been up to scratch. Some MPs are generally inexperienced.
For example on one occasion MPs of the portfolio committee on public enterprises criticized
the CEO of then Eskom Enterprises for not telling the committee about the company’s
strategies to rollout electricity to rural areas. However, Eskom Enterprises was a subsidiary
created by Eskom to house non-core assets, and it was not responsible for electricity
provision249. When in March 2011 the National Assembly had to vote on the Municipal
Systems Amendment bill, the new law that will ban political office bearers from holding
management positions in municipalities, the voting had to be cancelled because the house
could not quorum. Of the 400 MPs, 231 were absent.
Nyami Booi, the former chairperson of the defence portfolio committee said last year that “it
is important to train some of the current MPs and show them that the executive is
accountable to them, not the other way around”250. Booi said that the ANC had to relook its
deployment strategy because the “consequences of deploying fewer experienced cadres (as
MPs) was often a reversal of roles where ministers were treated with deference, instead of
being held accountable for the performance of their departments”251. In the case where
244
The ANC chooses MPs through a list system, which makes provision for half of the representatives to be
selected from a national list and the other half from regional and provincial list. The deployment committees and
the national leadership vet the final list of candidates that will be ANC representatives in the legislatures.
245
Kgosana, Caiphus and Mokone, Thabo (2011) Be gentle with ANC members. INETBridge/Sunday Times, January
23
246
Kgosana, Caiphus and Mokone, Thabo (2011) Be gentle with ANC members. INETBridge/Sunday Times, January
23
247
Kgosana, Caiphus and Mokone, Thabo (2011) Be gentle with ANC members. INETBridge/Sunday Times, January
23
248
Kgosana, Caiphus and Mokone, Thabo (2011) Be gentle with ANC members. INETBridge/Sunday Times, January
23
249
See Msomi, S’thembiso (2011) MPs’s truancy and ineptitude are an embarrassment to both the house and the
nation. The Times, March 29
250
Kgosana, Caiphus (2010) Lack of experienced MPs ‘weakens’ parly. The Sunday Times, September 12
251
Kgosana, Caiphus (2010) Lack of experienced MPs ‘weakens’ parly. The Sunday Times, September 12
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parliament’s communications portfolio committee in 2009 proposed the final nominees for
board members of the SABC there was a controversy because opposition parties claimed
that names were endorsed by the ANC deployment committee first and were not politically
inclusive enough and that there was a perception that some of the choices were
‘politicized’252, rather than based on merit – that is, if the names that were included are
compared to those who were left out.
7.6. King III and Executive Management and Board responsibility
in SOEs
The Code of Governance Principles for South Africa 2009 Report (King III) contains a code
of principles and practices on a non-legislated basis. In contrast to King I and King II, King
III applies to all entities regardless of the manner and form of incorporation or
establishment. The King III report applies to all entities: private and public. But King III is
also more specifically aligned to functional responsibilities within Public Sector structures.
The King III report emphasized boards should be at the centre of corporate governance 253.
According to it, the board should appoint the CEO 254. It emphasized the boards should
ensure companies have an effective risk-based internal audit255 and internal financial
controls256. It says the shareholders are responsible for the composition of the board. It
says directors should be appointed in a formal process. The board as a whole “would
normally appoint directors, assisted by the recommendations from the Nominations
Committee”257.
It says a board should comprise a balance of executive and non-executive directors, with a
majority of non-executive directors258. It recommends a rotation of non-executive directors,
to ensure that one third of the non-executive directors retire each other, by rotation. It says
the board should be led by a non-executive chairman who should not be the CEO of the
company259. The chairman should be reappointed on an annual basis 260. King III says the
performance of the board, its committees, individual directors and CEO should be evaluated
annually261. It says an independent non-executive director should lead the processes of the
assessment of the performance of the chairman of the board. It says the evaluation of the
CEO’s performance should concentrate on his/her performance as a director and as CEO. It
leaves open who should conduct the assessment of the CEO. However, the board and the
shareholder (government) could do this, based on transparent criteria.
King III has wider reporting requirements, in that it encompasses the principles of
‘sustainability’ and ‘corporate citizenship’, as part of a greater emphasis on more integrated
reporting. In King III therefore the emphasis is not only on the interests of the
shareholders, but a more inclusive (or enlightened) stakeholder approach. In the public
sector this means that SOEs cannot only focus on pleasing the shareholder (the
252
See Underhill, Glynis (2009) SABC board choices political. Mail & Guardian, September 23
King III, principle 1.1
254
Principle 1.6
255
Principle 1.10
256
Principle 1. 11
257
Principle 1. 20
258
Principle 1. 17
259
Principle 1.18
260
Principle 1. 18
261
Principle 1. 23
253
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government), but must report much more widely on whether the interests of the broader
public, consumers and the environment have been served.
7.7. JSE listing requirement rules on SOE Executive Management
and Boards
Those companies listed on the JSE262 must disclose how they comply with the King II Report
on Corporate governance. These include having a separate chair of the board and CEO.
Companies must also have a policy on board appointments, which is formal and
transparent. Where appropriate a nominations committee, which should consists of only
non-executive directors, of whom the majority should be independent, should assist in
nominations for board membership. The chair of the board must either be an independent
director, or a lead independent director.
Furthermore, boards must appoint an audit committee, a remuneration committee, and if
required a risk committee. The JSE (s21) through its requirements for listed companies
argues a director should be ‘fit and proper’. Potential directors should be investigated to
ensure they qualify to be directors and have suitable backgrounds. This is not extensively
elaborated on; in fact some corporate governance specialists say this requirement is not
very effective263. However, the listing requirements are not fully clear on the kind of skills
needed to be a director, other than things that disqualified one to be a director. A brief CV
of each director standing for election or re-election at a general meeting or annual meeting
should accompany the notice of the general or annual meeting. Directors are bound by the
listing requirements of the JSE in their capacities as directors and in their personal
capacities. The JSE has introduced penalties, up to an R1m on directors in their personal
capacity if they fail to adhere to JSE listing requirements.
7.8. ANC Deployment Committee and the appointment of Boards
and Executive Management
The ANC’s various deployment committees, national, provincial and local play a role in
nominating individuals to boards and management of SOEs264. In 1998, the ANC adopted a
comprehensive Cadre Policy and Deployment Strategy and established a National
Deployment Committee (NDC) headed up by Jacob Zuma (the then-deputy president of the
ANC), and followed this with setting up provincial and local deployment committees later.
Following the resignation of former President Thabo Mbeki in 2008, the National Deployment
Committee fell into disarray, but the ANC in 2009 reconstituted its National Deployment
262
JSE (2011). Limited Listings Requirements. Service Issue 14. June 2 (effective to coincide with the
implementation of the New Companies Act (2008)
263
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
264
The ANC’s 50th National Conference in Mafikeng resolved to establish National, Provincial and Local Deployment
Committees. See ANC (1997) Tactics and Strategies as Adopted by the ANC 50th National Conference. Mafikeng,
December 22
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Committee265, which is now chaired by Deputy President Kgalema Motlanthe and coordinated by ANC deputy general secretary Thandi Modise.
Deployment Committees were set-up as ANC party structures that would operate parallel to
those of the spheres of government.
The idea was that they would oversee key
appointments in the party, public sector (including SOEs) and legislatures, as well as civil
society and ‘other sectors of social activity’ (i.e., the media, academia, economy and sport),
make sure that such appointees follow ANC policies and also hold such appointees
“accountable” to the party leadership266. Joel Netshitenzhe, a member of the ANC national
executive committee have described the deployment policy as: “The ANC can identify
people and submit names to people who are recruiting, giving them a bigger pool, and
leaving it to them to choose following the laws of the land.”267
It is expected that executive authorities/shareholder departments/ministers under which an
SOE falls to consult with the ANC’s deployment committee when they recruit individuals for
positions on boards and executive management of SOEs. Gwede Mantashe, the ANC
secretary general complained in 2010 that “some ministers continue to make senior
appointments without checking and balancing their ideas and views with the Deployment
Committee. This is beginning to spread to (SOE) board appointments that fall within the
jurisdiction of specific ministers”268. The one real danger is that the deployment strategy
may undermine South Africa’s formal constitutional lines of accountability and governance
arrangements – and introduce an informal parallel and competing governance and
accountability system.
The deployment policy of the ANC has been controversial 269. The danger of cadre
deployment is that it many politicized appointments of board members and CEOs of SOEs;
or may lead led to the appointment of members to boards and executives of SOEs without
the appropriate skills to perform their jobs adequately – leading to inefficiencies and
governance failures at SOEs. Some deployees may see their roles as accountable to their
sponsors rather than the interests of the SOEs – the opposite of what good corporate
governance demands. In 2010, the former chair of Parliament’s Defence Portfolio
committee, Nyami Booi warned that the ANC had to relook at its deployment policy because
265
Mantashe, Gwede (2010) ANC and Governance: Secretary General Report to the National General Council.
(paragraphs 7.1-7.5) Sept. 20, Durban
266
See ANC (1998) Cadre Policy and Deployment Strategy: ANC National Executive Committee. December
267
Quoted in Hoffman, Paul (2010) Cadre Deployment. The Institute for Accountability in Southern Africa. March,
30 [http://www.ifaisa.org/Cadre_Deployment.html]
268
Mantashe, Gwede (2010) ANC and Governance: Secretary General Report to the National General Council.
(paragraphs 7.1-7.5) Sept. 20, Durban
269
Before the 18 May 2011 municipal elections Co-operative Governance and Traditional Affairs Minister Sicelo
Shiceka submitted amendments to the Municipal Systems Act in a bill submitted to Parliament. The amendments
defined—“chairpersons, deputy chairpersons, secretaries, deputy-secretaries or treasurers of the party nationally,
or any province, region or other area in which the party operates”—as those who would be excluded from senior
management positions. The amendments also excluded the employment of top municipal managers who did not
have basic skills and forced municipalities. Shiceka said stability and professionalism would be created in
municipalities by introducing rules that regulated the hiring and firing of managers. Shiceka said the bill was
meant to ‘depoliticise’ and ‘professionalise’ local government. “At national and provincial level there is no head of
department who is an office bearer of a political party ... if you want to become a politician, do that”. [Sapa (2011)
Zuma to end cadre deployment in local government. Aug 8]
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it “deployed fewer experience cadres” and led to a “reversal of roles where ministers were
treated with deference, instead of being held accountable”270.
In some cases different interest groups/factions within the ANC family have tried to push
‘their candidate/s’ for positions, whether in the public sector, including SOEs, whether for
boards or executive management. In other cases, ANC alliance partners, Cosatu, SACP or
SANCO, view the deployment committee process, as one where they have to push in ‘their
candidate’. Mantashe (2010) said in a response to this kind of action: “The challenge is that
of ensuring that the Alliance partners do not see their role in the deployment committee as
that of fighting for their own, but that of helping the process select the best-suited
candidates for the position being filled”271.
Acknowledging the strong influence of the ANC’s ‘deployment committee’ on appointments
in the public sector, Cosatu, the SACP and SANCO have lobbied the ANC National Executive
Committee to give them, as tripartite alliance partners “veto” over deployment
appointments272. Mantashe in his report to the ANC’s national general council in September
2010 acknowledged this, but rejected the idea. “There have been attempts (to) give Alliance
(Cosatu/SACP/SANCO) veto powers on deployments using the argument that the Alliance is
the strategic political centre”273. Mantashe said attempts from the ANC’s own alliance
partners to influence the deployment committee’s decisions are “either a reflection of the
extent of frustration stemming from exclusion of Alliance partners from the work of
deployment committees or outright mischief”274.
Furthermore, opposition parties, civil groups and alliance partners of the ANC have often
complained that the ANC deployment policy and process is not very transparent, and open
to abuse and manipulation. For another, many argue that the ANC’s Deployment Policy may
have degenerated into a jobs for pals or jobs for political allies/factions operation, with little
regard for appointing individuals with merit or technical skills or acumen to critical public
sector positions. In 2010, ANC Secretary General Gwede Mantashe stated that: “Mistakes
committed by our structures in deploying cadres who do not even meet the basic
requirements for the posts they are deployed in have opened the movement for unfair
criticism. We have a duty to ensure that when a cadre is deployed, he/she meets the
requirements of the post concerned by balancing political integrity and professional
competency”. It added: “Such an identified cadre must not be given guarantees upfront but
must be expected to perform well in the selection process” 275.
Off course many ruling parties in developed and developing countries do have ‘deployment
committees’ whether formally ones, or informal ones. In developmental states, such as
South Korea and Singapore ruling parties, often had had informal ‘deployment committees’
270
Nyami Booi quoted in Kgosana, Caiphus (2010) Lack of experience MPs ‘weakens’ parli: Booi says party needs to
rethink its deployment. Sunday Times, Sept. 12
271
Mantashe, Gwede (2010) ANC and Governance: Secretary General Report to the National General Council.
(paragraphs 7.1-7.5) Sept. 20, Durban
272
Cosatu’s 2007 discussion document “Paper on the Leadership Challenge” argue for an ‘Alliance-led deployment
committee’ to oversee the whole process of ANC deployment. See Cosatu (2007) Paper on the Leadership
Challenge. Cosatu Media
273
Mantashe, Gwede (2010) ANC and Governance: Secretary General Report to the National General Council.
(paragraphs 7.1-7.5) Sept. 20, Durban
274
Mantashe, Gwede (2010) ANC and Governance: Secretary General Report to the National General Council.
(paragraphs 7.1-7.5) Sept. 20, Durban
275
Mantashe, Gwede (2010) ANC and Governance: Secretary General Report to the National General Council.
(paragraphs 7.1-7.5) Sept. 20, Durban
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which focused on headhunting for talented individuals within and outside their countries
who were not members of the ruling party276. In such cases ‘deployment committees’ added
value because their role was specifically to expand the pool of talent within a ruling party
and country, bringing outsiders in. Mantashe himself said in his report to the ANC’s national
general council in 2010 that “as long as deployment is based on the principle of political
integrity and professional competence there should be no problem. If we ever drift into
making deployment an exercise that seeks to make professional work representative of
group interests’ seeds of disaster will be shown” 277.
7.9. Non-formal oversight mechanisms
Executive Managements
of
SOE
Boards
and
For SOEs, non-formal oversight mechanisms, such as ordinary citizens, consumers, civil
society, the media and communities scrutinizing their activities are crucial to hold them,
their boards and executive managements accountable. They should be seen as another
layer of oversight. Even though SOEs many not be listed they are public companies by
virtue of the fact that they are state-owned. Because of this, ordinary citizens, civil society,
communities and the media have a right, no obligation, to scrutinize their and their boards
and executive managements’ activities. Furthermore, SOEs by virtue that they are tax
paper financed or carry out public mandates must also be more accountable and more
transparent. In fact, “increased scrutiny by the public, press and non-governmental
organizations raises accountability, both for SOE management and government
overseers”278.
In South Africa trade unions regularly criticizes poor service delivery, wastages or corruption
in SOEs. Civil society groups, for example in the case of the SABC, where the SOS
campaign, has played crucial roles in pressuring these entities to become more effective.
The SOS campaign, in which trade unions and civil society have combined as a protest
group has been instrumental for example in bringing more transparency in the recruitment
of the SABC board and senior management. Since 2000 there have been also regular
community protests against poor service delivery by public institutions including SOEs –
whether against Eskom, Telkom, or other entity. Sadly, South Africa does not have
organized consumer civil society organizations that can help private and public institutions,
including SOEs accountable for the quality and price of products and the quality of service of
they produce. Furthermore, SOEs are not always responsive to complaints by the public,
civil society and consumers.
South Africa’s media have regularly exposed wrongdoing, mismanagement and inefficiencies
at SOEs and their executive management and boards. The media has also given extensive
coverage of inefficiencies exposed in audit and financial reports of SOEs. Parliamentary
portfolio committees and Executive Authorities have often responded to such reporting of
inefficiencies at SOEs. SOEs have generally not been forthcoming with information of their
activities, beyond the annual reports. In many cases executive managements and boards
have argued such information is ‘confidential’. Some researchers on SOE governance argue
276
Mantashe, Gwede (2010) ANC and Governance: Secretary General Report to the National General Council.
(paragraphs 7.1-7.5) Sept. 20, Durban
277
Mantashe, Gwede (2010) ANC and Governance: Secretary General Report to the National General Council.
(paragraphs 7.1-7.5) Sept. 20, Durban
278
Wong, Simon, C.Y. (2004) Improving Corporate Governance in SOEs: An Integrated Approach. Corporate
Governance International, 7(2), June, p.14
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that SOEs should provide information not only on performance, but also the objectives 279
including the public interest or social goals, the costs of pursuing these, any financial
support and in any other non-financial government intervention.
In Sweden, SOEs must organize what is called ‘capital market days’ when financial
journalists and external analysts can ask questions, interrogate and challenge executive
management and boards on financial performance, social mandates progress, strategies and
service delivery performance280. But Executive Authorities/Shareholder departments must
also be more transparent – not only SOE executive management and boards. Executive
Authorities/Shareholder departments should set clear goals for SOE management and
boards, and make these, along with the results of regular assessments of how far these
objectives have been realized, public. Furthermore, government must also disclose “the
guidelines for the oversight of state enterprises, including when and how government will
intervene”281.
It appears that a culture is lacking in SOEs and government that accepts the importance of
transparency and making information available. In 2010, Public Protector, Thuli Madonsela,
in a report on citizens complaints about the public sector and SOEs reported that whistleblowers in the public service and SOEs who report corruption, mismanagement and
inefficiencies appear to be prosecuted, rather than welcomed. Many whistle-blowers are
often dragged to disciplinary hearings on unrelated ‘wrong-doing’ to punish them282. The
proposed Media Tribunal and Protection of Information Act will give government broad
powers to classify almost any information involving an organ of state in the interests of
‘national security’. It prescribes stiff penalties of up to 25 years in jail for those disclosing
protected information, refuse to reveal their sources, or even attempting to uncover
protected information. This bill if signed into law will undermine transparency in SOEs and
public institutions – and thus undermine accountability of these institutions. It will
undermine efforts to hold SOE executive managements, boards and Executive Authorities
accountable for SOEs delivering on their mandates. In short, it will be a body blow to
corporate governance efforts in SOEs.
7.10. Governance practices in the broader public administration and
their impact on practices surrounding the appointments and
effectiveness of SOE Executive Managements and Boards
The governance practices of the broader public administration in a country impacts on the
governance of SOEs because SOEs are part of the public administration governance
framework. There are some governance practices in South Africa’s public sector which
undermines good corporate governance practices to take root. Some pertinent governance
practices in the broader public administration are relevant in how they impact on
appointments and effectiveness of executive management and boards and SOEs in general.
These include: the politicization of large parts of the public administration, large parts of the
279
See Wong, Simon, C.Y. (2004) Improving Corporate Governance in SOEs: An Integrated Approach. Corporate
Governance International, 7(2), June, p.14
280
Wong, Simon, C.Y. (2004) Improving Corporate Governance in SOEs: An Integrated Approach. Corporate
Governance International, 7(2), June, p.15
281
Wong, Simon, C.Y. (2004) Improving Corporate Governance in SOEs: An Integrated Approach. Corporate
Governance International, 7(2), June, p.15
282
Public Protector (2010) Report into Public Service Complaints (2009/2010). Government Printers, Pretoria,
October 24
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public administration lacking a professional ethos, a compliance driven administration, large
pools of inefficient and wasteful use of resources, ineffective performance systems, poor
accountability, low levels of transparency, endemic corruption in parts of the public
administration, and poor rates of citizen participation in decision-making.
The Public Service Commission’s 2010 report283 into the state of the South African public
administration were damning of some of its governance practices. The report annually
measures how the public service has performed against the nine constitutional values and
principles. It said the Executive should take concrete steps to close the legislative gaps that
still exist in the country’s public service’s ‘ethics infrastructure’. These include gaps the
adoption of a comprehensive policy framework on the management of conflicts of interest –
which does not currently exist.
Furthermore, the report (2010) said the policies guiding receipts of gifts by public servants
is limited, should be reviewed and departments should put in place and maintain accurate
gift registers. During the financial year 2007/2008 the PSC scrutinized a sample of 2038
(30%) financial interest disclosures of senior managers in the public service. Of these 434
(21%) may have potential conflicts of interest between their private interests and their
official duties. After cross-checking with the Companies and Intellectual Property
Registration Office (CIPRO) it was discovered that 210 senior managers in the sample did
not disclose their directorships/partnerships in private companies and close corporations 284.
In terms of effectively using resources, the Public Service report (2010) says the service is
still a long way from institutionalizing a focus on efficiency. The PSC (2010) report says that
government “must bring to an end the practice of unauthorized, fruitless, irregular and
wasteful expenditure”. In the 2008/09 financial year, five national departments incurred an
amount of R1.4billion in unauthorized expenditure285. National departments also incurred
around R35.2million in fruitless and wasteful expenditure. In addition, national departments
incurred an amount of R529.8 million in irregular expenditure286.
The 2010 PSC report287 noted departments persistently received qualified audits in annual
audits of the Auditor-General, with some departments getting such qualified audits at least
four years in a row, without any disciplinary steps by the Executive Authorities. In the
2008/2009 financial year, 43 departments (12 national and 31 provincial) received qualified
audits. The year before the figure was 48 (11 national and 37 provincial). Over the same
period (2008/2009) financial year, only 111 out of the 283 municipalities received a
qualified audit; and 95 out of 283 got an unqualified audit in 2007/2008. President Jacob
Zuma addressing the crisis of accountability in the public administration said: “The simple
truth is that we face a crisis of accountability”288.
Funds regularly go unspent. Recurring challenges is the need to ensure proper alignment of
planning, expenditure and reporting. Furthermore, measuring and monitoring planned
283
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October
284
Public Service Commission (2010) State of the Public Service Report, Government Printer, Pretoria
285
Auditor-General (2009). General Report on National Audit Outcomes 2008/9. Government Printer, Pretoria
286
Auditor-General (2009). General Report on National Audit Outcomes 2008/9. Government Printer, Pretoria
287
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October, p.58
288
Zuma, Jacob (2010) Presidential Address to Meeting with Directors-General and Deputy Directors-General of
National and Provincial Government Departments, April 23
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outputs against actual outcomes – essential to measure efficiency is a real problem
throughout the public service. Monitoring non-financial date and its link to expenditure –
essential to strengthening the quality of performance reporting is also a problem. The PSC
report (2010) says performance reporting in the public service is mostly compliance base;
rather than focused on value for money and quality of services. Financial performance
indicators set by the National Treasury is set mostly for output. The quality of information to
measure performance is also patchy.
On the constitutional principal that people’s needs must be responded and the public must
be encouraged to participate in policy making, the report that some citizens had become so
angry with the unresponsive, indifferent attitude and lack of public participation of the public
service that they have sought alternative ways to draw attention to the need for public
participation through service delivery protests and demonstrations. “This development
should come as a signal to government that effective communication and public
participation must remain a fundamental priority”, it stated. Furthermore, government
needed to ensure that complaints and recourse mechanisms are ‘functional’ and that these
respond to citizens’ complaints timeously and seriously.
It says in cases where government does reach out to citizens through its ‘imbizo’ public
consultation exercises, there is no “feedback loop for communities to track whether their
concerns are addressed or not”. Furthermore, the report calls for government to introduce
guidelines prescribing minimum levels of public participation on policies. It says although
departments have public consultation options, such as conducting Citizen Satisfaction
Surveys and assembling Citizen Forums, the uptake of these by departments “has
unfortunately been inadequate”.
Many heads of departments still do not sign performance agreements with their superiors.
The PSC report (2010) says of 31 March 2010, at the level of heads of departments only
51% had been assessed on the performance. In financial terms this means that almost half
of the national budget (using 2007/2008 figures) including transfers to provinces and
municipalities (and excluding state debt costs) was controlled by accounting officers who
were not assessed for performance289. Heads of departments regularly give themselves
performance bonuses without conducting proper performance appraisals.
In terms of increasing transparency by providing the public with timely, accessible and
accurate information, the report (PSC 2010) says departments have generally struggled to
comply with the providing information to the public as required by the Promotion of Access
to Information Act since it was introduced in 2001290. The Access to Information Act
compels departments to annually report to the South African Human Rights Commission
how many request for access to information they received and how they responded to
them291. But the Human Rights Commission report compliance is very low with as many as
10 national and 71 provincial departments in the financial year 2008/2009 did not submit
such required reports to the Human Rights Commission292.
289
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October, p.59
290
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October, p.64
291
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October, p.66
292
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October, p.66
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The PSC report (2010) bemoans the fact that annual reports of departments only show a
limited move away from reporting on activities to focusing on outputs, let alone reporting
outcomes – the ideal. In many cases departments do not fully report on their strategic
objectives in annual reports, provincial governments, where the bulk of public services are
rolled out, are particularly guilty. Annual reports only get published five months after the
end of the financial year. Clearly, more reporting ways are needed.
In 2004, the government introduced an additional reporting mechanism, the Program of
Action (PoA). However, these only cover a limited set of performances areas relative to
what government as a whole does and focusing in particular on the commitments that the
President’s identifies in his/her annual State of the Nation address. The PSC suggests
government supplement the annual report with an Annual Citizens Report, which should
provide accessible information of performance of government departments. The report adds
“sadly very few departments seem to have found it necessary to produce these reports”.
In reporting how government has done in ensuring good human resource management293
and career development says departments are battling to fill vacant posts timeously.
Government departments generally have ineffective recruitment policies. The quality of
officials both those elected and appointed appear to be problem across the public sector in
South Africa. The PSC (2010) reports notes when referring to councilors (elected local
representatives): “Part of the challenge appears to be the caliber of some of the ward
councilors themselves, with concerns having been raised that their first concern seems not
to be the Public Service but the accrual of wealth at the expense of poor communities” 294.
The Department of Cooperative Governance and Traditional Affairs says that “a culture of
patronage and nepotism is now so widespread in many municipalities that the formal
municipal accountability system is ineffective and inaccessible to many citizens 295.” In late
2010, Cabinet approved the Municipal Systems Amendment Bill for approval to parliament
which will prohibit office bearers in political parties from being appointed to senior
management positions in municipalities296. Political appointees who lack the necessary skills
have often been appointed to positions in the public service, which has been partially
blamed for the dysfunctional municipalities297.
Reporting on progress made in making the public service broadly representative of the
people of South Africa, the PSC states the public service now reflects the demographic
composition of the country. However, it appears that a lot of focus has been on reaching
numeric targets. Less progress had been made on reaching gender representativity – the
target is 50% parity. Only 1.7% of people with disabilities are employed in the public
293
The government has tried to build a pool of middle managers to compete for senior management positions. In
2005 the government adopted a Generic Competency Framework and the year thereafter an Accelerated
Development Program for middle managers. It also introduced an action learning training program called Khaedu
to give senior managers continues workplaces training.
294
Public Service Commission (2010) State of the Public Service Report 2010: Integration, Coordination and
Effective Service Delivery. Pretoria, Government Printer, October, p. 47
295
Department of Cooperative Governance and Traditional Affairs (2009) State of Local Government in South
Africa: Overview Report: National State of Local Government Assessments. Working Documents, Section 2.4 and
2.5.
296
The bill is opposed by some ANC leaders and trade unions. With the South African Municipalworkers’ Union
already publicly declared their opposition to the bill [Shoba, Syabongakonke (2010) Municipal managers face a
choice. Business Day, September 30
297
See Shoba, Syabongakonke (2010) Municipal managers face a choice. Business Day, September 30
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service – a target of 2% is set. In both cases there has not been the kind of targeted
recruitment and retention strategies needed.
8. Recommendations
8.1. General lessons from SOE reforms in comparable countries
Listed SOEs which follows listing rules and company law appear to perform better
on corporate governance, and Statoil, Vale in Brazil, and Temasek in Singapore,
are cases in point. In Singapore, Temasek, must adhere to the company law, is
governed by a board that is “commercially-orientated” and must “earn a
reasonable return on investments”298.
Competent, professional and merit-based boards and executives are crucial to the
improvement of the performance of SOEs.
All comparisons show that the best performing SOE boards were selected on
competency basis with criteria including “merit, professional qualifications,
experience, the personal qualities of the candidate, independence and
diversity”299, being absolutely crucial.
“Diversity in the members’ profiles and backgrounds gives the board a range of
values, views and sets of competencies. It can lead to a wider pool of resources
and expertise. Different leadership experiences, national or regional backgrounds
or gender can provide effective means to tackle ‘group-think’ and generate new
ideas.”300
Diversified expertise on a board is crucial for better performance of SOEs. “A
variety of professional backgrounds is needed to ensure that the board as a whole
understands, for example, the complexities of global markets, the company’s
financial objectives and the impact of the business on different stakeholders
including employees”301.
Generally, in countries where politicians dominate boards, the performance of
SOEs is poor. In Sweden, when it introduce a rule that less than 5% of all SOE
boards should be politicians or former politicians302, there appeared to be
remarkable increase in performance of their SOEs.
298
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.8
299
European Commission (2011) Green Paper: The EU Corporate Governance Network, Brussels, p. 6
300
European Commission (2011) Green Paper: The EU Corporate Governance Network, Brussels, p. 6
301
European Commission (2011) Green Paper: The EU Corporate Governance Network, Brussels, p. 8
302
Frederiksson, Lars Erik (2010) Board composition and nomination – reflections from a practitioner. Presentation
to the 2nd meeting of the OECD Global Network on Privatisation and Corporate Governance of SOEs, March 2-3,
Paris
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Therefore, “accurate assessment of skills and expertise is the single most
important factor in selecting new non-executive board members”303. However,
regular evaluation – by an external evaluator - of board performance, both
individually and collectively is also crucial to better SOE performance.
In Brazil, Petrobras annually evaluates individual board members and the board
collectively.
Such as evaluation must measure the “competence and effectiveness of each
board member and of the board committees, and how well the board has
performed against any performance objectives set” 304.
The best SOEs “maximize returns on state capital”305. However, returns on state
capital should be much broader defined. Sweden is one example where the return
on state capital is defined as providing “economic value adds”, which is calculated
as the SOE “earning more than its cost of debt and equity capital” 306.
South Korea has in recent years moved to a system of using economic value add
as the key performance indicator for their SOEs.
In New Zealand, SOEs are expected to be: (a) as profitable and efficient as
comparable businesses in the private sector; (b) a ‘good employer’; (c) show
social responsibility307.
Furthermore, SOEs that only focused on social goals, without expecting returns on
state capital or economic value add, has in most cases led to poor SOE
performance308.
8.2.
Streamline
recruitment
Chairperson, Board and CEO
and
appointment
process
of
Currently the shareholder is actually operating both as the shareholder and the board.
303
European Commission (2011) Green Paper: The EU Corporate Governance Network, Brussels, p. 8
European Commission (2011) Green Paper: The EU Corporate Governance Network, Brussels, p. 9
305
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.22
306
Stewart, Bennett, G. (III) (1991) The Quest for Value. HarperCollins, New York
307
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.22
308
Mako, William and Zhang, Chunlin (2004) State Equity Ownership and Management in China: Issues and Lessons
from International Experience: Presentation to the Policy Dialogue on Corporate Governance in China, hosted by
the Shanghai Stock Exchange, Organization for Economic Co-operation and Development (OECD) and
ERI/Development Research Center, Shanghai, China, 25-26 February, p.24
304
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Enabling legislation of most SOEs says the Executive Authority should appoint the CEO of
the SOE. However, this brings obvious accountability problems: when the executive
authority appoints the CEO, to who should the CEO be accountable – to the Executive
Authority or the board. In many cases the CEO of SOEs that were appointed by the
Executive Authority often see their role as reporting to the Executive Authority, rather than
the board. This means that the board is emasculated – as they cannot hold the CEO
responsible, as he or she can bypass the board and go directly to the Executive Authority.
This blurring of the responsibility between the shareholder (line minister/executive
authority) and those of the board has undermined operational effectiveness. This has often
meant SOE boards have in paper the responsibility, but in reality lacks the authority to
execute their mandates. This has been at the heart of most of the SOE conflicts between
CEOs and boards. As one analyst noted: “The 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”309.
The first prize is for SOEs and Executive Authority to follow King III and allow the board to
nominate for the chairperson, and to recruit and appoint the CEO and other directors – as
well as having the power to dismiss them - in consultation with the line minister/executive
authority. The emphasis must be on the board that recruits and propose the candidates.
In this scenario, directors of the board can be dismissed by the shareholder/executive
authority/line minister if it does not perform. However, this must be done formally at the
annual general meeting of the SOE.
However, in the meantime SOEs should be more pro-active and “engage the executive
authority … to bring its input to bear on the executive authority’s decision as to who to
appoint”310. One way to do this is for the SOE’s board to pro-actively propose a shortlist of
capable candidates and forward these to the Executive Authority for consideration. If failing
to persuade the executive authority on its list of capable candidates, the board could insists
that the contract of the executive authority appointed CEO states clearly that the CEO is
accountable to the board311.
8.3. Making SOE boards merit-based
The nomination process for SOE board must be made more transparent. The Protocol on
Corporate Governance in SOEs states that the Executive Authority/Line Minister should
establish a Nomination Committee. The Protocol prescribes that the executive authority
invites all the chairpersons and CEOs of SOEs to sit on the committee, and to recommend
“the best qualified people for each SOEs board positions” to the executive authority, “taking
into account the specific needs of each SOE” 312. The Protocol states that the Nomination
309
Sandra Burmeister, CEO of Landelahni Recruitment Group, quoted in Janice Roberts (2012) Sound governance
‘vital’ for state enterprises. The Times, February 27
310
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.2
311
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.2
312
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.12.3.1, p.
24
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Committee “should provide the Executive Authority with a list of candidates suitable for
board membership, which list may include names of retiring directors. The shareholder is,
however, not obliged to appoint a candidate proposed by the committee” 313.
This Protocol nomination process has not been implemented in the past. Some
SOEs have board nominating committees that provide a list of candidates to the executive
authority under which the SOE falls. The executive authority has the final say in appointing
board members.
As a way forward, either the SOE Nominations Committee should be expanded to
make recruitment to boards for all the SOEs, not only those based in the
Department of Public Enterprises. In such a scenario, the make-up of the
Nomination Committee could either be changed to include a mix of current and
former SOE CEOs/Chairpersons, as well as non-public sector members, to include
civil society, academics and industry leadership. Nominations for SOE boards could
then be forwarded to the committee, which would make the shortlist and pass it
on to the Executive Authority for a decision.
Another approach could be the approach in which the boards of the SABC are selected.
Public nominations are called for, which are then forwarded to parliament. The
parliamentary committee which oversees the SOE then makes a shortlist and interviews the
nominees. The parliamentary committee recommends the final list to the Cabinet and
President, which approves it. The constituted board should then elect its chairperson.
Appointments to SOE boards must be made less political. It should become
genuinely merit-based. There will have to be independent directors. Boards should
be chosen from a wider pool, more diverse ideological, political, race, gender,
industry and specialists – than currently.
When board members are nominated the skills, merit and ‘fit’ of the candidate must be key
considerations. The nomination process for board members must be structured and
transparent, including appraisals of board members. In appointing directors to SOEs, there
should be “a clearer set of rules who should be allowed to act (as director), not just a few
basic indicators of who should not”314. The idea of an effective SOE board “needs to be built
around ethics, skills and judgment”315. Furthermore, we need to move away from the
emphasis on ‘constituencies’ as a form of representation on SOE boards 316.
Listed SOEs must comply with the rules that apply to listed companies 317 in terms of the
board nomination process. Formal training for SOE board members, preferably developed
with non-state institutions318 may help improve the competence of SOE board members.
313
Department of Public Enterprises (2002) Protocol on Corporate Governance in the Public Sector. 5.1.12.3.1, p.
25
314
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
315
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
316
Mahoney, Pat (2009). Boards of Directors – The Intrusion of Anti-Corporate Governance issues: Paper for CIS
Corporate Governance Conference, Sept.10-11, Johannesburg
317
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
318
World Bank (2006) Held by the visible hand – the challenge of Corporate Governance in Emerging Markets. New
York, World Bank Publications, p.26
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The South African Reserve Bank, though a constitutional entity has very “fit and proper”
requirements for individual board members they must pass to be appointed to the board. It
also has a strict compulsory screening for prospective board members.
The Reserve Bank board has very clear skills requirement per board member for its 15
member board. For example, it is required an expert on mining, one on labour, one on
agriculture and one finance be appointed. Such a clear skills requirement policy per board
member should be adopted by SOEs. Furthermore, perhaps, a solution to the deployment
constraint, which is unlikely to go away, would be to have a fifth of every board of SOE
reserve for government appointees, which could be ‘deployed’ cadres – and the rest be
appointed on strictly merit basis. It will be prudent to restrict SOE board members to only
three or four SOE boards.
8.4. Differences between SOE Governance legislation and codes
undermines corporate governance
There are differences between the SOE enabling Acts, PFMA, Companies Act, King III and
the Protocol on Corporate Governance for Public Sector Entities. These differences
undermine good corporate governance in the SOE sector. The long-term objective should be
to align the different laws, codes and standards governing SOE corporate governance. In
differences in laws, codes and standards the PFMA [Section 3(3)] overrides. The Protocol on
Corporate Governance for Public Sector Entities is based on King II and is thus - outdated.
The Protocol will clearly have to be amended to take into cognizance the changes that
brought about King III, which ironed out some of the weaknesses of King II. An amended
Protocol on Corporate Governance in the Public Sector, made compulsory for all
SOEs should be considered.
The King III is currently the most well-round governance code – however, in terms of SOEs
it is a voluntary code. The Companies Act of 2008 applies to SOEs as well. However, the
weakness of the Companies of 2008 in relation to SOEs is the fact that line
minister/executive authority can exempt a SOE under its jurisdiction from aspects of the
Companies Act. Furthermore, the enabling legislation of a SOE can override aspects of the
Companies Act. This means that SOEs could conceivable opt out of the two key corporate
governance texts in South Africa.
The PMFA covers mostly financial management issues within the public sector, while the
Companies Act covers aspects much broader than just financial management issues319. It
Furthermore, the enabling acts in many cases are either limited in terms of corporate
governance – or undermine new post-global financial crisis ideas on corporate governance
as set out in King III. In the long-term the aspects of enabling legislation that goes
against new ideas on corporate governance should be amended. The King III code is
not compulsory – which is off course its weakness also, and is based on “apply or
explain”320. Thus SOEs can conceivably opt out of following its prescription when they have
complied with the PFMA.
319
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.4
320
King III Report on Corporate Governance in South Africa – 2009
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Often in cases of irreconcilable differences between the laws, many SOEs have often used
these differences to comply with the basic conditions of the PMFA only. Furthermore, there
is generally a ‘compliance’ or tick-box culture in the public sector and SOEs, where
institutions only comply where absolutely necessary. Yet, it won’t do for SOE boards in such
cases, to “wash their hands off” it321. One solution to this problem is that all these laws,
codes and standard – Enabling Acts, Companies Act, PFMA and King III - should be read
together, and the best standard should be used, if the relevant laws or codes prove
insufficient.
Firstly, the “fiduciary duties of directors and management of conflicts of interests are
expressed differently in the Companies Act, King III and the PFMA” 322. The Companies Act
includes certain common law duties, but also includes additional duties for directors.
Fiduciary duties require that directors act in good faith and for a proper purpose, in the best
interest of the company and with a degree of care, skill and diligence 323. It says the
director324 should act with the degree of care, skill and diligence that may reasonably be
expected of a person who carries out the same functions as a director in relation to the SOE
and who has the knowledge, skill and experience of that director 325. The Companies Act puts
the accent on the standard of behavior of individual directors. The Companies Act goes
beyond just financial management aspects of boards’ behavior, to broader responsibilities;
whereas the PMFA focuses on financial management aspects 326.
The PFMA states the board must act with fidelity, honesty, integrity327 and in the best
interest of the SOE in managing the financial affairs of the SOE328; and exercise the duty of
utmost care to ensure reasonable protection of the assets and records of the SOE 329.
Furthermore, directors should seek to prevent any prejudice to the financial interests of the
state330. King III says the board must always act “in the best interests of the company” 331.
In terms of the fiduciary duties of the board is a specific case where the boards of SOEs
should not read the PMFA as ‘excluding the provisions of the Companies Act’ 332, but should
rather in conjunction with King III, seen as complementary – and making up for any PFMA
shortcomings.
321
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.2
322
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.2
323
Companies Act (s76)
324
Acting in the best interests; and with care, skill and diligence are described by the Act as [Section 76(a-c)] as:
having taken reasonable diligent steps to become informed; either had no material personal interest in the matter
or complied with the provisions of Section 75 of the Companies Act; and made or supported a decision and had a
rational basis for believing, and dif believe that the decision was in the best interests of the SOE.
325
Section 76
326
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.6
327
The PFMA (Section) says a director of the board many not: Act in a way that is inconsistent with the
responsibilities assigned to the board in terms of the PFMA; use the position or privileges of, or confidential
information obtained as, the board or a director, for personal gain or to improperly benefit another person.
328
Section 50(1)
329
Section 50(1)
330
Section 50(1)
331
King III, principle 2.14
332
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.6
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How board members should handle conflict of interest issues are differently expressed in the
PMFA, Companies Act and King III. The Companies Act puts the onus on the director to
make sure he or she is not guilty of conflicts of interest breaches. The Companies Act
requires of directors not act in such a way that their personal interests undermines their
duties to act in the company’s best interests 333. The Companies Act “makes provision for a
wider spectrum of conflicts (of interest) that may arise, when directors or related persons
have a personal financial interest in matters considered by the board” 334. Furthermore, the
Companies Act requires director not only to disclose their own personal financial interest,
but also that of ‘related persons’ that “the director knows or ought to know about” 335. The
Companies Act336 says a director may not use his/her position or information obtained in
his/her capacity as a director to gain advantage for himself/herself or for a person other
than the SOE or its wholly owned subsidiary or knowingly cause harm to the SOE or
subsidiary company337.
The PFMA says on request, a director of an SOE must disclose to the Minister responsible for
the SOE or the legislature to which the SOE is accountable, all material facts, including
those reasonable discoverable, which in any way may influence the decisions or actions of
the Minister or that legislature338. Furthermore, the PFMA says that a director must disclose
to the board any direct or indirect personal or private business interest that, that member
or any spouse, partner or close family may have in the matter – and withdraw from the
proceedings when the matter is being discussed. This unless the board decides the
member’s direct or indirect interest irrelevant. King III however, goes further than both the
Companies Act and the PFMA by saying that certain conflicts of interests should not just be
disclosed timeously and managed, but should be avoided totally.
In this case (of conflict of interest) King III should serve as the guide for SOE board
members. Furthermore, many SOEs do not have a declaration of interest policy that ‘details
conflict or interest procedures’339 beyond what is prescribed by the PFMA and the Protocol
on Corporate Governance in State Entities. Ideally SOE boards so put together a detailed
conflict of interest policy and the procedures to resolve such conflicts. Such a policy should
be regularly evaluated to ascertain whether it is still relevant.
The big question whether being deployed to SOE boards (especially if it is by one lobby
group/faction) represents a conflict of interest – if this is not declared – or/and if the
deployee acts in the interest of those who deployed him or her. Furthermore, the enabling
legislation of many SOEs provide for the Executive Authority to appoint representatives from
the department itself (civil servants) on the boards of SOEs. In some cases interest groups
such as trade unions delegate their representatives to boards; yet in other cases, civil
society groups nominate their representatives (as is the case in the nomination of board
members for the SABC board) to the board of an SOE.
333
See Bouwman, Natasha (2011) New Companies Act means new corporate governance provisions. Sapa-AP,
March 17
334
Bouwman, Natasha (2011) New Companies Act means new corporate governance provisions. Sapa-AP, March
17
335
Bouwman, Natasha (2011) New Companies Act means new corporate governance provisions. Sapa-AP, March
17
336
Section 76
337
Section 76
338
Section 50
339
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.7
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The PFMA put the standards of conduct for the board as a whole entity, rather than
individual board members340. The Companies Act sets the standards and duties on individual
board members341. The Companies Act also holds individual directors personally liable for
losses incurred by companies, if it was due to a director’s fiduciary duty, skills or oversight
shortcomings, or through the neglect of other duties assigned in the Act, Memorandum of
Incorporation or because the director had engaged in a listed number of activities 342. The
limitation of the PFMA is that because it focuses responsibilities of directors on the board as
a whole individual board members’ may in some cases still escape to be held accountable
for poor oversight. In this case, in order to strengthen accountability - the Companies Act
should be used as a standard – even though the PFMA over-rides the Companies Act.
340
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.6
341
IoDSA/PriceWaterhouseCoopers (2010) State-Owned Companies: Companies Act, PFMA and King III in
Perspective. Public Sector Working Group: Position Paper 1, Johannesburg, p.6
342
Bouwman, Natasha (2011) New Companies Act means new corporate governance provisions. Sapa-AP, March
17
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Annexure 1
SOE Board & Executive Management Appointment
and Recruitment Legislation, Composition and Makeup
Selected snapshots of the 2009/2010 financial year
A. SOE Board & Executive Management Recruitment and Appointment
Legislation
SOE Appointment of Board Legislation
Name of SOE
Line Ministry
Act
Act related to the Board
Development
Bank of
Southern
Africa
Department of
Finance
Development
Bank of Southern
Africa Act[No.13
of 1997]
Government
Gazette, Vol.
382, No 17962,
25 April 1997343
Board of directors
7. (1) The Board of Directors of the Bank shall
consist of not fewer than ten and not more than
fifteen directors: Provided that if at any time the
number of directors holding office at any time
falls below ten, the remaining directors shall
manage the affairs of the Bank, until the
vacancy or vacancies can be filled by the
appointments by the Minister or the relevant
shareholders, as the case may be.
2. The directors of the Bank shall be appointed, in
the manner determined in the regulations, by
the Minister and the shareholders, as follows:
a. The Minister shall be entitled to appoint the same
proportion of the total number of directors as the
number of shares held by the Government bears to
343
http://www.info.gov.za/acts/1997/act13.htm
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the total number of shares issued; and
b. the institutional or other shareholders 344 shall be
entitled to appoint the remaining number of
directors, each in proportion to its holding in shares.
3. Directors shall be appointed on the grounds of
their ability and experience in relation to
socioeconomic development, development
finance, business, finance, banking and
administration
4. The chief executive officer, any executive
manager or member of the staff of the Bank
may be appointed as a director.
5. The board shall, with the consent of the
shareholders, elect one of its number as the
chairperson of the board. The person so elected
shall act as chairperson for as long as the board
determines.
6. No decision or act of the board, or act
performed under the authority of the board,
shall be invalid by reason only of the fact that a
person who participated in the proceedings at
the meetings in question was elected as a
director by the institutional shareholders without
the provisions of the regulations having been
observed.
Eskom
344
Department of
Public
Enterprise
With effect from 1
July 2002, Eskom
was converted
from a statutory
body into a public
company as
Eskom Holdings
Limited, in terms
of the Eskom
Conversion Act,
13 of 2001. The
two-tier
governance
structure of the
Electricity Council
and the
Management
Board was
replaced by a
Board of
Directors
According to Eskom’s website:
The government of the Republic of South Africa is
Eskom’s sole shareholder. The shareholder
representative is the Minister of Public Enterprises.
Eskom has a unitary board structure with a majority
of non-executive directors. All of the non-executive
directors are independent directors, appointed by
the shareholder, and are drawn from diverse
backgrounds (local and international) and reflect
South Africa’s demographics. Their contributions to
the board consisting of a wide range of experience
and professional skills, is invaluable. These skills
are supplemented at committee level by external
committee members.
Currently the board consists of 11 non-executive
directors and the chief executive.
Eskom’s articles of association stipulate that the
shareholder will, after consulting the board, appoint
a chairman, chief executive and non-executive
"institutional shareholders" means the holders of shares in the Bank, excluding the Government of the Republic
and any individual, but including national, international or multilateral institutions
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directors. The remaining executive directors are
appointed by the board after obtaining shareholder
approval.
Good corporate governance requires that the
composition of the board be reviewed on a regular
basis. The rotation of directors at regular intervals is
accepted as standard practice as it ensures that the
board remains dynamic and does not become
stagnant in terms of its thinking and abilities.
However, it is important that it is managed in such a
way that the rotation of directors does not lead to a
disruption in the operations of the business and that
the board is well-balanced in terms of skills,
expertise and demographics (race, gender and
people with disabilities).
The term of office of non-executive directors is a
maximum of three years. Retiring directors are
eligible for re-appointment.
Executive directors are full-time employees and as
such are subject to Eskom’s conditions of service.
Board meetings are scheduled annually in advance.
Special meetings are convened as necessary to
address specific issues. Directors or external
committee members unable to attend meetings may
use teleconferencing facilities.
Delegation of authority
The board has the authority to lead, control, manage
and conduct the business of Eskom, including the
authority to delegate its powers. Its aim is to ensure
that Eskom remains a sustainable and viable
business of global stature. Its responsibilities are
facilitated by a well-developed governance structure
through board committees, including the executive
management committee (Exco), as well as
subcommittees of Exco and a comprehensive
delegation-of-authority framework. This framework
assists decision-making without diluting director
accountability and responsibility.
Board evaluation and performance
A performance evaluation of the board and
individual directors is conducted at the end of the
financial year. Any shortcomings are addressed and
areas of strength consolidated. The performance of
board committees is evaluated against their terms of
reference. The human resources and remuneration
committee facilitates the evaluation of senior
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management.
Industrial
Development
Corporation
Department of
Trade and
Industry
Industrial
Development
Corporation Act
(Act No 22, 1940
as amended
(the “IDC Act”).
The Corporation has a unitary Board of Directors,
appointed by the Department of Trade and Industry.
It represents many sectors of our economy and has
the authority to approve new application finance and
expenditure of capital, which fall outside approved
limits and policies as well as the ones that have
significant strategy corporate implications. 345
Land Bank
Department of
Agriculture
Land and
Agricultural
Development
Bank Act 2002346
Control of Bank by Board
4. (1) The Minister must appoint a board of directors
to manage the business of the Bank.
(2) Whenever it is necessary to appoint a member of
the Board the Minister must. by notice in the
Gazette as well as in other appropriate media and
by written invitation to the relevant parliamentary
committees, call for the nomination of persons
who are not disqualified in terms of section 10 to
serve on the Board.
Functions of Board
5. (I) The Board must(a) direct and control the operations and
business of the Bank;
(b) implement the policies laid down in this Act:
(c) develop strategies for the efficient management
of the Bank; and
(d) develop a code of good practice.
best interests of and for the benefit of the Bank.
(2) In carrying out its functions, the Board must
exercise utmost care and act in the
(3) The Board has all the powers necessary to
carry out its functions in terms of this Board
accountability
6. Board members are individually and collectively
accountable to the Minister.
Public
Investment
Cooperation
345
346
Department of
Finance
Public Investment
Cooperation Act
2004347
Board of directors
6. (1) The Minister must, in consultation with
Cabinet, determine and appoint the
(2) The Minister must, when appointing the board,
have due regard to the nominations
(3) The members of the board must be appointed on
http://www.idc.co.za/IDC%20Corporate%20Governance.asp
http://www.info.gov.za/view/DownloadFileAction?id=68049
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69
South African
Airways
Telkom
Transnet
348
Department of
Public
Enterprise
Department
of
Communication
Department of
Transport
No. 5 of 2007:
South African
Airways Act,
2007348
2003 Telkom was
listed on the New
York Stock
Exchange and
JSE Limited
Legal Succession
to the South
African Transport
the grounds of their knowledge members of the
board. submitted to him or her by the depositors and
experience, with due regard to the FAIS Act, which,
when considered collectively, should enable the
board to attain the objects of the corporation.
(4) The Minister may issue directives to the board
regarding the management of the corporation if(a) it is in the public interest; or
(6) it is reasonably necessary to do so.
The Act makes no mention of the appointment of the
Board, but notes the following:
Transfer of SAA shares and SAA interests
3. (1) The Minister and Transnet, with the
concurrence of the Minister of Finance,
must determine by agreement— 25
(a) which SAA claims and which assets, liabilities,
rights or obligations of
Transnet in connection with SAA constitute SAA
interests; and
(b) the consideration payable for the transfer of SAA
shares and SAA interests to the State.
(2) In the absence of an agreement between the
Minister and Transnet on any matter 30 referred to
in subsection (1) that matter must be finally
determined by the Minister, with the concurrence of
the Minister of Finance.
(3) With effect from the transfer date—
(a) the State becomes the shareholder and member
of SAA; and
(b) the Minister exercises all the rights attaching to
SAA shares and SAA interests 35 on behalf of the
State, including the rights as shareholder and
member of SAA.
Shareholding:
38.8% Government of South Africa
33.6% Free Float1
15.6% Public Investment Cooperation
7.2% Elephant Consortium
3.8% Telkom treasury stock
“The appointments of the board are made by the
Government of South Africa, Telkom's Class A
shareholder holding 39.8 percent of the issued
share capital as at 31 January 2011.” 349
(1) The affairs of the Corporation shall be managed
by a Board of Control of not more than 11 members
including the chairman, who shall be appointed and
http://www.info.gov.za/view/DownloadFileAction?id=71986
Statement by the Ministry on the appointment of Telkom SA Limited CEO- 17 March 2011
http://www.doc.gov.za/index.php?option=com_content&view=article&id=491:statement-by-ministry-on-theappointment-of-telkom-sa-limited-ceo&catid=88:press-releases
William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
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349
69
70
Services Act No9
of 1989 350
dismissed by the Minister.
(2) At least—
(a) one of the members of the Board of Control shall
be an officer in the Department of Transport;
(b) one of the members of the Board of Control shall
be an officer in the Department of Finance;
one of the members of the Board of Control shall be
an officer in the Department of the State
Expenditure;
(c) one of the members of the Board of Control shall
be nominated by the Association of Regional
Services Councils; and
(d) three of the members of the Board of Control
shall have expertise and experience in the
management of a private sector enterprise.
Wording of Sections
(3) The Minister shall appoint the Corporation´s first
Board of Control with effect from the date referred to
in section 3 (1).
(4) The first Board of Control shall appoint a
secretariat which shall carry out, on a full-time basis,
such functions as the Board may depute to it.
(5) The Board of Control may, subject to such
conditions as it may stipulate, delegate any of its
powers to any member of the Board, employee or
other person with or without the power to delegate
such power further.
(6) Any action taken by a member of the Board of
Control, employee or other person on behalf of the
Corporation may be ratified by the Board of Control.
(7) The Board of Control shall ensure that any
directive issued under section 23 (6) is taken into
consideration in the management of the affairs of
the Corporation during the financial year concerned.
1992.]
Transnet notes the following:
“The Transnet Board of Directors consists of
individuals from diverse racial, gender, and
business, professional, financial and cultural
backgrounds, which is crucial to the successful
direction of corporations in the present day South
Africa. After consulting with the board, the directors
are appointed by the respective shareholders. All
directors are equally accountable for the proper
stewardship of the Company's affairs. The executive
directors have specific responsibilities for the
various businesses and functions of the Group.”351
350Legal
Succession to the South African Transport Services Act No9 of 1989
http://www.pmg.org.za/files/docs/080610succession.pdf
351 http://www.transnet.co.za/AboutUs/BDirectors.aspx
William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
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71
B. 2009/2010 Board Experience of Selected SOE Boards: A
snapshot
Eskom
Name
Previous
Other SOE
SOE Board Board
Mr. C J Campbell
None
None
Ms L C Z Celle
None
None
Mr. B Dames
None
None
Mr. S D Due
None
None
Mr. B L Fanaroff
None
None
Mr. L G Josefsson None
None
Mr. H B Lee
None
None
Ms W E Lucas-Bull None
None
Mr. P M Makwana
None
None
Ms B Mehlomakhulu Pebble Bed None
Modular
Reactor
Mr. J Mirenge
None
None
Mr. J R D Modise
None
None
Ms U Z Nene
None
None
Mr. P ‘O Flaherty
None
None
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72
South African Airways (SAA)
Name
Previous Other SOE Board
SOE
Board
Mr. A A Bouchon
None
None
Ms C Carolus
None
None
Mr. T Daka
None
None
Mr. T C Jantjies
None
None
Ms Y Kwinana
None
None
Prof D Lewis
None
None
Mr. R Looser
None
None
Mr. B F Mohale
None
South African
Express Airways
Ms D C Myeni
None
None
Ms S Mzimela
South
African
Express
Airways
Board
None
Mr. J Ndlovu
None
None
Adv L Nkosi-Thomas None
None
Mr. L Rabbets
None
None
Mr. Z J Sithole
None
None
Ms M Whitehouse
None
None
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73
Transnet
Name
Previous
Other SOE
SOE Board Board
Prof. G K Everingham
None
None
Ms N B P Gcaba
None
None
Mr. M J Hankinson
None
None
Dr N D Haste
None
None
Mr. P G Joubert
South
African
Airways
Board
None
Ms N N Matyumza
None
None
Mr. M P Moyo
None
None
Ms N R Ntshingila
None
None
Ms K C Ramon
None
None
Mr. A Singh
None
None
Mr. CF Wells
None
None
C. Compliance of Selected SOE Boards
2009-2010 snapshot
Compliance of the SOE Board 352
352
PriceWaterHouseCoopers http://www.iodsa.co.za/downloads/documents/1007132_StateownedcompaniesPFMAandKingIIIperspectiveFinal.pdf
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73
74
Companies Act
PMFA
King III
Section 66. (1) provides that
the business and affairs of a
company must be managed
by, or be under the direction
of, its board, which has the
authority to exercise all of the
powers and perform any of
the functions of the company,
except to the extent that
this Act or the company’s
memorandum of incorporation
provides otherwise.
Section 51 determines that
the board of an SOC must
ensure that it has and
maintains:
The role and functions of the board are
set out as follows in King III:
Effective, efficient and •
transparent systems of
financial and risk
management and internal
control;
P Principle 2.1: The board should act as
the focal point for and custodian of
corporate governance;
P Principle 2.2: The board should
appreciate that strategy, risk,
performance and sustainability are
inseparable;
A system of internal • audit
P
under the control and
direction of an audit
committee complying with
and operating in accordance P
with the Treasury Regulations
and the PFMA;
Principle 2.3: The board should provide
effective leadership based on an ethical
foundation;
Principle 2.4: The board should ensure
that the SOC is and is seen to be a
responsible corporate citizen;
Principle 2.5: The board should ensure
An appropriate • procurement that the SOC’s ethics are managed
and provisioning system
effectively;
which is fair, equitable,
transparent, competitive and • Principle 2.6: The board should ensure
cost effective;
that the SOC has an effective and
independent audit committee;
A system for properly •
evaluating all major capital
projects prior to a final
decision on the project.
P Principle 2.7: The board should be
responsible for the governance of risk;
P Principle 2.8: The board should be
responsible for information technology
(IT) governance;
P
The board must take effective
and appropriate steps to
collect all revenue due to the
SOC; prevent irregular
P
expenditure, fruitless and
wasteful expenditure, losses
resulting from criminal
conduct, and expenditure not P
complying with the
operational policies of the
SOC and manage available
working capital efficiently and P
economically.
The board is also responsible for
P
the management and
safeguarding of the assets
and for the management of
the revenue, expenditure and P
liabilities of the SOC.
The board must comply with any
tax, levy, duty, pension and
74
Principle 2.9: The board should ensure
that the SOC complies with applicable
laws and considers adherence to nonbinding rules, codes and standards;
Principle 2.10: The board should
ensure that there is an effective riskbased internal audit;
Principle 2.11: The board should
appreciate that stakeholders’
perceptions affect the SOC’s reputation;
Principle 2.12: The board should
ensure the integrity of the SOC’s
integrated report;
Principle 2.13: The board should report
on the effectiveness of the SOC’s
system of internal controls;
Principle 2.14: The board and its
directors should act in the best interests
of the SOC;
Principle 2.15: The board should
William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
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75
audit commitments as
required by legislation.
The board must take effective
and appropriate disciplinary
steps against any employee
of the SOC who contravenes
P
or fails to comply with a
provision of the PFMA;
commits an act which
undermines the financial
management and internal
control system of the SOC; or
makes or permits an irregular
expenditure or a fruitless and
wasteful expenditure.
consider business rescue proceedings
or other turnaround mechanisms as
soon as the SOC is financially
distressed as defined in the Companies
Act;
Principle 2.16: The board should elect a
chairman of the board who is an
independent non-executive director.
The CEO of the SOC should not also
fulfill the role of chairman of the board;
and
Principle 2.17: The board should
appoint the chief executive officer and
establish a framework for the delegation
of authority
The board is responsible for
the submission by the SOC of
all reports, returns, notices
and other information to
Parliament, and to the
relevant Minister or Treasury,
as may be required by the
PFMA.
The board must promptly
inform the National Treasury
of any new entity which that
SOC intends to establish, or
in the establishment of which
it takes the initiative and
allows the National Treasury
a reasonable time to submit
its decision prior to formal
establishment; and
The board must comply, and
ensure compliance by the
SOC, with the provisions of
this Act and any other
legislation applicable to the
SOC.
The board must promptly
inform the National Treasury
of any new entity which that
SOC intends to establish, or
in the establishment of which
it takes the initiative and
allows the National Treasury
a reasonable time to submit
its decision prior to formal
establishment; and
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The board must comply, and
ensure compliance by the
SOC, with the provisions of
this Act and any other
legislation applicable to the
SOC.
D. SOE Board Racial, Gender Composition (2009-2010 Snapshot)
Name of SOE
SOE Board Racial, Gender Composition (2009/2010 snap-shot)
Board Composition
Development
Bank of
Southern
Africa
Male
Eskom
Male
Female
9
Blck
4
4
Blck
3
76
8
Blck
4
Female
Whte
2
Whte
2
Clrd
1
Clrd
2
Indn
1
Indn
Kore
an1
4
Blck
2
Wht
2
Wht
1
Clrd
0
Indn
0
Clrd
0
Indn
0
William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
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77
Industrial
Development
Corporation
Male
Female
10
Blck
6
5
Blck
4
Public
Investment
Cooperation
Male
South African
Airways 353
10
Blck
7
Clrd
0
Indn
0
Wht
1
Clrd
0
Indn
0
Clrd
0
Indn
0
Clrd
0
Indn
0
Clrd
0
Indn
0
Clrd
Indn
0
1
Female
Whte
1
Clrd
0
Indn
2
3
Blck
2
Wht
1
.
Male
9
Blck
4
Telkom
Whte
4
Female
Whte
5
Clrd
0
Indn
Male
7
Blck
3
6
Blck
5
Wht
1
Female
Whte
2
Clrd
0
Indn
2
2
Blck
1
Wht
3
Transnet
Male
Female
11
Blck
Whte
Clrd
Indn
7
Blck
6
3
0
2
6
Wh
t
0
References
Department of Communications: Statement by the Ministry on the appointment of Telkom
SA Limited CEO- 17 March 2011
http://www.doc.gov.za/index.php?option=com_content&view=article&id=491:statementby-ministry-on-the-appointment-of-telkom-sa-limited-ceo&catid=88:press-releases
Eskom- http://www.eskom.co.za/live/content.php?Category_ID=562
77
William Gumede Wits P&DM SOEs Boards, Executives and Recruitment PRC
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78
IDC-http://www.idc.co.za/IDC%20Corporate%20Governance.asp
Government Information website:
http://www.info.gov.za/view/DownloadFileAction?id=133658
http://www.info.gov.za/acts/1997/act13.htm
http://www.info.gov.za/view/DownloadFileAction?id=68049
http://www.info.gov.za/view/DownloadFileAction?id=71986
http://www.info.gov.za/view/DownloadFileAction?id=133658
Dr JW Hendrikse “The Impact of the New Companies Act on Business and Legislation on
Boar and Directors- Responsibilities and Risks.”Paper for CIS Corporate Governance
Conference on 10 to 11 September 2009
“Hogan searches for CEO.” November 2009.Mail and Guardian
http://www.mg.co.za/article/2009-11-19-hogan-searches-for-ceos
Lund Troy “SOE muddle calls for state clarity”
June 2010 http://www.fin24.com/Economy/SOE-muddle-calls-for-state-clarity-20100623
Parliamentary Monitory Group:
Legal Succession to the South African Transport Services Act No9 of 1989http://www.pmg.org.za/files/docs/080610succession.pdf
http://www.pmg.org.za/report/20101103-shareholder-oversight-and-risk-management
Parliamentary Monitoring Group -Date of Publication: 10 September 2010
http://www.pmg.org.za/node/22490
PriceWaterHouseCoopers/IDOSA http://www.iodsa.co.za/downloads/documents/1007132_StateownedcompaniesPFMAandKingIIIperspectiveFinal.pdf
Department of Public Enterprise- Annual Report 2009/2010
Telkom-https://secure1.telkom.co.za/ir/sustainability/management/board-of-directors.jsp
Tempin S “Institute Warns on Succession Plan for Boards.” Business Day June 2010
http://www.netassets.co.za/article.aspx?id=1156930
Transnet-http://www.transnet.co.za/AboutUs/BDirectors.aspx
Treasury: Governance Oversight Role over State Owned Entities
http://www.treasury.gov.za/publications/other/soe/Governance%20Oversight%20Role.pdf
78
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