State-owned companies’ board games kill prospects

Governance and leadership are "the yin and the yang of successful organisations. If you have leadership without governance, you risk tyranny, fraud and personal fiefdoms. If you have governance without leadership you risk atrophy, bureaucracy and indifference," says Mark Goyder, a British author and governance expert.

For years, the boards of SA’s state-owned enterprises (SOEs) acted as though they were part of a social experiment or the cast of a reality show, gobbling taxpayers’ money while testing their bounds of loyalty.

No wonder newly elected ANC president Cyril Ramaphosa said at the party’s recent anniversary celebration: "We need also to act with urgency and purpose to restore SOEs as drivers of economic growth and development. Several key SOEs are in financial distress, threatening not only their own operations, but the national fiscus.

"Many of these enterprises have experienced serious governance lapses and poor delivery of their mandate," he said. "These challenges have been exacerbated by state capture, through which billions of rand have been illegally diverted to individuals.

"Governance of these SOEs has been severely weakened and confidence in the public sector generally has been undermined.… We will act urgently and decisively to improve governance, financial management and performance in all SOEs and protect them from improper interference.

"Corruption in SOEs and other public institutions has undermined [the] government’s programmes to address poverty and unemployment, weakened key institutions, discouraged investment and contributed to division within the ANC and the alliance."

Maybe that is why there are winds of change at Eskom and more changes expected in other SOE boards and executive management.

A good board has a confluence of qualifications, talent, experience, industry expertise and personality, and a relationship with the management team, shareholders or owners.

Like the engine of a car, a board of directors is the sum of its parts. Directors should have complementary talents and demonstrate integrity, the ability to think strategically, intuition, vision, the capacity to make effective decisions and the ability to handle conflict.

Overloading a board with financial advisers, lawyers, single-industry management experts or political appointees suppresses and damps contribution to company efficiency and profitability.

Their attendance of board meetings is crucial. If a board member misses several meetings without proper explanation, there should be a process to remedy the situation.

At SOEs, board members need the skills and strength of character to do the right thing for the organisation, even if it’s not always popular. This should be accompanied by accountability — that they will pull their weight and hold one another to account.

Accountability requires effective evaluation processes and a culture of candour. Board members should conduct an annual review of one another’s performance and ensure the evaluation process has integrity. A chairman/woman with strong leadership skills can create a culture of honest feedback. Above all, board members should be held liable for their actions — and ignorance is no defence in the eyes of the law.

Companies should adopt the practice of rotation and institute term lengths to avoid deadwood remaining on the board forever

SOEs should require board members to educate themselves on corporate governance, risk management, ethics, auditing, fiduciary responsibilities and countering money laundering.

There should be a separation of powers and responsibilities between management and the board. Management should not regard the board as a rubber-stamping pushover and should be open to ideas and criticism from the board. While management runs the company, the board has the power to replace them.

To thrive, prosper and be profitable, companies should adhere to good corporate governance, which depends on good relationships between the management and the board.

The Organisation for Economic Co-operation and Development describes corporate governance as "a set of relationships between a company’s management, its board, its shareholders and other stakeholders". An SOE director’s most prized attribute is an adherence to governance procedures, particularly the Public Finance Management Act, which provides strict rules and guidelines on how boards should function and other checks and balances.

Another prized asset for boards is independence from management. Even if managers are personable, talented, knowledgeable and smart, it may be necessary to vote against a management initiative or to replace managers.

Companies should adopt the practice of rotation and institute term lengths to avoid deadwood remaining on the board forever. It is also the duty of every board to ensure that an internal successor to the CEO is being groomed or, failing that, identify capable outsiders.

Board members must act with loyalty towards the company and use their authority in good faith and in a manner they believe to be in the organisation’s best interests.

This means, among other things, not misusing their positions for personal gain or interfering with management and impairing their independence. It also means disclosing personal interests in any proposed transaction or business opportunity.

Company directors must remember that the execution of fiduciary duties of care and loyalty can be contested in court. When company performance suffers, disgruntled shareholders often choose to express their unhappiness by reviewing board decisions to identify an action — or inaction — that could be deemed a breach of these duties.

Directors should always take care when dealing with company affairs and ensure decisions and proposals are properly documented and the minutes and notes kept.

In an ideal world, boards and executive management should jointly define the firm’s strategic challenges, jointly identify the information needed to deal with them, jointly assess the CEO’s developmental needs and jointly ensure accountability for results.

But these tasks are a challenge for many companies because good governance depends on good relationships. When relationships break down, neither boards nor CEOs can effectively fulfil their governance duties.

Boards are susceptible to a range of dysfunctional practices — for example, when the CEO regards the board as a necessary evil, a burden on management and keeps directors in the dark, providing as little information as possible. These kinds of behaviours have led to corporate scandals and the collapse of companies.

There could be instances when directors violate the norms of boardroom debate by aggressively challenging the corporate leadership, running the risk of finding themselves isolated and possibly replaced, as happened at many SOEs and private sector companies.

But a board that is beholden to management cannot be effective. This doesn’t mean a board hand-picked by a government department is doomed to failure. But a board cannot be subservient to the department to the detriment of the SOE’s management.

This is why robust nominations to appoint the right board talent are critical and a nominating committee comprised of strong, independent directors can make the difference.

The government should adopt a process where the nominations committee of a board recommends names to the shareholder by applying an approved process to ensure continuity. When the shareholder replaces or changes the board, it should follow proper process in terms of the Companies Act.

Section 71 of the act defines how a board member should be removed. As shareholder, the government needs to apply those processes to ensure that professionals with the right skills can be placed at SOEs.

At many SOEs, political interference has been the gravest risk facing board members, followed closely by the risk of regulatory over-reaction. This interference — including attempts to influence which companies are awarded contracts and the appointment of senior managers — has led to instability at many public firms.

The government should provide clear policy direction and let members of boards do what they know best. The success or failure of SOE boards has a big effect on SA’s economic performance. It is time boards are held accountable and given a clear mandate in terms of the law.

• Ramano is chief financial officer of PPC and a former board member of South African Airways.