The Treasury’s recent presentation to parliament’s appropriation committee of the annual reports of our major state-owned enterprises (SOEs) paints a distressing, if not surprising, picture.
Public enterprises minister Pravin Gordhan’s angry instructions to the newly installed board of Transnet reveal that the corporation’s problems are rooted in poor governance practices. I’m convinced this is the case with respect to all SOEs.
Among the injunctions Gordhan, as the shareholder state’s representative, issued to the board are to review executive management “with a view to establishing whether persons with the right skills are optimally utilised to deliver on the mandate”; to develop a new framework for transparency and accountability through detailed reporting on the successful execution of a turnaround strategy; to instil in the organisation a culture of accountability, discipline and transparent access to relevant information; to develop a rigorous system of controls; and to urgently implement the controls identified by the auditor-general.
Among the auditor-general’s concerns are those related to financial reporting, in particular material misstatements and irregular expenditure of R556m; those related to procurement and contract management, in particular breakdowns in the standard tendering process and concerns over the awarding of contracts; deficiencies in financial reporting, compliance and record management; a lack of disciplinary action against officials responsible for irregularities; vulnerabilities related to the management of IT infrastructure; and, predictably, corruption.
The good news is that solving governance problems is not rocket science and the solutions are relatively inexpensive. The bad news is that if they persist beyond the point — what Gordhan calls an “inflection point” — at which physical plant and equipment begins to deteriorate, funders call it a day and customers cast around for alternative providers, the solutions become extremely costly and complex. They also become highly controversial. It will not be lost on the more doctrinaire among us that when public provision of major goods and services like rail, electricity and even water fail, private provision has to be considered.
The first principles of sound corporate governance are implicitly present in Gordhan’s instruction to the board. It is the shareholders’ duty to present a mandate to the board. He has done so. But the shareholder is also required to appoint a board capable of exercising the mandate, arguably the most important role played by the shareholder in the governance of a corporation. In this particular instance it seems crazy to appoint a board with such sparse skills or experience in accounting and corporate financial management. It would also have been reassuring, to say the least, to see someone with experience of freight rail management on the board.
The board is responsible for developing the strategy necessary to give effect to the mandate given to it by the shareholder. But to do so, the board has to ensure that it has in place a CEO with the necessary skills and experience to run a logistics business of this size. The Minerals Council has already called for the removal of Portia Derby, the current Transnet CEO. Businessman Patrice Motsepe points out that though she may be a smart individual, she has no experience in managing an enormous logistics business.
The shareholder has instructed the board to assess the quality of executive management. If the CEO or any other members of the top executive team are indeed found wanting, they must go, and the board must appoint a new CEO whose immediate task is to ensure the executive team has the necessary skills, experience and integrity to give effect to the strategy developed by the board.
The trick is for each of these layers of governance to stay in their lanes. The board may expect to be consulted on the shareholders’ mandate and the composition of the board, but sole responsibility for these decisions rests with the shareholder. The minister may expect to be consulted on the appointment of the CEO and the development of strategy, but these decisions rest with the board and the board alone. The board’s job is to develop a strategy and satisfy itself that executive management is implementing the strategy; it is not to meddle in the operations of the company.
Transformation of the boardrooms and executive suites of our SOEs is a perfectly legitimate government objective. It should be part of the mandate the shareholder hands down to each SOE board, and it should be reflected in the composition of the boards and executive suites.
Detractors of the government — including many frustrated and anxious supporters of the governing party — will immediately cry “cadre deployment”, but transformation doesn’t and shouldn’t have to equate to patronage. It needn’t mean compromising on experience and efficiency. Business people with experience in the sector insist that seasoned black SA rail managers and engineers, often trained by previous generations of Transnet officials, are to be found running efficient rail networks across the continent.
SA is home to many perfectly competent black board members and executives — just as it has produced public spirited white board members and executives. Executive salaries should reflect the responsibilities and skills (and, if necessary, their scarcity) needed to run huge SOEs. Board fees, on the other hand, should be modest, to discourage those whose major interest in joining a board is the fee, and to attract those who are eager to serve as nonexecutive board members for the intellectual challenges it offers and the public duty it constitutes.
In fact, effecting transformation is one of the least complex social interests that ministers, the boards and the executives of SOEs have to satisfy. The critical challenge in governing any SOE is maintaining the necessary balance between public interest on the one hand, and financial sustainability on the other. If it wasn’t required to deliver on this dual mandate why would it be state owned? This feature of SOEs should be top of mind when each minister, board member and executive manager exercises their respective responsibilities.
But there is no doubt that governing and managing Transnet poses daunting problems. It may well be past the tipping point. Certainly, those with experience of the sector and the corporation believe that to get Transnet up and running will require tens of billions of rand in new investment. This can only come from the private sector. Apparently some progress has been made with concessioning major ports. There has been an attempt to concession some of the major freight lines, but on terms so unattractive as to suggest that the offers to concession were not made in good faith.
Moreover, while bringing the private sector in to run large parts of Transnet’s operations is absolutely essential, it requires that a regulatory regime be in place. This requires complex legislation and institution building, which complicates the governance process.
Above all, Transnet’s governance and management structures require urgent strengthening. The new board needs to be supplemented with rail experience. The board in turn needs to undertake a robust investigation of the experience and skills of its key executives. Poor governance is costly — suppliers still experience corruption on a grand scale from Transnet’s procurement services.
We’d better get on with this. The train is leaving the station. Or not, as the case may be.
• Lewis, a former trade unionist, academic, policymaker, regulator and company board member, was a co-founder and director of Corruption Watch.
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