Corporate Governance in State-Owned Entities: briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE; LABOUR AND PUBLIC ENTERPRISES: JOINT MEETING
20 September 2000
CORPORATE GOVERNANCE IN STATE-OWNED ENTITIES

Documents handed out:
- Corporate Governance Content Audit
- Memo on Guidance for Government Departments in Relation to State Owned Entities
- Draft Discussion Policy Document on Ethics and Probity in Business
- Framework for Shareholder Compact Between the Minister of Public Enterprises and State Owned Enterprises
- Memo on Guidelines: Board Appointments and Induction - State Owned Entities
- Memo on Minister's Roles and Responsibilities in Relation to State Entities
- Slide Presentation on Corporate Governance
[e-mail [email protected] if these documents are required]

SUMMARY
The Department briefed the committee on corporate governance issues with respect to state-owned entities. He explained some of the issues and future challenges, with his main concern being guidance over the relationship between an a state-owned entity's management and the government as shareholder. There was some discussion on this, particularly on the growing role of strategic equity partnerships where the government is no longer 100% shareholder in an state-owned entity and how this phenomenon must affect the analysis on this topic.

MINUTES
Malixole Gantsho, the Head of Performance Monitoring and Evaluation of State-Owned Entities (SOE), briefed the committee. Noting that "corporate" governance relates to aiding, assisting, and collaborating, he indicated that he had two main topics: an introduction to corporate governance and the need for it; and a discussion of the management of relations between government and state-owned entities.

Context
Mr Gantsho explained that government is not in the business of going into business but of delivering on economic and social mandates. He stated that there are always issues of how to balance the need for efficiency and the need for entities to deliver on social and economic mandates.

He outlined the history of SOE restructuring and corporatisation which was reflected in the policy documents that he would not summarise. He also noted that present policy included disposing of SOEs that are not key to the government's contribution. For those in which it remains involved, government must devise methods of performance monitoring, something which has been lacking in the past.

Mr Gantsho explained that corporate governance is one vehicle used in ensuring accountability. The King Committee analysed guidelines on corporate governance issues, and its Report is currently under review. In 1997, the government adopted a Protocol on Public Enterprises, which has since sat idle on the shelves. He suggested that this Protocol had shown the government's interest but that it also showed how the government was lacking in terms of demarcating roles. The Department is beginning to review this Protocol to see if it complies with best practice and acceptable standards, as well as how it relates to the findings of the King Committee. A recent corporate governance audit has identified as key issues: ethics and probity, risk-related issues on the running of businesses, and globalisation.

Issues on Corporate Governance
Mr Gantsho explained that the Companies Act creates fiduciary responsibilities for companies' boards and that directors' liabilities are defined in terms of that Act. He explained that the difference between SOEs and companies operating under the Companies Act is that the latter are profit-driven. SOEs, by contrast, have a mixture of business efficiency goals and goals in terms of delivery on the mandates of the government shareholder as service-provider. Mr Gantsho stated that there is necessarily some kind of conflict about what an SOE is expected to deliver at the end of the day. He emphasised as well that this comes from issues about the relationship of management to the government shareholder.

Ms Taljaard (DP) interjected at this point to suggest that the presenter's continual reference to the government shareholder ignored SOEs where there is a division of equity. As an example, she referred to South African Airways, which is 80% owned by the government and 20% by private investors. She suggested that it is inappropriate to refer to "the shareholder" in a uni-dimensional way. The Chair suggested deferring questions until after the termination of the presentation. In a brief response to Ms Taljaard's comment, Mr Gantsho stated that corporate governance is something general that applies to an entity whether it is state-owned or not. He stated that all entities must operate in a framework of corporate governance.

Mr Gantsho noted that another important issue is that of directors' accountability. He stated that this must be defined for directors individually and for directors as directors. He observed that how directors discharge their responsibilities is an important part of how the SOE fulfils its mission. He explained that measures of an SOE's performance must relate to its objectives and not to the general performance of the economy nor to the general objectives of the global basket of SOEs. This being said, he emphasised that SOEs do make a major contribution to the economy and make enormous resources available for government to deliver on social and other projects.

Mr Gantsho stated that there are also issues on financial transparency, reporting, and auditing but that these have been sufficiently addressed by the Public Finance Management Act.

Mr Gantsho mentioned issues of the involvement of stakeholders in consultative processes within government. In every restructuring, it is important to look at the relationship of management and shareholders. The environment in which SOEs operate is generally regulated and also subject to shareholder compacts. Mr Gantsho stated that there is sometimes a perception that SOEs operate under a law unto themselves. How to manage the relationship to government is a critical issue and that this is why guidelines have been developed. The goal is to allow the SOE to manage its own business without interference in micro-management but to have the shareholder responsible for dividends and business structure. The Minister is to give direction to the entity as a guardian of assets. Government departments are only to give the necessary support to enable the Minister to oversee matters in this way.

Future challenges
Mr Gantsho stated that the interpretation of instruments and institutions is the first challenge for the future. He stated that South Africa's instruments to monitor performance have not historically been among its best instruments.

Mr Gantsho also referred to the matter of codifying corporate governance inside SOEs in order to move away from the idea of gentlemen's agreements. The King Committee had discussed compliance issues but not proposed anything beyond these gentlemen's agreements, and Mr Gantsho considered that this was a worrying aspect of it. He stated that corporate governance agreements must be codified.

Mr Gantsho referred as well to critical issues related to dividends. In the past, whatever profits and gains SOEs have made, have been used for recapitalisation. The challenge in the coming years is to look at how dividends will accrue to government.

He stated that another critical challenge relates to how SOEs relate to government social policies. There is no intention by government to micro-manage SOEs. There is thus no intention to force cooperation. The government wants them to operate as business entities while taking cognisance of government mandates. Many departments currently have oversight responsibilities. He cited the example of the Department of Minerals which is involved in policy formulation and the development of public enterprises. He emphasised that the coordination and demarcation of responsibilities will remain a continuing challenge. One possibility is to look at SOE models outside South Africa, such as from New Zealand where there is legislation to remove ambiguities. In South Africa, there has been in the past a serious lack of involvement by government in guiding the relation of management and SOEs. He concluded that the review of the Protocol and the entering into shareholder compacts give some confidence that measures are now being put in place.

Discussion
The Chair asked about the possible implication throughout the presentation that SOEs are not obliged to concur with government policy. He asked if this creates conflicts. Mr Gantsho explained that the philosophy with respect to SOEs is that they must be able to operate as business institutions once they are in place. The question is not one of cooperating or not cooperating with government. He stated that as with any business, an SOE must have a business plan approved by its board of directors. This is where the government can also have an impact. Under the Public Finance Management Act, the business plan must be approved by the government shareholder because of finance issues. After the SOE has gone through this, it then has a mandate to operate freely. But there is a place for government to be involved in the approval of the plans. Mr Gantsho noted that there has actually been legal argument about the responsibility of government if an approved plan fails. In any case, however, the government has a chance to interrogate the plan and then must be prepared for what happens.

The Chair also asked why the 1997 Protocol sat on a shelf and gathered dust and who should have taken responsibility for implementing it. Mr Gantsho replied that the 1997 Protocol was an attempt to address corporate governance issues that was not drawn in terms of the King Report. He stated that there were many reasons it simply gathered dust, the principal ones being that the Department of Public Works had not yet been a full department at the time of the Protocol and that the document had not been sufficiently popularised. Mr Gantsho stated that the 1997 Protocol was never a perfect document, but the Department is now in the process of revising it, popularising it, and making it into a working document.

Mr L Montana, Parliamentary Officer of the Ministry of Public Enterprises, interjected that there is a move around the world away from traditional forms of intervention in SOEs. The traditional approach of intervening on every issue has fallen by the wayside, even in China. Governments are looking at other creative ways of guiding SOEs. He stated that shareholder compacts are a promising way.

Ms Taljaard (DP) indicated that she wished to return to the tension of government as shareholder and private equity shareholders in strategic partnerships. She stated that she accept that corporate governance applies to both SOEs and private companies. But she suggested that there are tensions between an SOE's social objectives and business objectives and that these tensions do not diminish but increase as private equity partners, focussed solely on business objectives, take an increasing stake. She asked how there is any adequate reflection of this change in the models of corporate governance under discussion. The Chair added to this question by asking what the differences between SOEs and private companies are if corporate governance applies to both.

Mr Gantsho replied that the very first question is whether government should become involved in business or not. If so, then the next question concerns the constraints on its involvement. A number of issues arise in the SOE context: the question of the government's level of interference in the business; the soft risks dilemma of no limited liability status for SOEs; the significant use of management and executive time to try to address social responsibilities from a number of unrelated businesses; the lack of provision for the application of bankruptcy legislation; and the pumping of funding into failing institutions. At the end of the day, a business must do business. He added that corporate governance applies to all kinds of businesses. He stated that the involvement of government in business with other entities contributes to the stake of government and thus should not result in conflicts.

Ms Taljaard (DP) stated that her concerns about conflicts were not based on theory and hypothetical situations. There have been concrete examples of the rising tension in such relationships in the short and the long term. For example, when South African Airways got new Boeing planes, there was a significant conflict as to what principles should govern the decision to purchase these. Swissair had actually raised concerns about the Minister's role in the process.

Mr Msomi (IFP) interjected that any such conflict was healthy and necessary. He said that this conflict came out of measuring shareholder value out of positional approaches. He said that he thought concerns would arise mainly if there are significant differences in governance between SOEs and private companies.

Mr Montana said that the example around the Boeing planes was not right. He said that this was a decision of the South African Airways Board, which made a business decision. Any problems that arose were when bidders in the process started trying to lobby the Minister and say that he must exert influence. The government and the Minister had been clear that this was to be a Board decision. Some officials had received constant phone calls from bidders, even during the night, to try to set up meetings with the Minister but that these had all been refused. It was a decision of the Board of South African Airways, in which the Minister chose not to get involved.

Mr Montana stated that he also wanted to touch on the principle of cooperative governance from the Constitution. This principle means that national, provincial, and local governments, within their spheres, must cooperate toward national unity, economic development, and the like. He stated that this might seem to engage with respect to some SOE matters. For example, when Alexkor thought of pulling out of the Northern Cape, this would have had a dramatic economic impact in the region, so the Premier took the matter up with the Minister. Thus, there are questions of how to deal with something entrusted to the national government that has major impacts at the provincial and local levels. He stated that Eskom would similarly have major impacts at the local level and that decisions might be negotiated and engaged by other levels of government through the national Minister.

Mr Msomi (IFP) asked a question about how differently an SOE would act with or without the government as sole shareholder. Ms Taljaard added that there was a need to hear from all stakeholders on an issue and that, thus far, the Committee has been hearing the government's side. She suggested that the Committee should hear from Swissair, Telkom Malaysia, and other companies that are in private equity partnerships with the South African government in order to hear about their side of the picture.

Mr Gantsho acknowledged that he was coming from a background where the government is having difficulties on how to manage SOEs. There is now a realisation that with unbundling and restructuring of these SOEs, strategies must begin to change. The environment is one where we are now beginning to understand the government's role as shareholder. As to how to deal with a 100% SOE as opposed to a partially private entity, he stated that with a 100% SOE, the government must not move away from best practice corporate governance but realise that it is in a unique situation. In a strategic equity partners situation, there is a need to define roles very clearly. The tensions on Swissair and South African Airways show the need for coordinated and structured approaches. He added that the Protocol will not necessarily apply where there are strategic equity partners but only on 100% SOEs. In the case of strategic equity partners, there may be a framework from a shareholder agreement.

Ms Taljaard welcomed this differentiation but asked if there is any similar specialisation within strategic compacts to consider different sectors. She suggested that strategic compact documents might dovetail with business plans and other normal documents. Mr Gantsho replied that different businesses differ and that there might be differences in different sectors.

In concluding the meeting, the Chair commented that it is tough to plan a programme for the year when the parliamentary program is still undetermined. The uncertain date of the local elections was making planning difficult. Mr Montana, Parliamentary Officer to the Ministry of Public Enterprises, interjected to say that the Committee has thus far engaged on all kinds of questions and should think about developing a defined mandate.

[Attendance at the meeting was low, with eight of thirty-two committee members present at the beginning and the attendance reaching a peak of thirteen.]