Best Corporate Governance Practices: Institute of Directors of Southern Africa capacity building session

Meeting report

Institute of Directors: Best practice in Corporate Governance: Capacity building session
Prior to the presentation, Mr N Singh (IFP) asked to what extent the Institute had implemented the suggestions on state-owned companies (SOCs) and if these issues had been factored into the presentation.

Mr Joe Lesejane, Chairperson of the Institute, and facilitator, explained that issues related to the Auditor-General's report had been included, and he would also cover the Companies Act, and discuss control and risk management to assist the Committee in its oversight work. He explained that the Institute of Directors of Southern Africa (IoDSA or the Institute) capacitates Boards and this briefing would empower the Committee to ensure that boards in the public sector were effective and profitable, to create more job opportunities for the public. He said that in this capacity-building session, he would encourage all Members to engage and seek any clarification during the briefing.

Mr Lesejane noted that the Institute is aware of the role of the Public Finance Management Act (PMFA) and Companies Act, and certain practices are required to ensure performance compliance and effectiveness with regard to public enterprises and entities. The management letter set to public sector boards includes information regarding the mechanisms that the boards should adopt to fulfil their responsibilities and achieve their objectives.

Mr Lesejane said that various in-house projects would be used by way of practical example. He was a member of the public sector Audit Committee Forum, and this aimed to capacitate committees. The King 3 code was presently being re-designed and updated to King 4,  to include various relevant regulations, enterprises and requirements for unlisted companies.

Ms D Rantho (ANC) explained that the Committee would also be able to engage during subsequent presentations. At the moment, the Committee was in the process of evaluating budgets and hoped to gain sufficient knowledge to use in the  budget-evaluation period.

Shareholder Expectations: Oversight Responsibilities
Mr Lesejane noted that the Committee is required to be concerned with the quality of Board appointments in the public sector. He explained that this process is important in terms of the quality and effectiveness of entity governance. Ethics and values needed to be addressed for any entity to perform successfully and sustainably.

Mr Lesejane explained that the shareholders appoint the Board, and the Board appoints the Chief Executive Officer (CEO). It was important that any reporting relationships should not have any negative effect on governance. The Board must enter into a Compact (agreement) with CEO setting out expectations for delivery, accountability and evaluation.

He added that Board dynamics should be such that they served the best interests of the entity and the entity’s common purpose.

Mr R Tseli (ANC) said there was often confusion amongst employees in a State Owned Company regarding the chain of management.

Mr Lesejane explained that the Chairman is consulted on critical and strategic issues. The danger is that if the Chairman is frequently present, he/she becomes involved in operational issues rather than strategy, and this undermines the Board position. The ideal solution is that the SOC should not actually provide offices for Board members to be present daily, to ensure that they did maintain their strategic roles and responsibilities.

Mr Z Luyenge (ANC) explained that there is a political-administration dichotomy and that there should be an interface between the members, whilst also understanding the role of the Chairman and the CEO. He thought that more familiarity needed to be built on the environment, in order to ensure that there is mutual understanding between members. There was a problem of some competition at this level of governance, which did not recognise that governance and administration should be complementary to each other. He said that the separation was sometimes referred to as "a Chinese Wall", but all members of the SOC should be working to the same common purpose. The Chairman and the CEO should work in conjunction to ensure delivery. The Chairman is required to run the Board of the company, whilst the CEO facilitates administration.
Mr Lesejane explained that the PMFA empowers the CEO. He went on to deal with the role of the stakeholder representatives. The Shareholder Compact deals with expectations and commonality in establishing legislation, and ensures compliance and accountability. The Chairman of the Board should ensure that the Shareholder Compact is signed, as the leadership which ensures shareholder and entity expectations and performance is fulfilled.

The Chairperson asked who is required to initiate the Shareholder Compact.

Mr Lesejane explained that the Monitoring Unit usually initiates the Shareholder Compact but the Board should initiate the Shareholder Compact through the Chairman.                                                                                                                                                                                                

Ms Rantho asked what the role of the Committee is with regard to the Shareholder Compact, as the Committee had experienced some sensitivities when enquiring as to the content of the Shareholder Compact. This negatively affected the oversight function of the Committee and the Committee had been worried about the relationship between the Committee and the Department if the Committee cannot access this information.

Mr Lesejane explained that the Management Letter includes points which are included in the Shareholder Compact and that public sector entities conduct Board evaluations, which do include sensitive issues, and that it is the role of the Committee to deal with them. The Committee must be in a position to evaluate how strategy is being implemented and whether this is sustainable.

Ms Rantho noted that the Committee's work was carried out in public and asked if there was any risk to sensitive and confidential information in such Shareholder Compact.

Mr Luyenge pointed out that the Committee Members were bound to sign oaths of secrecy in respect of sensitive information.

Mr Tseli asked what would normally be contained in the Shareholder Compact and what the consequences of non-compliance would be.

Mr Lesejane explained that it is a traditional Performance Compact and that consequences are emphasised as the Ministry would address the Board in order to implement corrective measures to ensure accountability.

The Chairperson explained that the Department of Public Enterprises (DPE) did present the strategic plans and annual performance plans of all entities and enquired what sensitive issues there might be.

Mr Lesejane thought that the sensitive issues may relate to risk management. However, since it is clear that the Committee is entitled to this information, he suggested that perhaps a closed meeting could be held with the Committee during any discussion of sensitive issues in the Shareholder Compact. The Committee might struggle to get to grips with a Management Letter if it had not been able to engage on the contents of the Shareholder Compact.

Mr Phahlani Mkhombo, Chief Director: Legal and Governance, DPE, explained that the Shareholder Compact is constructed annually and leads into development of a business plan for the entity, therefore exposing the entity to competition. The Shareholder Compact will be disclosed at the end of the financial year, in line with the reporting requirements, although he accepted that this may be problematic if the Committee has not engaged on its contents.

Mr Lesejane said that the Committee can provide full guidance once the performance information, the Shareholder Compact and the finances have been discussed.

The Chairperson explained that the strategic plan does not include the mechanisms for achieving goals, and that the Committee requires information on performance and lack of performance.

Ms Rantho pointed out that the Committee is required to ask serious questions to fulfil its oversight role, and she could understand the Department's concern that through probing questions, sensitive issues in the Shareholder Compact may be at risk of being exposed.

Ms P Van Damme (DA) said that the Committee does not require company and commercial sensitivities in the corporate plan to be disclosed.

The Chairperson asked if the Committee is required to exercise oversight over the corporate plans.

Mr Lesejane explained that the Committee's lack of access to the contents of the corporate plans is problematic for the oversight of the Committee and overall accountability.

Ms N Mazzone (DA) explained that the non-disclosure of the KPIs and the Shareholder Compact in the past has been attributed to the sensitivity of the corporate plan and confidentiality agreements with employees. She emphasised that it is nonetheless important for the Committee to review the Shareholder Compact, as the Committee must be empowered to evaluate all the outcomes set out in the document.

Mr Lesejane noted that ethical reporting is a challenge. Mr Lesejane explained that the role of the Board is to understand the business well, understand the business model and advise government on the best business model. He added that setting the right value systems is an international challenge. He further explained that key risks facing the organisation should be evaluated. He explained that government entities require entrepreneurs and visionaries.

Boards and Directors

Mr Lesejane explained the role of the Chairperson, the CEO and the Director, respectively. Mr Lesejane explained that there is a clear division of responsibilities between the Chairperson and the CEO and that there is a balance of power and authority.

The following points around the Chairperson's role were noted:

• Elected by the Board in terms of the Articles
• Leads the Board and harnesses the input of the Directors
• Acts as conciliator between Directors
• Maintains the quality of information to the Board
• Involved in selection and induction of new Directors
• Ensures Board effectiveness and ongoing Director development
• Acts as the link between management and the Board
• Handles official communication with stakeholders

The CEO's role was distinguished from this, in several respects, which include:

• Appointed by the Board
• Operates in term of authority delegated by the Board
• Develops strategies, budgets and  business plans for consideration and approval by the Board
• Runs the company on a day-to-day basis, and implements the strategy of the entity
• Ensures that daily operations are appropriately controlled
• Builds a management team
• Represents the company to the media and stakeholders
• Responsible for the employment and performance contract

Corporate Governance

Mr Lesejane explained that the government stakeholders own the entity and define its purpose, and that the Board directs the performance of the entity and appoints employees.

Mr Lesejane explained that the role of the Board is to monitor the implementation of strategies through Board committee meetings, ensure that timeous corrective action is taken if necessary, and account to the shareholders and stakeholders. Management operates, through the CEO to implement strategies, make operational decisions, manage risk and account to the Board.

Mr Lesejane noted that the Committee should assess the effectiveness of the Board in assuring accountability.

The Chairperson asked how often the Department would meet with the Boards of the SOCs.

Mr Mkhombo explained that the Department has regular interactions with management and the Minster has regular meetings with the Board, and that the lines of communication will remain open throughout the year, including the Chairperson’s Forum. The Department interacts with the SOCs on a monthly basis and their performance is monitored through the quarterly reports.

Mr Lesejane said that the monitoring by the Board and Ministry entities should also be evaluated.

The Chairperson referred to the Companies Act and explained that the Committee does not have influence despite being a shareholder.

Mr Lesejane explained that if the shareholders are not satisfied, it is their right to hold the organisation and the Board accountable and propose corrective measures. The PMFA takes priority and the Companies Acts deals with the Board and the roles and responsibilities of the directors. If the Board is not satisfied with the direction of the entity, the shareholder may fire the Board. This should be set out in the Shareholder Compact.

Mr Mkhombo explained that it is within the shareholder's prerogative to appoint and dismiss Board members. In practice, at the Annual General Meeting, the Minister will evaluate the performance and there will be agreement on the Shareholder Compact which culminates into the new Corporate Plan.

The Chairperson enquired as to the relevance of the Shareholders Management Bill.

Mr Mkhombo explained that the Bill outlines the process for managing the SOCs within different Ministries, in order to streamline the management of state-owned companies across the public sector.

The Chairperson explained that contradictions do exist, as the Committee understood that the Shareholders Management Bill will enforce compliance.

Mr Mkhombo explained that currently the PMFA and the Companies Act deal with the financial requirements and the SOCs respectively. As set out in the Companies Act, the shareholder appoints the Board, and must intervene through the Board in order to manage the relationship between these positions.

Mr Lesejane indicated that one particular concern is how the PMFA and the Companies Act interact. The Shareholder Compact ensures that governance is of a satisfying standard.

He explained that the Committee should evaluate the manner in which agendas and corrective actions are established. He further noted that the Committee should evaluate the number of Board meetings taking place. Committees regulate the number of meetings which take place in order to save money.

Mr Mkhombo explained that the Ministry ensures that it complies fully with the King 3 Code, and the DPE is also currently updating its protocols which are aligned with the PMFA, the Companies Act and the Code of good governance.

Mr Lesejane said that the Board is required to ensure that the CEO and Executives deliver on corrective measures by means of the Performance Compact.

Mr Mkhombo added that the Institute of Directors will often evaluate the operation and performance of the Board and report this to the Ministries.

The Chairperson noted that there is a concern around the employment of service providers and consultants to monitor performance.

Ms Rantho added that the main problem is often that the service providers have not reviewed the Shareholder Compact and large amounts are nonetheless being budgeted for their services. She insisted that the Committee should be able to review this performance by the Board to assist the Department.

Mr Lesejane explained that it is common for Boards to request an independent evaluator to monitor performance and maintain objectivity. Perhaps the Committee should enquire whether it may access the evaluation reports on the performance of the Board in order to facilitate its oversight.

Mr Mkhombo explained that the Board assessment is conducted by the Board in line with the Best Practice principles. The Department should evaluate any request for the release of the evaluation reports.

Mr Lesejane emphasised the need for the Committee to have access to the relevant reports, Shareholder Compacts and Corporate Plans.

The role of the Board in Strategy

Mr Lesejane went on to note that the role of the Board should ensure that the strategy, risks, performance and sustainability are inseparable. The Board should set the parameters, with the influence of the shareholders. He set out the following roles of the Board:

• To insist on robust strategic processes
• To challenge assumptions
• To create a strategic sounding board
• To ensure effective resource allocation
• To ensure measurable performance milestones (KPA/KPI)
• Effective monitoring and actions regarding the Board and Committee meetings
• The appointment of a  competent CEO and a performance-driven Executive
• To create a system of reward or incentive

Balance of Effective Management

Mr Lesejane explained that the public sector places emphasis on managing the risks associated with management. He explained that without ensuring the sustainability of the business, the entity may suffer. The risk management model should be aligned with the context of the entity and its business model and that a strategy to identify the risks should be implemented. The Committee should evaluate the management of risks to deliver on the core mandate of the entity. Furthermore, this should be noted in the Shareholder Compact.

Mr Lesejane referred to the Strategic Risk Register, and explained that risks need to be evaluated if they indicate issues such as irregular expenditure. There is a need for mitigating circumstances, and strategies to address these should be set out, and management have a timeframe to correct internal risks.

Governance of Risk

Mr Lesejane explained that there are three lines of defence to risk. Line Management is the first line of defence and the most pivotal. The second line is the Supervisory and Consultative departments for risk management and assurance, who assist in group risk and the consultative role of compliance. Thirdly, the internal and external auditing of compliance was vital.

Common Issues: Risk Management

Mr Lesejane said that often, Board members struggle to link risk management to strategy, and there is often a general lack of commitment to risk management. Risk Appetite and Tolerance is articulated in the Shareholder Compact and should be utilised to drive the Board. He explained that risk appetite pertains to risk areas which require investment from the Board, and these should be articulated within the Ministry's KPIs. He explained that a risk averse entity would tend to avoid rather than tackle the risks and related problems. Risk Tolerance refers to the Materiality Limits and is a threshold for the Board in terms of authorisation.

Mr Mkhombo added that the PFMA says that the Committee requires Executive Authority to conclude a Significance and Materiality , to allow for particular transactions.

Mr Lesejane explained that if the business entity does not comply with aspects of the compacts, that this will be articulated in the Shareholder Compact and the Auditor-General’s report.

Mr Lesejane noted that role of internal audits is not always effective for risk management. He explained that business continuity is often not emphasised and this reduces sustainability. He said there were several examples regarding the role of the Board and the risk management issues and failures in corporate governance. African Bank, for instance, experienced its problems as a result of a suppression of information and ineffective supervision. He also alluded to problems experienced by various South African business entities, and explained that internal control measures were ineffective in these instances. It had been shown that there was insufficient sustainability and productive relationship between the Board, the Executive and the shareholders. He noted that the Board needed to be creative, but also to advise the shareholders. The Board is responsible for the sustainability and profitability of the entity.

Mr Lesejane defined corporate governance as a system by which a company or public entity is directed and controlled, and explained that this is basically the role of the Board in achieving its legal duties and the objectives articulated in the Board Charter. The principles of governance are founded in ethics and integrity and governance within the entity will not be successful if these do not exist. The Board is responsible for the pillars of fairness, accountability, responsibility, transparency and confidentiality, which is upheld by discipline. He emphasised also that good corporate governance is centred on effective leadership.

Mr Lesejane indicated that corporate governance increases entity value, improves share prices and credit ratings, lowers the cost of capital, and improves access to capital. Good corporate governance also improves operational performance, lowers the risk of corporate scandals and damage to reputation and improves decision-making.

Ethical leadership is featured in the King 3 Code, which notes that businesses should be good corporate citizens. He explained that the King 4 Code will articulate the governance of various organisations. The King Code particularly emphasises the need for appropriate skills in audit committees. In order to interpret performance effectively, individuals or service providers with the relevant qualifications should be employed. Currently, skills were lacking in regard to internal performance evaluation, and there tends to be resistance in outsourcing further individuals with the relevant skills for the performance evaluation. Accountants comprise the majority of the internal audit committees and the Board.

He explained that the Board provides oversight and that the Executive manages risk, and often the audit and risk committee issues are combined. This, however, creates a dilemma between financial and business risks.

Mr Lesejane noted that governance of IT was a particularly important point. Cyber risk is one of the greatest current challenges.

Some of the major factors tending to undermine the effectiveness of good governance are ethics, lack of independent thought by Board members, and greed. He expanded that lack of independent thought of Board members refers to factional thinking, especially prevalent in the public sectors, whereby members meet beforehand and align their stance with each other.

The Chairperson asked what the lack of leadership could comprise.

Mr Lesejane explained that this could arise where individual Board members and employees are highly educated, but the relationship between the Board and the Executives is not conducive for effective leadership and pro active work.

Mr Lesejane recommended a follow-up session in which the Committee could be further informed of the detailed sections of the King Code. He recommended that the Committee could evaluate issues of Board dynamics, compliance culture, the relationship with stakeholders, ethical culture at Executive level and the effectiveness of governance in the organisation. He further emphasised the need for implementing the relevant mechanisms and procedures to ensure good governance and capacity building.

Mr Lesejane concluded that good performance and control in the public sector results from good conformity, and said that revenue should be generated within the frameworks of the relevant policies. He explained that there is a need for creativity from the Executive, whilst maintaining compliance when driving performance.

The Chairperson expressed her appreciation for the briefing and the manner in which the session was presented. The Committee would need to invite the SOC Boards in order to address the issues of governance, and brainstorm issues through.

The meeting was adjourned.