Presentation on corporate governance in state owned enterprises

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
6 NOVEMBER 2002
PRESENTATION ON CORPORATE GOVERNANCE IN STATE OWNED ENTERPRISES

Chairperson: Mr B Dikobe.

Documents handed out:
Presentation on Corporate Governance and State Owned Enterprises

SUMMARY
The Committee was briefed by the Department on corporate governance issues facing state owned enterprises. They showed that there has been a significant improvement in the governance of SOEs. However, some problems are still unresolved. The government's 1997 Protocol on Corporate Governance in the Public Sector does not address certain key issues and concerns around SOEs. The Protocol is therefore being revised to deal with the unique environment within which the Boards of SOEs operate. The Protocol will apply to all SOEs in which government holds a substantial interest. A formal launch of the document is planned for the end of 2002.

MINUTES
The Department of Public Enterprises was represented by Ms Celeste Appollis and Ms Nonkululeko Msomi.

Governance status of SOEs
By way of introduction Ms Msomi drew attention to the fact that the government has significant investments in strategic state owned entities such as Eskom, Transnet, Denel and Telkom. Hence, good corporate governance, which entails accountability and transparency and ensures effective management of Government's shareholding interests in these SOEs, is necessary. In 1997 Government adopted the Protocol on Corporate Governance in the Public Sector. However, the 1997 Protocol does not address certain key issues and concerns around SOEs. The Protocol was therefore in need of revision to specifically deal with the unique environment within which the boards of SOEs operate. The Protocol is an aspirational document. It is a guide to assist in the practical implementation of the rules and regulations which apply to SOEs. Its purpose is to amplify and not to place it in juxtaposition to the King II Report.

Ms Msomi indicated that the need for and significance of good corporate governance practices has been recognised by all SOEs. Initiatives undertaken to promote good governance have resulted in reform. There is also a general understanding of responsibilities and fiduciary duties by directors. However, there is some level of distrust between the executive management and the board. In some instances strategic decision making powers are being abdicated to executive management. There is also a lack of understanding of the risks to which SOEs are exposed. Performance reviews do not appear to be effective.

The DPE has taken some remedial actions which require Board Charters to set out the responsibilities of SOEs officers. Delegation of authority should be in writing. Board members should also declare their interests with regard to various activities of the SOEs. There should also be regular performance reviews of the boards. Systems are being put into place to monitor compliance with the PFMA, Shareholder Compact and Protocol. Skills assessments by the Board before appointments are made would also be undertaken. It is also required that the majority of the Board should be composed of non-executive directors. Director's development initiatives seeking to raise awareness of certain practices would also be undertaken.

Application of the Protocol
Ms Appollis explained that the Protocol is a product of a collaborative effort between the Department of Public Enterprises, management of the National Treasury, Department of Public Service and Administration, management and directors of SOEs and external advisors. A communication strategy has been developed to communicate the principles of the Protocol through various means. A formal launch of the document is planned for the end of 2002.

The Protocol is applicable to all public entities listed in Schedule 2 and 3 (B) and (D) of the PFMA and subsidiary companies of these entities. This is largely because a far more business like approach is expected from these entities. It is remains applicable for as long as Government retains an interest in the SOE. It makes no difference whether the government has disposed more than 51% of shares in an entity. However, the Protocol would have limited application where Government has disposed of 51% of the shareholding and the PFMA is then no longer applicable, provided the Government retains a significant interest.

The presenters highlighted that, in terms of the guiding principles, directors of SOEs should ensure the following:
-The development of business strategies, policies and procedures.
-That the SOE's activities are conducted so as to minimise any divergence of interests.
-That SOEs and their officers maintain the highest standards of integrity, accountability and responsibility.

Ms Appollis indicated that the Board should provide strategic direction to the SOE. The Board should also be aware of all applicable legislation, regulations and policies that govern it and should identify all risk areas and manage those risks. It is also required that the Board should annually review its performance and the performance of each director. The Shareholder should prescribe the role and responsibilities of the Board within the context of the company's mandate. The boards are required to submit quarterly reports on progress against or deviations from the corporate plan.

The Protocol further provides that the corporate plans submitted by SOEs should contain benchmark standards or baseline data, which will be used to benchmark the SOEs in future. Initiatives should be taken to advance members of the historically disadvantaged groups. The director's annual report should disclose the SOE's procurement practices in so far as they relate to Black Economic Empowerment and whether the SOE has achieved the empowerment targets as agreed with the Executive Authority. The reporting requirements already set out in the PFMA and Companies Act, will be added to this reporting requirement to ensure effective monitoring by the Shareholder.

Discussion
Mr R Heine (DP) asked the presenter to give the size of the monitoring committee.

Ms Msomi acknowledged that monitoring the performance of directors is a big function. She indicated that in terms of numbers there are eleven people who are doing the monitoring. It has been proposed that there should be some internal restructuring in the DPE so as to enhance the capacity of the monitoring committee. Systems to help in the monitoring process are also being put in place.

Mr Heine also asked how often financial statements of SOEs are monitored. He also enquired if such statements are submitted on time. He asked how the DPE knows if a director has been disqualified from being a director in terms of the Companies Act.

Ms Msomi and Ms Appollis indicated that generally financial statements are submitted on time. However, there are exceptions. Certain SOEs, for specific reasons, are not submitting statements on time. The Department is working hard to ensure that problems are resolved. With regard to disqualification of directors Ms Msomi showed that upon assuming their duties directors are asked to sign a declaration that they have not been disqualified. Such a declaration has a status of an affidavit. The Department also has a system which uses a person's identity number to check if such a person has not been disqualified.

Mr M Sibiya (IFP) asked if there are plans in place which ensure that directors submit annual reports with regard to black empowerment. He also asked the Department to give a date on which the Protocol would be launched.

Ms Msomi indicated that the intention is to launch the document before the end of this year. However, because of certain problems the Department could not commit to a specific date. The Protocol establishes the principles upon which the Boards shall be held accountable to the Shareholder. The reporting requirements already set out in the PFMA and Companies Act would ensure effective monitoring by the Shareholder.

A Member asked whether the annual report to be produced would also cover issues concerning black empowerment.

Ms Msomi indicated that, given the volume of issues covered by most annual reports, issues of black empowerment might form part of annexures to the report.

The meeting was adjourned.