Corporate Governance: discussion on recommendations

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Public Enterprises

06 June 2001
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Meeting report

PUBLIC ENTERPRISE PORTFOLIO COMMITTEE

PUBLIC ENTERPRISE PORTFOLIO COMMITTEE
6 June 2001
DISCUSSION ON REPORT ON CORPORATE GOVERNANCE


Chairperson: Mr ST Belot (ANC)

Relevant Documents
:

- Report of the Ad Hoc Committee on Report 13 of the Public Protector
- Report of the Portfolio Committee (Public Enterprises) to Parliament on the Report of the Ad Hoc Committee on Report Number 13 of the Public Protector as Referred to the
Committee (see Appendix below)

SUMMARY
The Department of Public Enterprises briefed the Committee on the Report submitted by the Ad Hoc Committee on Report 13 of the Public Protector [that dealt with the affairs and financial statements of the Strategic Fuel Fund Association]. The Committee was specifically concerned with whether corporate governance applies to all government departments and who would be responsible for implementing corporate governance.

MINUTES

The Chairperson reminded the members of the Committee that the National Assembly had referred the Report of the Ad-Hoc Committee on Report Number 13 of the Public Protector to the Committee. The National Assembly had directed the Committee to consider those clauses of the Report [appearing in the Announcements, Tablings and Committee Reports (ATC) of 1 March 2001] dealing with corporate governance recommendations. After discussing the report, the Committee must report back to the National Assembly.

The Chairperson recommended that the Report be tabled in the Committee for members to discuss the report with their respective parties.

Mr A van Jaarsveld (NNP) and Mr R Heine (DP) supported the recommendation.

Mr Heine re-iterated his view that their should be a top-down approach to corporate governance. He added that this approach should include the executive and that he had asked SCOPA to investigate this possibility.

Mr M Msomi (IFP) asked why the National Assembly had instructed the Committee to examine the report.

The Chairperson explained that the Ad-Hoc Committee had produced a report on Report Number 13 of the Public Protector. The report by the Ad-Hoc Committee instructed the Public Enterprise Portfolio Committee to consider the report as a result of the clash between the then Minister of Minerals and Natural Energy Mr Penuel Maduna and the Auditor-General.

The Ad-Hoc Committee's report was adopted by the National Assembly, but parts were referred to different Committee's for closer scrutiny. The Public Enterprise Committee has to consider sections 4, 9 and 10. The Chairperson pointed out that these sections concerned issues of corporate governance.

The Chairperson said that he did not have a copy of the ATC with him and hence he was asking members to consider the report very closely to ensure that they fulfilled their brief.

Mr Msomi said he understood the Chairperson's explanation but asked how closely the Committee should examine the report.

Mr Heine said that according to paragraph 2 on page 2, the Committee should consider who is responsible for auditing corporate governance for each SOE. He suggested that a person be appointed for implementing corporate governance in SOE's.

Mr Msomi pointed out that the shareholder compact signed by public enterprises compels each SOE to be responsible for its own corporate governance issues. These issues can be scrutinised by the Committee through their annual reports.

Inkosi Nonkonyana (ANC) said that in order for the Portfolio Committee to exercise its oversight role, the Committee need only ask the Department how it was tackling the issue of corporate governance as laid down by the Public Protector. The Committee could take action from this point.

Mr Msomi supported this view and suggested that the Department be asked to brief the Committee. He added that this did not preclude members from studying the report.

Mr Heine said that the Department should be asked whether the rules of corporate governance apply to all the SOEs. Further he said that the Department should be asked who is responsible for driving corporate governance.

The meeting was adjourned.

Appendix
REPORT OF THE PORTFOLIO COMMITTEE (PUBLIC ENTERPRISES) TO
PARLIAMENT ON THE REPORT OF THE AD- HOC COMMITTEE ON
REPORT NUMBER 13 OF THE PUBLIC PROTECTOR AS REFERED TO THE
COMMITTEE.

I. PURPOSE

The purpose of this report is to report to Parliament on the following:

(a) Issues of corporate governance in the State Owned Enterprises and within government;
(b) An integrated approach on the management of the state shareholding in the State Owned Enterprise (SOE) as referred to the Committee by the report of the ad hoc Committee on report number 13 of the Public Protector. (Check paragraph 5(2) of the AHC report and recommendations contained in paragraph 4(4), 4(9) and 4(10).

2.BACKGROUND

The need for this report arises from a report, which was referred to the Portfolio Committee on Public Enterprises indicating matters of corporate governance breaches and requiring that the Portfolio Committee address these matters. In the light of the said report, this Committee was entrusted with a responsibility to consider and report to Parliament.

3. SUMMARY

The ADH report requested a report from this Committee to address the following matters as indicated in paragraph 5(2).

3.1 The management of issues of corporate governance within the SOEs.
3.2.The management of the issues of the State shareholding in the SOEs.

The current situation is that the shareholding~ in the SOEs is held by a principle of governance within the SOEs are handled in a diverse, varied and fragmented manner from Department to Department. This leads to confusion both to the SOEs and to the Departments themselves and results in difficulties in managing governance issues

The fragmented approach in handling governance matters is also experienced with other public entities at National and Provincial levels. To this end some of the responsible Departments at Provincial levels. may not be familiar with the Protocol on the Corporate Governance, which is a serious concern, requiring urgent attention.
4.

DISCUSSION
The ADC on Report of number 13 clearly indicates the following issues relating to Corporate Governance within SOEs Public Enterprises and within government.

· The need for a board with a balance of Executive and Non-Executive Directors. Reference should be made to the King Report on Corporate Governance for guidance in addressing these matters with particular reference to the work done by the Department on Corporate Governance.
· We also want to indicate that there is a need for a uniform approach to addressing Corporate Governance matters within government. (Reference to point 10 of page 153 of the King Report)

Those entrusted with the custody of the state assets must keep this obligation, as it will assist them in managing these assets in a manner that is in compliance with the principles of corporate governance as espoused in the Corporate Governance Protocol for the use in the Public Enterprises as published in October 1997.

These principles include:

Board such as appointments, remuneration, accountability, ethics, probity and overall performance of the board and the Public Enterprises.
· Roles of shareholder/s in relation to clarifying the multifaceted roles of Govemment as a shareholder. This includes clarifying reporting by the public enterprise to the respective Departments.
· Financial reporting, transparency and audit both internal and external.
· Communication and participation all stakeholders.
· Technology, risk management and fraud detection plans.
· Compliance with the instruments of good governance, which include among others legislation. Memorandum and Articles of Association, Protocol on Corporate Governance, shareholder Compacts. Internal Business Policies and Procedures.

ln giving effect to the Protocol and the provisions or. the Treasury Regulations, the shareholder compacts have been developed for the use in the SOEs. The shareholder compact is an annual performance agreement entered into between the boards and the shareholder It seeks to clarify the roles and responsibilities of the parties and set out the performance targets to be attained by the SOEs annually in an attempt to achieve the
Ion g-term targets set out in the corporate plans. When the objectives and goals are set out in the shareholder compacts and its supporting documents as well as in the corporate plans, it is anticipated that there could be real maximization of the shareholder value as envisaged in the Restructuring Policy Framework of Government.

RECOMMENDATIONS:
In the light of the above, it is recommended that this House considers the following recommendations as charting the way forward in the handling the State's shareholding and governance matters

· That the Government Departments entrusted with the responsibility of managing shareholder matters attend to these matters in a uniform manner. This can be achieved through adopting the same processes including board appointment remuneration and induction policies. There has to be strict compliance with these policies as soon as they are adopted. This will assist in eliminating the fragmented approach in handling board related matters.
· The shareholding of SOEs should be handled in manner that allows for growth and prosperity, by defining the mandate of the SOE and allowing the professionals to give the SOE strategic direction that will optimally maximize the SOE's potential in business. This can be achieved by removing the uncertainties that the management of the SOEs encounter on a regular basis. These uncertainties generally arise from the multifaceted role of government as a shareholder regulator and stakeholder through various Departments and at times one Department performing most if not all of these roles. The Department concerned could also find itself in a compromised position as in most instances it is likely to send mixed messages to the same SOE
· Where the Public Entities are placed under the executive authorities in terms of PMFA, the Executive Authority should fully discharge its authority and minimize a situation where National Treasury' takes full charge of the whole business reporting. This is because PMFA as it stands puts enormous responsibility on National Treasury for a number of business reporting which to a certain extent can lead executive authorities responsibilities not being taken seriously

Full financial responsibility of other public entities which are non-profit making entities can reside with National Treasury as they are either fully or partially subsidized by
government and have to account for the utilization of the assets at their disposal.
· A shareholding model will have to be considered by government. This model will assist government in addressing the fragmentation in handling the shareholding issues. It must be submitted that it has not yet dawned on some shareholding Departments as to what the real meaning and responsibilities of the shareholder are. The business environment is not stagnant and requires frill preparedness and understanding of how to manage these issues as government without placing a heavy reliance on consultants.
· Whilst government is restructuring its SOE it is understood that this is done to achieve maximum efficiencies, it however has also to be understood that whatever asset has not bee restructured either through privatization, should also attain the same level of efficiency. This can be achieved where all these assets are managed through one system of shareholding, which will consider the investrnent possibilities and a full realization of the shareholder value. Various models exist in various countries where these models are being used successfully. In Ghana for example, the Ghanaian Commission is responsible for all state businesses. In Singapore a model referred to as a shareholding company is used, whilst in Australia and New Zealand they use the Treasury and the Auditor General's office to efficiently manage government shareholding. These models have to be investigated further with a view of finding a model that will be able to address the unique South African socio-economic requirements.
· In the meantime, extensive workshops for Departments, provinces and even relevant portfolio Committees are necessary to enhance the level of awareness and to entrench a culture of good governance both in government and business. These workshops should aim at clarifying the responsibilities of government as sole or major shareholder and how it relates with other shareholders where it is not the sole shareholder. The workshops should also be extended to all public entities popularizing good governance ethos within the entities.
· Those Departments that have made significant progress in these issues should take a lead in driving these issues to avoid reinventing the wheel whilst others need to be fully capacitated to address these issues as a matter of urgency.
· Some systems are already in place and others are being developed to ensure that shareholding governance matters
are given effect to. These systems include the database of all public entities, the database of a pool of potential non-executive directors, board appointment and remuneration policies, board selection processes covering the induction, training and monitoring of performance of board members. There is always a scope for learning as the processes unfold, and Departments can learn from each other and can improve on what has been done.

Report to be considered.


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