Corporate Governance Report: adoption

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
3 0ctober 2001
CORPORATE GOVERNANCE REPORT: ADOPTION

Chairperson: Mr. B.Martins (ANC)

Committee Report on Corporate Governance Adoption
The Committee adopted their report on Corporate Governance.

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

PREAMBLE
Government has a significant investment in State-owned Enterprises (SOEs), some of which are of a significant strategic nature. Shareholding and corporate governance matters in these enterprises are critical for government especially in the global and competitive environment in which these entities operate. It is essential for government to develop a focused approach in managing its shareholding portfolio in a consistent manner for it to realize maximum value in its investment.

The report by the Public Protector as contained in Ad Hoc Committee report No 13 of the Public Protector that is the subject matter of this report to parliament highlights pertinent corporate governance issues demanding urgent government attention.

The government's approach on corporate governance is reflected in the protocol on corporate governance for public entities as published in October 1997. This protocol encapsulates global and international corporate governance principles consolidated in the King Report of 1994. The intention of government in adopting the protocol was to provide for an appropriate corporate governance framework to be applicable within all SOEs, Entities, Bodies and Organs. What the protocol did not accomplish however, was the operationalisation and compliance mechanisms of the principles therein contained. Equally, the protocol does not provide for a vehicle for uniform, consistent, coordinated and non-fragmented approach for the management of government shareholding interest in SOEs.

The direct consequence of this deficiency in the protocol is the divergent approach by different government shareholding departments in the implementation of the corporate governance principles and management of shareholding matters.

Whilst the Public Protector's report highlights corporate governance shortcomings within a specific context of the CEF and SFF, in essence it calls for remedial actions on the part of government to avoid the recurrence of these and some of the corporate governance transgressions within the general body of SOEs. The purpose of this report therefore is to attempt to address the questions the Public Protector's report posses.

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

(a) Issues of corporate governance in the State Owned Enterprises.
(b) An integrated approach on the management of the state shareholding in the State Owned Enterprises ("SOE"),
(c) To respond within a broad framework on the questions arising from the Public Protectors report and possible responses thereto.

2. BACKGROUND
The need for this report arises from a report, which was referred to the Portfolio Committee on Public Enterprises by the Ad Hoc Committee (report No.13 of the Public Protector) indicating matters of corporate governance breaches and requiring that these matters be addressed. In light of the said report, this Committee was entrusted with a responsibility to consider and report to Parliament.

3. SUMMARY
The current situation is that the shareholding in the SOE's is located in different government departments and governance matters are handled in a diverse, varied and fragmented manner from department to department. This leads to uncertainties in both the SOE's and to the departments themselves and ultimately 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 all levels of government, it is submitted, have not even had sight of the Protocol on Corporate Governance.

4. DISCUSSION
The report by the Public Protector, Ad hoc Committee on Report of No.13 clearly indicates the following issues relating to Corporate Governance within the SOE's, Public Entities and within government:

The need for a board with a balance of Executive and Non-Executive Directors (Reference to point 9 of page 153 of the report). The report also indicates that reference should be made to the King Report on Corporate Governance for guidance in addressing these matters.

The report indicates a need for a uniform approach to addressing Corporate governance matters within the government. It indicates that …"the State Institutions should form the model for good Corporate Governance" (Reference to point 10 of page 153 of the report)

The report imposes an obligation on those entrusted with the custodianship of the state assets to manage these assets in a manner that is in compliance with the principles of corporate governance as espoused in the Corporate Governance Protocol for use in the Public Entities, published in October 1997.

These principles include:
-Criteria for appointments of board such as appointments, remuneration, accountability, ethics, probity and overall performance of the board and the public entities.
-Roles of shareholder/s in relation to clarifying the multifaceted roles of Government as a shareholder. This includes clarifying reporting by the public entities to the respective Government departments.
-Financial reporting, transparency & audit both internal and external. Financial reporting presupposes having proper business plans, strategic plans and restructuring plans. The financial reporting also include a report on tax, dividends, recapitalization and other financial matters.
-Communication and participation by all stakeholders.
-Technology, risk management and fraud detection plans.
-Compliance with the instruments of good governance which include legislation, Memorandum and Articles of Association, Protocol on Corporate Governance, Shareholder Compacts, Internal Business Policies and procedures.

In giving effect to the Protocol and the provisions of the Treasury Regulations, the shareholder compacts have been developed for the use in the SOE's. 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 to set the performance targets to be attained by the SOE's annually in an attempt to achieve the long-term targets set out in a corporate plans. If the objectives and goals 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 maximisation of the shareholder value as envisaged in the Restructuring Policy Framework of Government.

5. RECOMMENDATIONS
In the light of the above, Parliament is requested to consider the following recommendations as a way forward in handling the State's shareholding and governance matters:

5.1 That the Government Departments entrusted with a responsibility of managing shareholder matters, attend to these matters in a uniform manner. This can be achieved through adopting the same processes in implementing the principles on corporate governance as reflected in the protocol, King Report and in point four above. 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 corporate governance matters.

5.2 The shareholding of SOE's should be handled in a manner that allows for growth and prosperity, by defining the mandate of the SOEs and allowing the management to give the SOE strategic direction that will optimally maximise the SOE's potential in business. This can be achieved by removing the uncertainties that the management of SOE's 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 thise roles.

5. 3 A shareholding model/vehicle will have to be considered by government. This model will assist government in addressing the fragmentation and uncoordinated approach in handling the shareholding issues.

5.4 Whilst government is restructuring its SOE's it is understood that this is done to achieve maximum efficiencies. It has however, to be understood that whatever asset has not been restructured either through restructuring, 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 investment possibilities and a full realisation of the shareholder value.

Various models exist in various countries where these models are being used successfully. In Ghana for example , a Commission called State Enterprises Commission is responsible for all the state businesses and manages government shareholding therein. In Singapore a "Holding Company Model" known as Temasek is the shareholding company used, whilst is Australia the Treasury and the Auditor-General's office are used to manage government shareholding. In New Zealand the vehicle used is known as Crown Company Monitoring and Advisory Unit. India has a model akin to our Department of Public Enterprises as a vehicle for management of all State-owned Enterprises shareholding interests of government. These models have to be investigated further with a view to finding a model that will be able to address the South African socio-economic requirements.

5.5 In the meantime, extensive workshops for departments, provinces and even Parliament are necessary to enhance the level of awareness and to entrench a culture of good governance both in government and business. These workshops should also aim at clarifying the responsibilities of government as a 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 popularising good governance ethos within the entities.

5.6 Those departments that have made significant progress in developing a culture of corporate governance 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.

5.7 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 non-executive directors, board appointment and remuneration policies, board selection processes including 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.

5.8 Parliament should take a keen interest and an active role in promoting corporate governance . In this regard, a Parliamentary Committee on Corporate Governance could be established. Such a step will contribute significantly in the development of a culture of corporate governance in the country and in line with international trends, the promotion of the role of Parliament in corporate governance.