Termination of Contract of Employment of Mr Khaya Ngqula, Former Chief Executive Officer of SAA: Committee Inquiry

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Public Enterprises

24 March 2009
Chairperson: Ms F Chohan (ANC);Acting Chairperson: Mr P Hendrikse (ANC)
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Meeting Summary

The Board Chairperson of South African Airways reported the details of the termination of the contract of former CEO of SAA, Mr Khaya Ngqula. The report covered the process followed and the rationale for the decision to terminate the former CEO’s contract. SAA also commented on the investigation of retention premiums. They reported that the details of the termination would be disclosed in their Annual Report, due to be released in September 2009. They could disclose that Mr Ngqula had repaid his retention premium. The SAA Board was scheduled to hear a progress report on the forensic investigation on 31 March 2009.

Some comments and questions that arose from his report:
▪ The Committee noted that a statement from Cabinet was in complete opposition to the decision of the Board.
▪ The Committee had requested information on retention bonuses for SAA senior management some time ago and had not received this.
▪ The frustration in the relationship between the Portfolio Committee and SAA.
▪ Why information on the CEO payout could not be made known now instead of via the Annual Report in September 2009?
▪ Had the SAA Board been informed of the South African Transport and Allied Workers Union dossier at an earlier stage?
▪ The alleged conflict of interest and issuing of the in-flight catering tender.
▪ Should they not have retained part of the payout to pay for any claim arising out of the forensic investigation?
▪ Would it not have been prudent to receive the preliminary investigation report before embarking on the termination of the contract?
▪ What was SAA’s legal jurisdiction to terminate without Cabinet approval?
▪ The grey area in the relationship between Parliament and the boards of parastatals.
▪ The question of the need for a closed parliamentary committee to oversee state-owned enterprises due to the release of commercially sensitive information.

Meeting report

The Chairperson remarked that the representatives of South African Airways (SAA) were present as a result of a letter that she had sent them about the termination of the former CEO of SAA, Mr Khaya Ngqula. She welcomed Prof Jakes Gerwel, SAA Board chairperson, and Mr Chris Smyth, Acting SAA CEO, and commented that the issues for discussion had developed over several days and the Committee had not had the opportunity to formally interact on the issue, as Parliament had not been in session. She noted that SAA wanted to motivate for the possibility of a closed session.

Prof J Gerwel, Chairperson: SAA Board, responded that the question of a closed session had been raised in light of the sensitivity of the some of the matters. However in their discussion, they had agreed that an open session was welcomed. If sensitive matters arose, the Chairperson could use her discretion to rule that the session be closed.

The Chairperson responded that this was an amiable way forward. If the information the Committee required in response to their questions was of such a nature, they could close the session for that response. She asked Mr P Hendrikse to chair the remainder of the session as he was generally an expert on SAA.

Mr P Hendrikse, Acting Chairperson, asked Prof Gerwel to review his response to the questions posed.

Prof Gerwel summarised the seven questions posed in the letter and commented that he would not address the questions in that sequence but aimed to have them all covered and be available to answer any questions that might arise, following the response. The Board welcomed this public engagement. The media reportage had been overwhelmingly negative and pejorative without much attempt to understand the industry, the company, the recent history of SAA, the governance context or the particulars of the matter.

After the explaining the detail of the process followed, he reported that the SAA Board took the decision to terminate Mr Ngqula’s contract for what were thought to be very logical reasons. If the board had not decided to separate with Mr Ngqula, he would still be earning his salary and retention premium while on special leave. The conundrum facing the board was explained and he referred specifically to the consequences of the investigation finding against Mr Ngqula, which was that SAA would have to continue to pay the full package during a potentially lengthy appeal. It was made clear that if the investigation should uncover wrongdoing, Mr Ngqula’s separation from SAA would not protect him from the consequences of the investigation. The Board took the decision to negotiate a termination due to the need to stabilise the company and allow operations to continue without the uncertainties of a CEO on special leave. Details of the settlement would be fully disclosed in the Annual Report, to be published in September 2009. SAA was able to disclose that Mr Ngqula had repaid his retention premium as per SAA policy.

Prof Gerwel also commented on the use of retention premiums as a way to retain skilled staff. As this had been contentious, it was also one of the items being looked at by forensic investigators. A detailed report was on its way to the Committee on this matter. The independent forensic investigation continued and the SAA would hear a progress report on 31 March 2009.

Ms Chohan commented that she was particularly perplexed when she had read some of the articles of the last two weeks pertaining to SAA, particularly the issues raised by the media. One article interestingly referred to payouts to the former CEO being in the region of R33 million. She did not have the official figure, and the reports on this would only be released at a later date. Hence this was the kind of fishing expedition that could occur when some information was made public but not all facts were laid before the public. This lent itself to enormous distortion and the wild speculation that had occurred.

Prof Gerwel responded that he was also chairman of the board of a media company and had some insight into the way that newspapers worked.

Ms Chohan referred to the response and the decision to terminate his employment. The members were still not quite sure if a CEO ought to be paid a retention premium, simply because it was his job to make sure that the executives and the rest of the management team at SAA actually stayed. If this extraordinary mechanism had to be implemented because of the bleeding at SAA – then that should apply to everyone but the CEO. It was his job to ensure that the company was sound and that it had the kind of capacity that was required. This was problematic.

Prof Gerwel responded that he agreed with the sentiments but thought that the unfortunate happening had made that an almost abstract question.

Ms Chohan noted that the other issue was the possibility of protracted legal proceedings, that would hang as a noose around the company. What she found extraordinary was that they submitted that the shareholder Minister was aware of and supported the decision. A few days later, however, there was a statement from Cabinet that was completely opposed to that position. She asked if SAA could shed any light on this extraordinary turn of events.

Prof Gerwel responded that he could not say that the Minister and Cabinet had agreed. There had been no indication of Cabinet disagreeing or the likelihood that Cabinet would disagree with that decision which was what the board had taken the Minister’s involvement to mean. This was not passing the buck. It was a matter of fact and something he had shared with the President in discussions on this matter. He did not think that there was any conflict about that and he had not heard that either the Department or the Minister had dissociated themselves from the decision taken. This was clearly a matter for Cabinet rather than one he wanted to speculate on. The impression created by the Cabinet statement that the Board had acted unilaterally, was not factually correct.

Ms M Meruti (ANC) referred to the second last paragraph of Prof Gerwel’s response which stated that a detailed report on the implementation of retentions premiums was underway to the Committee. She thought this was long overdue and referred to a past committee meeting where the Committee had posed questions on the retention bonuses and that they were supposed to have had the answers long ago. She asked for a timeframe for the report on the retention bonuses.

Prof Gerwel responded that he was sorry to have recently learnt that answers had not been provided. He initially inquired into this and was assured that responses had been given. The letter of response awaited only his signature and once signed could be provided to the Chairperson of the Committee before the close of day.

The Acting Chairperson, Mr P Hendrikse, commented that part of the frustration in the relationship between the Committee and SAA had been the obfuscation the Committee had experienced, in particular, in dealings with the former CEO. There had been long presentations and the like and perhaps the Committee Chairperson of that time should have called them to order. Answers would be buried in a lot of paper and this might have given rise to some of the attitudes towards SAA senior management. Another part of this could have been the attitude of the previous Minister to the former CEO – where the CEO could do no wrong in the Minister’s eyes. That had led to quite a bit of frustration in the past.

Mr Hendrikse referred to the comment in the response letter that the payout details would be revealed in the SAA Annual Report in September. He asked what the difference was between that information being made available now or in the Annual Report in September.

Prof Gerwel responded that they had statutory disclosure responsibilities and the Annual Report was the formalised mechanism for that disclosure. They had worked with labour lawyers throughout the process and their advice was that in settlements like these, there were these issues of confidentiality. On the other hand, they had reminded the lawyers that this was public money and that they were governed by the Public Finance Management Act and would have to disclose this information in the statutory mechanism for disclosure. He could see Mr Hendrikse’s point but they were governed by their legal advice.

Mr Hendrikse responded that one of the challenges that Parliament faced was that they did not have lawyers to advise them as permanent members of the Portfolio Committee. They had argued for specialist researchers to work with the committees and perhaps this would be addressed in the next Parliament.
Mr Hendrikse stated that he understood the rationale for retention bonuses, but one matter that had concerned them in the past was the high turnover of senior managers at SAA. When the Committee had tried to find out why that had happened, they had been told that it was because of the high mobility in the industry and that such people were in big demand. Informally, they had heard that it was because of differences people had had with the CEO. Perhaps retention bonuses were not the way to go, and they should instead address the cause of the problem – if that was the problem at the time.

Ms Chohan referred to news articles that the South African Transport and Allied Workers Union (SATAWU) claimed to have submitted an earlier report to the Minister, who then submitted it to the Board. Subsequent articles indicated that there was no written report prior to now. The question remained whether the Board had been aware of the allegations by SATAWU or any other party. It did seem that these allegations were doing the rounds and had not been taken seriously because upon investigation, they were found to be without foundation. Clearly when the Board took the decision to place the CEO on special leave, they would have been convinced that there were some grounds to do so. She asked if there was an earlier occasion where the Board was informed of the issues now being investigated.

Prof Gerwel responded that he had to be careful in his response because there was a forensic investigation underway and the investigated party had rights in this matter.
SATAWU had been canvassing the Minister about these issues (also regarding the management restructuring at SAA), sometime in December 2008. Minister Mabandla had mentioned that SATAWU had approached her sometime in January and she eventually gave him the dossier from SATAWU. This dossier was with the forensic investigators. In discussions with the shareholder, they had agreed to instigate an independent investigation into that. The former CEO had insisted on this investigation, as he believed that he could prove his innocence. What the Board then did, was appoint a sub committee to engage a forensic agency and to draw up the terms of reference. In addition to the items in the SATAWU dossier, the Board had scanned some of the newspaper reporting (as the former CEO was often reported on) to add to the items mentioned in the SATAWU dossier.
To answer the question of whether Board members were aware of these issues, he responded that they were not aware to his knowledge. Board members had learned of this upon receiving the dossier from the Minister and the press reports. There was one report on conflict of interest and this was one item currently under investigation.

Ms Chohan referred to the conflict of interest and tendering irregularities in the acquisition of the in-flight catering contract, and asked when the catering contract had been issued.

Mr J Smyth, Acting SAA CEO, said that the contract dated back to two years before when it was put out to tender. It was a long process and ended up being retracted and restarted a number of times. It was currently at the stage of there being a recommendation but there was no contract signed yet. The Board had accepted the recommendation but, subject to further negotiations, no contract had been signed at this point.

Ms Chohan responded that this was news to her as the news reporting had made it seem as if this was a fait accompli and that somebody had benefited in a manner that was untoward. The fact that it had not been awarded was new information. She referred to the matter of the tender being retracted and the process being restarted and asked what the reason for this had been.

Mr Smyth responded that the main reason for this was to get a clearer sense of what kind of pricing was available. The contract resided with a subsidiary of SAA and the main reason for withdrawing it was the decision taken to attempt to combine the sale of Air Chefs, the subsidiary, with the awarding of the contract. This was not caused by process deficiencies.

Ms Chohan referred to the termination of the contract of employment of the CEO prior to the finalisation of the investigation and any potential financial loss to the company. If the contract of employment had not been terminated and the result of the forensic investigation found that monies were actually owed to SAA, SAA would have been in a far stronger legal position to retrieve such monies, had they retained the payment to the CEO as a portion of the unfinished contract as a matter of propriety – as opposed to the situation they now found themselves in (having removed the CEO from their employ). Any further claim arising out of the forensic investigation would have to be pursued in normal civil proceedings. She knew that it was often difficult to retrieve money through civil proceedings and they may have to deal with the long legal battle they had sought to avoid. In the interim, there was nothing stopping the CEO from spending what he had been paid. He might then not be able to return any amounts in question, unless there was a specific “clawback” in the agreement with the CEO. She asked if there was any such clause in the interests of the company.

Prof Gerwel responded that their legal advice had indicated that the route of suspension was not a route they could legally pursue. The alternative was special leave in which they would have paid the full salary and benefits. Even then, they would not have been able to tell him to save that money, in the event of claims against him. He disclosed that the termination agreement contained a very explicit clause to the effect that the company did not indemnify anything and if there were findings of impropriety, the company would follow its right. This was very clear in the termination agreement.

Ms Chohan asked when the contract of employment would have terminated, had it not been prematurely terminated.

Prof Gerwel responded that it would have terminated in December 2010.

Ms Chohan asked if they expected the forensic investigation to be completed prior to that.

Prof Gerwel responded that the Board had a scheduled meeting on 31 March 2009 to hear a progress report on some aspects of the investigation. He had raised the point that the terms of reference of these investigations were quite broad. The Board and shareholder had agreed that it should be broken up into two parts. The first was more specific and the second would go into examining all procurement deals and tenders going back to 2003. The consequent length of the report was therefore a danger they faced. He was pushing for an earlier report.

Ms Chohan responded that she understood this to mean that there was not, as yet, a preliminary report and that they were hoping to get an indication of where the investigation was on 31 March 2009, as well as some sense of the potential materialisation of these allegations. She asked if it would not have been prudent to receive the preliminary report before embarking on the termination of the contract. In that way, they would have had a sense of whether there was something substantial there or if the allegations were made out of nothing.

Prof Gerwel responded that he had the preliminary report and would make that available to the Committee. The Committee would, however, see that it was more a report on what the investigators had done, rather than on findings. It was very difficult to quantify the likely suspected amount SAA might have held back. The termination agreement was for the reasons of getting the CEO formally out of the system of the company while the investigation was underway. The Board would have waited quite a while to get a substantive preliminary report to make that decision. They might have been wrong but the Board and the shareholder thought this the best way to go for the company’s functioning and stability.

Mr Z Kotwal (ANC) thanked Prof Gerwel for the clarity and demystification of the matter.

Mr Hendrikse remarked that there were many grey areas in the relationship between Parliament and the SAA Board. The Board reported to the shareholder representative, who was the Minister, and the Minister reported to the Portfolio Committee. There was also the relationship where SAA presented their annual reports to Parliament. In essence, there were reporting complexities. The next Parliament would have to pursue the matter of how to deal with these matters with all State Owned Enterprises (SOEs). He wondered if there should not be a role for Parliament in the appointment of board members, in clarifying the relationship.

Mr Hendrikse commented on the question of confidentiality when it came to SOEs. He accepted that this was done in good faith on the part of SAA but there was also the question of who decided on the confidentiality. He understood that this information was often commercially sensitive and asked if Parliament should not have a special committee such as the Joint Standing Committee on Intelligence (JSCI) whose members would be security vetted to deal with confidential issues.

Prof Gerwel responded that this went to the issue of the governance of public entities. He was of the opinion that there were avoidable complexities in the relationship between the board, management, minister, shareholder, department, Cabinet and Parliament. He agreed that it needed to be debated, clarified and be made more efficient. He was still not clear on the exact powers and competencies of portfolio committees in Parliament. He often hoped they could return to the period where public hearings were used to appoint boards. If he understood correctly, Parliament did have the right to subpoena information that had been classified as confidential. This was one way of getting around commercial or other confidentialities, using the right of Parliament to know.

Ms Chohan responded that it was true that Parliament had the right to do that. The members of the JSCI were sworn to secrecy and they did not have that mechanism in this and other portfolio committee for obvious reasons. The balance had to be maintained between the public’s right to know and the issues that could affect commercial viability of some of the SOEs. SAA was particularly susceptible to the kind of leaks which might emanate. The Chairperson would have to deal with those very dicey issues and would ultimately be the referee. This was an unfair role. The practice had therefore been that information should not be provided to the Committee if they did not want that to go out to the media. Although Parliament did have this power, the question remained whether it was worth the fallout if commercially sensitive information was released that might adversely affect SAA.
Parliament had a responsibility to probe parastatals and equally had a responsibility, as a functionary of the state, to protect state interests. What SAA might perceive as commercially sensitive might not necessarily be seen in the same light by the Committee. It was an energy sapping interplay and not the best mechanism one could have and the debate should continue.

Ms Chohan stated that they she had looked at the Board Charter and comments in the response letter and asked what SAA’s legal jurisdiction was to terminate the CEO without Cabinet’s approval. She was further unsure as to whether approval by Cabinet amounted to an official appointment.

Prof Gerwel responded that they never dealt with Cabinet. The Board dealt with the shareholder Minister. The Board did the process of appointment and the final approval came from the Minister and he assumed that this would go to Cabinet. The only other place he had dealt with this issue was as Chairperson of the Human Sciences Research Council (HSRC). The HSRC Act was clear on the board’s competencies. The case of SAA was less clear.
In the case of Mr Ngqula, the Board had no involvement in that appointment.

Ms Chohan asked if they could clearly state that it was the Minister of Public Enterprises who assented to and approved the termination.

Prof Gerwel responded that this was contained in the correspondence he had left with the Committee and this extended to the shareholder Minister being involved in approval of an acting CEO.

The Acting Chairperson asked members and delegates for concluding remarks.

Prof Gerwel responded that he welcomed the opportunity to explain and bring clarity to some of the speculation before one of SAA’s oversight bodies.

Mr Hendrikse referred to an overseas study trip where they had learnt that it was not the ownership of the SOE that was important, rather, it was the management of the SOE that was important. There had been calls to sell off SAA. The Committee was not of that school of thought and it did believe that management was important. He wished SAA well and commented that they wanted SAA to succeed but that their frustration lay in the events surrounding SAA.

The meeting was adjourned.



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