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Poor Performance in State owned Enterprices.

30 April 2014, 07:09
Preamble – The role of the Board

The generally accepted duty of the Board is to protect the assets of the shareholders and ensure that they receive a good return on their investment.  Boards are also the highest governing authority.  Additional duties of the board include the appointment of CEO and in some cases executive management.  In many first world countries the Board of directors also feel obliged to protect the environment, society and employees.
In the South African context, the Companies Act 71 of 2008, clearly articulates that Board of Directors must act:

•    in good faith and for a proper purpose,
•    in the best interests of the company, with care, skill and diligence that may reasonably be expected of a person.

State Owned Enterprises

Globally, successful nations have leveraged their State Owned Enterprises (SOEs) to improve the economic wellbeing of its citizens.  China for example has seen a tremendous growth in its SOEs, particularly since its economic boom era.  India and Brazil are also examples of nations whose failing SOEs have turned around and now contribute to the wellbeing of its citizens as well as contribute to the overall economic success of the nation.  Surprisingly even Gulf monarchies have successfully leveraged their SOEs, which are well managed and highly profitable.

There is a shift in the position taken by many capitalist economists, a shift away from liberal orthodoxy, as seen in the eighties.  They now acknowledge that indeed SOEs have a role to play in nation building, especially in emerging economies.  They recommend active, targeted industrial policies to enable long term growth.

An interesting point for South Africa to note is the additional recommendation of the Washington Consensus that States should avoid direct overbearing control of its productive assets.  It warns that direct state control generally leads to bureaucratic quagmire, and eventually a burden to the nation. (South African Airways comes to mind.)

The South African State Owned Enterprises

South African State owned enterprises (SOE) are controlled directly by the State. (This article will not be going into the tyranny and morass the apartheid government fostered at the expense of all its peoples, except some whites.  Rather the focus is on the post 1994 to the present paradigm).

SOEs in South Africa, post 1994, were tasked with delivering quality service to all its citizens.  SOEs were tasked to energise the poisoned apartheid era economy and drive economic growth.  The citizens of this country had great expectations.  The SOEs certainly have improved from the original status quo, but have fallen far short of potential and expectations.

Why SA SOEs are poor performers

International economists have pointed out the global culprit of poorly performing SOEs as direct state control.  In South Africa, SOEs have a significant role to play in the economy for they provide national fundamentals including Electricity, Telecommunications, Potable Water, Transport, Sanitation etc.  Thus far it is generally accepted that the SOEs are below par, indeed they are disappointing.  There is also growing concern that the failure of monopoly SOEs will lead to the further decline of the South African Economy.  

The South African President has appointed a ‘Presidential State-Owned Enterprises Review Committee’.  This agency is supposed empower SOEs through directive and good governance.  However we are increasingly witnessing political meddling in the agency, by the ruling party.  The situation at SOEs is such that the agency now acts opportunistically and pursues the interests of politicians at the expense of the principal.

The Role of Boards in the SA SOEs

As has been discussed, Boards are at the core of corporate governance.  The modern board has complex responsibilities that now include strategy evaluation, risk assessment, financial instruments, fraud prevention, financial accountability, ICT oversight and Systems of Control.  Thus it is critical that the Board is an intellectual body and not a political puppet.  While the politically elected party should provide overarching direction garnered from the citizens, it should never directly interfere with any government entity.

The ANC has enormous input in the construction of Boards of SA SOEs.  Today, these boards run the SOEs.  Even a cursory look at the SOE Boards reveals political nepotism, cronyism and corruption.  For example, consider the SETAs and one will immediately see the influence of the SA Communist Party and some of the tri-partite alliance (various unions).  Chairmen and women of these boards, by and large, enforce the will of their master politicians on the organization. These acts are then party political and thus not necessarily what is best for the organization or the country.  There will inevitable be a blurring of lines separating what is government and what is the party.  SOEs and other public organizations are being pillaged as party politics takes centre stage.  Appointed chairmen and women are not accountable to the organization, but rather their political gods.  Chairmen and women fear nothing except their gods, who can bestow and take away favour.

Failing Boards at the heart of Failing Organizations

SOEs fail to deliver because their boards are run by politically appointed incompetent individuals.  Their political masters cloud their ability to be independent in judgement.  These board members continually direct the SOEs in directions that would benefit them personally or their political masters.  Today the image of many SOEs have been tremendously compromised (SABC board and executive shenanigans comes to mind). Personal and political agendas also trigger internal disagreements and result in a dysfunctional board.

There is certainly a serious lack of trust in the boards running SOEs.  The informed public don’t have any trust or confidence in the boards.  Employees in these organizations don’t trust their boards either.   No, you don’t need a survey to establish this.  Just a casual chat with employees who interact with board members will reveal how disliked and untrusted they are at most SOEs.  Subject matter experts advice that if large numbers of employees do not trust the board, its recommendations and decisions are likely to be treated with contempt. Actions will be undertaken due to fear, rather than an inclination to add value. Indeed the high turnover rates within many SOEs, among other issues, points to a dissatisfaction with the ruling board.  An unconvinced workforce results in below par production.

The SOEs are infested by Dominating chairmen and chairwomen.  These individuals are of course appointed by the ruling party or its alliance partners.  These men and women are generally a law unto themselves.  Observing them in action will reveal the opaque nature of the board meetings.  These individuals usually have the final say and take decisions without bothering to genuinely consider other board members opinions.  Indeed, these political appointees regularly dominate board meetings.  Dear reader, if you have attended such sessions, you will not be surprised in the statement that these chairmen and women often verbally assault management and executives. It will also be noted that they usually reserve a particular hatred for CEOs, especially those that are knowledgeable and not appointed by the standing board.  It is not uncommon for chairmen / women to harass fellow board members, especially those not as politically connected or in the right click (the Zuma click, comes to mind).

A final reason for the failure of SOEs through failing boards is the non-participant board member.  In South Africa, which it seems cannot shake off its racist heritage, the non-participant board member is usually Coloured, White and / or Indian.  (We can also observe tribalism, in this context, on a few occasions).  And indeed most of the chairpersons are now black.  Now, back to the non-participant board member – these individuals are usually not politically well connected.  They are likely to be subject experts, such are risk, finance, audit etc.  They often sit on these boards for the prestige of the position as well as the financial benefit. These characters always attend meetings, to collect the attendance pay, but rarely speak.  They are scared to some extent, and prefer the speak when spoken to tact.  They are often flown in for meetings from various parts of the country and accomodated at quality hotels, all expenses paid, at the tax payer’s expense.  When they do speak, it is usually to agree with the politically connected speaker and thus get into his or her good books.  Another rare time one can hear them is when the topic of discussion is genuinely subject matter related, eg. Information Technology architecture framework.  

Concluding the argument, all of these contribute to the overall dysfunction of the SA SOEs.  Reflecting again on the preamble at the top of this article, are the boards doing what they should?  Dear reader, what are your thoughts?

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