Should SOE boards have greater autonomy?

(Tehillah Niselow, Fin24)
(Tehillah Niselow, Fin24)

Balancing the imperatives of state-owned enterprises (SOEs) as companies with shareholders should be a key part of the drive to reassess the regulatory framework governing the appointment of new boards.

In his state of the nation address earlier this year, President Cyril Ramaphosa implored government to “build a society defined by decency and integrity that does not tolerate the plunder of public resources”.

“The inquiry [into state capture] is critical to ensuring that the extent and nature of state capture is established, that confidence in public institutions is restored and that those responsible for any wrongdoing are identified,” he said.

Integral to this pledge is the appointment of new boards of directors of SOEs as a significant step towards delivering public services, investing in infrastructure, creating jobs, diversifying wealth and providing opportunities for people to realise their potential.

The appointment of new boards is therefore part of a broader agenda of structural reforms in our country that began when the first democratic government came into power in 1994.

By the late 1990s, the idea of a democratic, inclusive, nonsexist, nonracial post-apartheid public sector had triumphed, morally and politically.

However, the mood in the country in recent years has been anything but triumphal.

Public entities have suffered major blows to their operational functionality and capability to deliver public value due to maladministration, corruption and state capture.

South Africa is now one of the most unequal economies in the world, more than half of the population lives in poverty and 27% of the labour force is unemployed (with the expanded definition at more than 36%).

Growth is not expected to exceed 2% over the medium term.

Materially turning the economy around towards strong and inclusive growth will require swift implementation of a bold reform agenda.

The developmental agenda

As the tide of history turns towards a new state-building exercise, SOEs should be central to our developmental and economic agenda.

According to last year’s strategic plan written up by the department of public enterprises, which has oversight responsibility for several of the approximately 700 SOEs at national, provincial and local level, the challenge is about effectively arguing that there is a greater role for SOEs as delivery agents in a context of massive inequality.

The policy thrust now is towards the construction of a capacitated, capable state with ethics at the centre.

It is a sense of common purpose, bound by the constitutional goals of a capable developmental state, that underpins our new dawn.

However, to durably improve growth and lift people out of poverty, these actions need to be followed by the implementation of a broad set of reforms in governance.

More generally, two developments are driving the SOE turnaround.

Firstly, there has been a move away from the shareholder-dominated enterprise to one that is more inclusive of relevant stakeholders.

While this has not detracted from the primary relationship between government as shareholder and the role of SOE boards, strident moves are afoot for greater shareholder activism in the enterprises.

Having the state as shareholder therefore poses unique challenges for the governance of SOEs. Firstly, to fulfil its wide range of functions, in most economies, the public sector determines, usually through a political process, the outcomes it wants to achieve and the different types of interventions.

In South Africa, these include enacting legislation or regulations; delivering goods and services; redistributing income through mechanisms such as taxation or social security payments; and redistributing economic opportunities through affirmative procurement.

Boards play a central role in corporate governance and the performance of SOEs, and have ultimate responsibility, including through their fiduciary duties, for developing corporate strategies and overseeing SOE performance.

In this capacity, the boards act fundamentally as intermediaries between the state as a shareholder and the company and its executive management.

This role is no less important in SOEs than in private companies.

However, the state (or government) as a shareholder has different and diverse objectives in terms of what it wants from SOEs, and these can sometimes conflict. They therefore need to be managed in a manner that achieves an efficiently managed company.

Secondly, SOEs operate in strategic sectors of the economy, and their impact is massive, with many having the potential to stimulate economic growth. The challenge of this unique relationship between government as shareholder and the SOE boards running the enterprises is now being reframed to allow effective clarity of roles and leadership by each of the parties.

Performance measures are therefore determined by outcomes rather than throughputs and outputs within the entities.

According to recent Organisation for Economic Cooperation and Development recommendations, SOE boards should be charged with a duty to act in the interests of both the state and the company.

With an increasingly prevalent practice of “commercialisation” of SOEs in recent decades and growing expectations for improved performance, many governments have made efforts to professionalise boards of directors, and have sought to make boards perform better by ensuring their independence and shielding them from ad hoc political interventions.

Governments have taken a number of steps to implement their company laws to improve the efficiency and performance of SOE boards.

In an increasing number of countries, SOE boards have evolved from oversight bodies entrusted with compliance towards driving performance and establishing corporate strategy.

The appointment of new boards in South Africa is therefore only the first step in combatting inefficiency and corruption in SOEs.

Together, the strategic measures taken by the department of public enterprises and SOE boards reflect a paradigm shift in the way government and its entities at all levels do things.

Balancing the imperatives of SOEs as companies and shareholders must be a key part of the drive to refashion the regulatory framework governing the appointment of new boards.

The challenge is investing in infrastructure to reduce the cost structure in the economy so that other economic players become more efficient and competitive while increasing the efficiency and quality of public service.

The boards of SOEs should be assigned a clear mandate and ultimate responsibility for the enterprises’ performance.

Their role should be clearly defined in legislation, preferably according to company law.

They should be fully accountable to the owners, act in the best interest of the enterprise and treat all shareholders equitably.

Ultimately, success will be dependent not just on the aptitude of the boards alone, but also on their relative autonomy from government interference. Increasing the autonomy of boards would support cost-effectiveness, improve the efficiency of SOEs and reduce fiscal risks.

The bottom line is that governance is not an end in itself; it is a means towards eradicating poverty and inequality, building a prosperous and united nation, and creating a better life for all in South Africa.

*Mbhele is a director of strategy and marketing  at Business Leadership SA. He writes in his personal capacity.

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