The Institute of Directors in Southern Africa (IoDSA) is adding a governance view to the concern being expressed in recent new articles around proposed changes to the SABC’s Memorandum of Incorporation (MoI) by Minister Faith Muthambi. Parmi Natesan, Executive: Centre for Corporate Governance at the IoDSA, says that some of the reported changes do not align to governance best practice.

One issue raised by Natesan is the fact that the changes to the MoI has the potential to blur the governance roles played by the shareholder (the state) and the SABC board. In the private sector it is very clear that the shareholders hold shares in a company and appoint a board to direct and oversee the company on their behalf. 

“The board could bear liability if its decisions are wrong, so it’s important that it has the power to make its own decisions,” Natesan explains. “Thus if shareholders interfere too much in the way that the company is run, then governance breaks down. This is unfortunately a common problem that exists in the public sector as boards become rubber stamps for the dominant shareholder—which results in poor board and ultimately poor company performance.”

Another adverse result is that these boards find it increasingly difficult to attract directors with the right levels of knowledge and skills. Individuals with governance knowledge would be reluctant to serve on such boards because they realise they will incur great responsibility and liability, whilst their true power to make the right decisions are restricted. 

The MoI also permits the Minister to appoint the COO as acting CEO when the latter position is vacant, and also gives her the power to extend employment contracts for the CEO, CFO and COO. 

Natesan points out that there is a danger of sacrificing general principles in order to achieve short-term goals. There’s widespread agreement that boards have to be responsible for executive appointments because executives are responsible and accountable to the board. When executives are appointed by the shareholder, they tend to feel accountable to the Minister, as the representative of the shareholder, and not the board. Again, as the IoDSA’s studies show, this causes significant confusion around role clarity and reporting lines within the governance structure.

A more complex, though related, issue is the power given to the Minister to recommend the removal of a board member. Shareholders have always had the power to remove directors but Natesan cautions that the dynamics are complicated when there is a single shareholder represented by a single individual. In the private sector, the fact that there are generally multiple shareholders ensures that alternative viewpoints compete, and the delicate balance between shareholders and board can be maintained. 

“The fact that public sector corporations have only one shareholder who is politically driven, makes it much harder to strike the right governance balance, and this in turn compromises the board’s ability to do its job,” says Natesan. “If the single shareholder refuses to follow governance best practices in pursuit of short-term, political ends, it will fatally damage the ability of an entity to function effectively. South Africa is a global leader in corporate governance—we should practice what we preach.”

ENDS
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MEDIA CONTACT: Cathlen Fourie, 012 664 2833, [email protected] 

For more information on the IoDSA please visit:
Website:  www.iodsa.co.za
Twitter:  @The_IoDSA
LinkedIn: The Institute of Directors in Southern Africa group  

The recent warnings issued by the Company and Intellectual Property Commission to five state-owned companies demonstrate once again just how seriously boards need to take their governance role, says Parmi Natesan, Executive: Centre for Corporate Governance at the Institute for Directors in Southern Africa (IoDSA). 

As reported in Business Day Live, the CIPC warned the boards of the South African Express Airways, South African Forestry Company, South African Broadcasting Corporation, South African Post Office and the Central Energy Fund that they risked being declared delinquent or of being placed on probation if they failed to address their non-compliance with the Companies Act. 

A finding of delinquency will adversely affect the long-term reputation of these directors, effectively calling their fitness for office into question.   It could also results in these directors being disqualified in terms of the Companies Act, from taking up Directorship positions in the future.

“The CIPC has indicated that it intends to be proactive in holding these companies and their boards to account,” observes Natesan. Governance best practice, as denoted in King III Principle 6.1, is for the board to take ultimate accountability for ensuring compliance with laws and regulations. “Compliance with the law is not optional, and directors need to make sure that the companies that they are overseeing are doing so.”

Natesan points out that the IoDSA’s 2014 benchmark study of board performance shows that public-sector boards, by their own admission, are lagging those in the private sector in most areas. 

Aside from the board, Natesan says that in the public sector, the audit committee should play a big role in ensuring that the company, inter alia, complies with the applicable legislation. However, audit committees in the public sector generally need to be strengthened, as is indicated by the high percentage of public-sector entities whose financial statements are disclaimed annually by the Auditor-General—for example, only 48 percent of audited organisations obtained an unqualified audit opinion in 2011-12, while 94 percent were found to be materially non-compliant with legislation.  The CIPC said it is particularly concerned about irregular expenditure, which points directly to a lack of quality audit committee oversight. 

“The long and short of it is that audit committees have a vital role to play in assisting their  boards with discharging their duties as regards to compliance. In the public sector, particularly, audit committees sometimes face several challenges which make it difficult for them to adequately fulfil their responsibilities,” says Natesan. “As this latest development shows, boards in both the public and private sectors will bear the consequences of their audit committee’s lack of performance, and should thus be looking for ways to improve it—such as participating in the Public Sector Audit Committee Forum, a forum created to strengthen Audit Committees in the public sector.”

ENDS
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MEDIA CONTACT: Cathlen Fourie, 012 664 2833, [email protected] 

For more information on the IoDSA please visit:
Website:  www.iodsa.co.za
Twitter:  @The_IoDSA
LinkedIn: The Institute of Directors in Southern Africa group