Implementing enforceable accountability: Finding a solution for failing state-owned companies

November 1st, 2021
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The performance of State-Owned Companies (SOCs) in South Africa (SA) has been on a downward trajectory over the last decade. Against a backdrop of many issues, these SOCs are plagued by a chronic lack of accountability, which has hindered their ability to perform. The board is the focal point for ensuring the accountability of an SOC to its stakeholders, with the state being the sole shareholder in most instances. Each director and the board of an SOC, in compliance with the predominant statutes, namely the Companies Act 71 of 2008 (Companies Act) and the Public Finance Management Act 1 of 1999 (PFMA), is under a duty to always act in the best interests of the SOC. This article will provide a brief overview of the accountability and corporate governance issues facing SOCs and suggests a solution involving the implementation of an enforceable accountability framework to improve the accountability, corporate governance and, ultimately, performance of SOCs.

The lack of accountability of SOCs

The recent hearings from the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector including Organs of State (Zondo Commission) have highlighted the underperformance of many SOCs. The boards from South African Airways SOC Limited (SAA), Eskom Holdings SOC Limited and Transnet SOC Ltd have come under scrutiny as a result of vigorous questioning by the Zondo Commission. The shortcomings of SAA have become abundantly clear with business rescue proceedings being initiated in December 2019 and its former chairperson, Duduzile Myeni being declared a delinquent director under s 162 of the Companies Act, in the case of Organisation Undoing Tax Abuse and Another v Myeni and Others [2020] 3 All SA 578 (GP). It is clear from these two events, as well as testimony given at the Zondo Commission, that the board of SAA has experienced a total failure of corporate governance over the past decade. At the heart of this failure lies the demonstrable lack of accountability by the board of an SOC to its various stakeholders, including the state as its sole shareholder and the public as its ultimate funder with taxpayer money.

The corporate governance of SOCs

Every director and the board of an SOC is under a statutory fiduciary duty and a duty of care and skill to always act in the best interests of the SOC, in accordance with s 76 of the Companies Act and s 50 of the PFMA. The board is also encouraged to apply the voluntary recommended practices from the King IV Report on Corporate Governance for South Africa, 2016, published by the Institute of Directors Southern Africa, to achieve sound corporate governance. One of the core pillars of corporate governance is the achievement of the principle of accountability. There is a sector specific supplement dedicated to SOCs in ch 16 of the King IV Report, which provides distinct recommended practices for SOCs due to their unique nature and structure. The structure of an SOC is unique as the state is the sole shareholder, which begets tailoring of the recommended practices to accommodate this uniqueness and enhance the accountability of SOCs.

The accountability of SOCs is distinct in comparison to that of public or private companies. The boards of SOCs are held accountable by the minister under whose portfolio they fall. SOCs were previously under the control of the Minister of Finance but are now under the purview of the Minister of Public Enterprises (Minister). The unique challenge facing the accountability of SOCs is that the Minister, and not various shareholders, is required to supervise the accountability of the board and ensure compliance under s 63 of the PFMA. This challenge is completely distinct to the nature and structure of an SOC and not comparable to the ownership structures of private or public companies with numerous shareholders.

The presence of numerous shareholders provides an accountability enforcement measure for the boards of private and public companies. If the board fails to perform, the shareholders may demand accountability at annual general meetings and then divest their shareholding if they remain unsatisfied with the performance of the board or the company. The shareholders are also able to vote against board decisions to increase the remuneration of the directors. Through this shareholder activism, the accountability of the boards of private and public companies is enforced. Directors who take decisions, which are found to be in breach of their statutory duties, are often swiftly punished due to shareholder pressure and activism. Any complacency by the shareholders in supervising the board may result in decisions taken, which are not in the best interests of the company. This in turn may result in a diminution in the value of the shares of the company and, consequently, a loss in the investment made by the shareholders. Shareholders who desire to see a growth in their investment are incentivised to hold the board accountable to ensure improved corporate and financial performance.

This is not the case for SOCs whose sole shareholder is the state and where the Minister alone is required to hold the board to account. The Minister is then accountable to the President and Parliament for the administration of the Public Enterprises Portfolio, in terms of s 92 of the Constitution. There are no other shareholders to hold the board of an SOC accountable or to vote against board decisions, which may not be in the best interests of the SOC. Therefore, enforcement of the accountability of the board of an SOC, through the supervision of its shareholder, is diluted in comparison to the activist role played by the numerous shareholders of private and public companies. As a result of this unique ownership structure of an SOC, the accountability of its board has always been problematic. This accountability issue is further compounded when the sole shareholder, who is responsible for supervising the board, is faced with numerous allegations of complacency and corruption. The accountability of the board of an SOC becomes questionable when the accountability of the Minister and the state is compromised.

Despite being under statutory duties to act in the best interests of the SOC, the punishment levied against recalcitrant directors for a failure to discharge these duties is not often implemented. Save for the recent Myeni case (and a slew of recent media reports), there have been few court cases alleging breaches of duties by various SOC directors. With the recommended practices under the King IV Report remaining voluntary, the enforceability of the accountability for SOC directors must be embodied under the statutory duties and liabilities. The fear of punishment, which is levied against guilty directors, is meant to act as a deterrent for future recalcitrant directors. However, this retributive approach may not be the most effective enforcement mechanism for ensuring the accountability of the board of an SOC.

The enforceable accountability of SOCs

Currently, there is a Shareholder Management Bill (the Bill) that is intended to be presented to Parliament in 2021 for consideration. The purpose of the Bill is to construct a framework to improve the accountability of all State-Owned Enterprises, including SOCs, to the state. This Bill has been waylaid for over three years and the urgency of its statutory enactment has become undeniable given the recent hearings of the Zondo Commission. President Cyril Ramaphosa also appointed members of the Presidential State-Owned Enterprises Council on 11 June 2020 to assist the state to effectively reposition State-Owned Enterprises, including SOCs. However, the effectiveness of this Council has yet to be seen.

The boards of all SOCs should be galvanised into implementing their own enforceable accountability measures, while waiting for the Bill and Council. The concept of enforceable accountability stems from a reward-based mechanism, which seeks to incentivise the board of an SOC to be accountable for its decisions. It is proposed that an independent, third-party institution be created in order to rate the accountability of the board of an SOC. This independent institution may be established in terms of ch 9 of the Constitution, akin to other independent state institutions, such as the office of the Auditor-General and Public Protector.

The accountability rating by the independent institution is then linked to the amount of state funding provided to the SOC, on an ascending scale. In this way, the accountability of the board of an SOC is enforced through the incentive of a reward in the form of favourable state funding (on preferred terms) and, therefore, the possibility of increased remuneration for SOC directors. This reward-based enforcement mechanism may incentivise the board of an SOC to be accountable for its decisions. Given that the best interests of the SOC are required for every decision taken, the performance, sustainability, and growth of the SOC may consequently improve.

The strict linking of the outcome of the annual rating of the SOC to the provision of its state funding may also serve to improve the accountability of the state in effectively performing its supervisory role. SOCs with limited state funding may not be able to effectively discharge the service delivery functions that they perform on behalf of the state. Favourable or increased state funding should incentivise the state to properly supervise an SOC to ensure the achievement of a good accountability rating.

A possible solution for failing SOCs

The current retributive measures levelled against directors who are alleged to have breached their duties may not be the best mechanism to enforce the accountability of the board of an SOC. While the Zondo Commission continues to deliberate on its investigation, current and future directors of SOCs need to be deterred from attempting to commit a breach of their duties, to the ultimate detriment of the SOC and the economy at large. While directors of various SOCs may still be found to have breached their statutory duties and be held liable following the possible findings and recommendations of the Zondo Commission, the dismal performance of SOCs still needs to be addressed.

The implementation of enforceable accountability as a corporate governance mechanism for all SOCs may serve to improve their performance. The mechanism for enforcement being a reward-based approach, as opposed to a retributive-based approach, may better illuminate, and significantly improve the accountability of the directors and the board of an SOC. Improved accountability may lead to better decision taking, thereby eliminating decisions being taken due to personal gains, political motivations, as a result of a conflict of interest or due to complacency. The enforceable accountability of SOCs should be coupled with the application of various other principles including: Transparency, disclosure, fairness, leadership and responsibility in order to promote a holistic implementation of accountability and to reap the benefits associated with good corporate governance. The blind application of corporate governance practices which are showcased in the robust annual integrated reports of SOCs should be avoided at all costs.

Conclusion

The implementation of an enforceable accountability framework may serve to improve the performance of various flailing SOCs. By no means the only challenge facing SOCs, a dire lack of accountability has been highlighted as a direct root cause of the downfall of many SOCs. As part of its corporate governance measures, the board of an SOC should adopt the concept of enforceable accountability through the implementation of a reward-based framework. This framework incorporates the use of an independent rating agency to attend to the mandatory rating of the accountability of various SOCs on an annual basis. The framework also incorporates the mandatory linking of the outcome of the rating of an SOC to the provision of its state funding. This proposed enforceable accountability framework is reliant on the enactment of legislation for regulation and the implementation of such legislation by the executive in holding SOCs accountable. The aim of the framework is to improve the performance of SOCs and incentivise the state to effectively supervise such performance.

Angela Stevens BCom LLB LLM PhD (UCT) is a legal practitioner at Tim du Toit & Co Inc in Cape Town.

This article was first published in De Rebus in 2021 (Nov) DR 22.

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