/ 18 November 2016

​Molefe quitting is ‘common sense’

Both Dr Pathmanathan Naidoo and Eskom CEO Brian Molefe responded to the public protector's report on Friday.
Both Dr Pathmanathan Naidoo and Eskom CEO Brian Molefe responded to the public protector's report on Friday.

There are many laws and regulations intended to hold disgraced company executives to account but in South Africa, as was the case of Brian Molefe’s resignation from Eskom, the best reason for him to step down was probably common sense — on balance, remaining at the helm would have been bad for the state-owned enterprise (SOE).

Parastatals such as Eskom are subject to tighter regulation than most companies. Operating like private companies but falling under the government and often supported by taxpayer funds, they primarily fall under the Public Finance Management Act (PFMA) and the treasury’s Protocol on Corporate Governance for State-owned Enterprises, which encapsulate the King code on corporate governance. They are also governed by the Companies Act.

In resigning from Eskom last week, chief executive Molefe claimed it was in the best interests of the company. This followed the release of the public protector’s State of Capture report, which implicates Molefe and the Eskom board in a string of deals that appear to have favoured the politically connected Gupta family.

The report suggests there might have been transgressions of the PFMA, the Companies Act and the guidelines and protocols for good governance.

“The Companies Act would be the Bible for private companies. When it comes to SOEs, the PFMA is their Bible. An official should know the provisions of the PFMA backwards, as it sets out everything they can or can’t do,” said David Loxton, a partner in law firm Denton’s.

The public protector’s report did not make any findings against individuals but called for a judicial inquiry to carry out further investigations. It also referred some matters of a suspected criminal nature to the Hawks and the National Prosecuting Authority.

Molefe resigned nine days later. In his resignation letter, he stated his innocence, vowing that he would clear his name, but said he would step down in the “interests of good governance”. Eskom declined to provide further details about Molefe’s reasons for resigning.

Loxton said the chief motivation to resign in a situation like Molefe’s would be common sense. He said the general principles of good corporate governance, in the face of serious allegations, require a balancing act — one has to measure up whether it is better or worse for the company if one stays.

“The overriding principle must be to act in the best interest of the organisation,” he said.

In developed countries, executives are quick to stand down at the first sign of a controversy, said Loxton, but one of the biggest complaints about governance in South Africa is that officials don’t depart until a court finds them guilty.

In Molefe’s case, despite all the credit he has received for stabilising Eskom and the country’s power supply, he decided the company is better off if he goes. He said this again when staff called a meeting on Tuesday, asking him to withdraw his resignation.

All directors on a company’s board share an equal responsibility for good governance.

On Tuesday, an Eskom director with direct interests in Gupta-owned companies, Mark Pamensky, also resigned. But several people tarnished by the public protector’s report are still on the Eskom board and one of them, Matshela Koko, it is speculated, will be Molefe’s replacement.

According to the trade union Solidarity, Koko, a champion of a nuclear build in South Africa, should instead tender his resignation. “[Koko] has been plunged into controversy repeatedly, including with regard to tender fraud and suspension pending an internal investigation,” the union said.

But in general company law, the shareholder appoints the directors of a board and the board appoints the chief executive, who is accountable to the board. “So, if you have a corrupt board and the [chief executive] is a good guy, that [chief executive] is in a very much impossible position as he reports to the board,” said Loxton.

There are other, less admirable reasons for executives and directors to step down. “When a director steps down, there is often a view from the company of: ‘Why should we waste our time with an inquiry?’ and they get to walk off into the sunset,” said Loxton. “A lot of companies take that view as [an inquiry] is costly or time-consuming.”

A disciplinary hearing in a company works on a balance of probabilities, whereas a criminal trial requires proof beyond reasonable doubt. A disciplinary inquiry involving a chief executive or director is instituted by the board. When an inquiry does go ahead, if it is in the accused person’s absence, they can always maintain their innocence in claiming their version of events was never heard, Loxton said.

In the case of a judicial inquiry, experts say resignation does not absolve an executive of wrongdoing, but it might be a mitigating factor when it comes to criminal sanction or sentencing.

Mervyn King, the chairperson of the King committee on corporate governance, said there are 20-odd judgments that have drawn on the King codes to test for good governance, “so it has become part of our common law”.

Furthermore, the fourth, latest iteration of the King report, King IV, no longer talks of companies and boards but of organisations and governing bodies. “The intent, at the request of certain state-owned entities, is to make the code applicable to them. There is also a sector supplement to the code, showing how it can be applied to SOEs,” he said.

King said he hoped the Protocol on Corporate Governance for State-owned Enterprises will be updated to incorporate King IV.

Speaking at an event last week, former public protector Thuli Madonsela said: “The King conversations are being brought into the public sector. “The principles of corporate governance could be mainstreamed into the public sector, going beyond the principles enshrined in the Constitution. I believe that will take us forward.”


Eskom finances ride out State of Capture storm

Despite the cloud hanging over Eskom since the release of the public protector’s State of Capture report and the subsequent resignation of its chief executive, Brian Molefe, the utility’s financing has not suffered.

Industry experts say that, if pressure is exerted by financiers, it’s unlikely to be done overtly.

The World Bank, which lent $3.75-billion (its biggest loan ever) to Eskom in 2010, much of which was for the long-delayed coal power station, Medupi, said its financing agreements have standard provisions for environmental and social safeguards, as well as fiduciary obligations to assure that funds are used for their intended purposes.

The Integrity Vice-Presidency, an independent unit in the World Bank, investigates and pursues sanctions related to allegations of fraud and corruption — but only in the event of allegations of corruption in bank-financed operations, the spokesperson said.

Asset managers ascribe to codes of conduct that require ethical investing.

But Eskom domestic bond yields have been largely unchanged since the release of the report and the resignations, with trade in a range of about 1% from the sovereign yield, as they are underwritten by the treasury.

A fixed-income analyst said: “Up to this point, it hasn’t been an issue. But I think there will be a lot more questions going forward.

“SOEs [state-owned enterprises]have said, when they go on bond road shows, they are fielding more questions about governance.”

The Public Investment Corporation (PIC) claims its mandate requires its investments to be made responsibly, taking environmental, social and governance issues into account.

It played a pivotal part in drafting the Code for Responsible Investing in South Africa.

The PIC did not respond to questions whether this mandate would restrict investing in Eskom. — Lisa Steyn