State-owned enterprises will have to be more responsive to the needs of the communities they serve if recommendations made by the second King report on corporate governance are anything to go by.
Corporate governance in South Africa was institutionalised by the publication of the first King Report on Corporate Governance in 1994. This was followed by the recently released King report of 2002 – commonly known as “King 2”. The purpose of both reports is to promote the highest standards of corporate governance in South African companies, and includes state-owned enterprises (SOEs) and agencies that fall within the ambit of the Public Finance Management Act of 1999.
The government has also been looking at issues of corporate governance and has recently released its Protocol on Corporate Governance in the Public Sector. The public has been invited to submit comment by May 31.
The government had identified sound corporate governance of SOEs as a priority as early as 1997 when the Cabinet endorsed a corporate governance protocol for SOEs. Looming privatisation appears to be the impetus for providing clarity regarding the role of directors and, collectively, the boards of directors of SOEs. The newest protocol, however, constitutes a substantial revision of the 1997 protocol, in the light of King 2 and various other international developments.
Corporate governance represents the schism between the ownership and the control of companies – ownership is held by shareholders who abdicate control of a company to a board of directors that oversees the business of the company.
The new protocol applies to SOEs only and seeks to take into account their “unique mandate”. Included is a range of socio-economic and political objectives. The protocol must be read in conjunction with King 2 and does not seek to conflict with its recommendations or provisions.
If one accepts that a company/SOE exists not only for the benefit of its shareholders but also for other stakeholders, then there must be an obligation for the company/SOE to consider the interests of these stakeholders who are, for example, the community at large, employees, customers, suppliers of the company and its creditors. Changing times demand that directors be aware of issues such as employment equity, transformation, development and the application of the new labour laws.
In its section on socio-economic issues, the protocol attempts to incorporate considerations such as black economic empowerment, employment equity, information, public education and awareness, and a code of ethics into the operations of SOEs.
What it will mean is that SOEs will have to give greater consideration to socio-economic issues and the community at large. SOEs, therefore, will need to take initiatives to advance members of previously disadvantaged groups on “a large scale”. These initiatives would need to be incorporated in the corporate plan of SOEs to ensure that they contribute to job creation, rural development, urban renewal, poverty alleviation, empowerment of women, skills and management development and education.
A further mechanism of accountability is that directors, in their annual reports, should disclose what SOEs’ procurement practices relating to black economic empowerment are, and whether their employment targets in this regard have been met. SOEs will, therefore, have a greater responsibility to ensure that they operate for the benefit of communities and not simply for the narrow benefit of directors and shareholders. In addition, the protocol stipulates that boards have to ensure that SOEs comply with the provisions of the Employment Equity Act. This obliges SOEs to develop employment equity plans and to report on their progress in implementing these plans.
The protocol attempts to enhance the public’s understanding of the role and responsibilities of SOEs. They will have to disseminate meaningful information about their operations as part of their general education and awareness programmes. An interesting aspect of the protocol is the obligation on SOEs to implement codes of ethics. These should commit SOEs to the highest standards of behaviour.
It is accepted in the protocol that boards of directors constitute the fundamental base of corporate governance in SOEs. Therefore, SOEs should be led and controlled by effective, efficient boards comprising executive and non-executive directors. In addition, the protocol recognises the need for members of the boards to be in contact with each other, thus increasing their efficiency and accountability to shareholders.
In addition, emphasis is also placed on the role of non-executive directors in ensuring sound corporate governance. Non-executive directors will bring expertise and conflict-resolution skills to the board, as well as serving as a check against the exercise of unfettered power by the executive directors. It is recognised that non-executive directors play an increasingly important role in providing the wider, independent and, perhaps, more objective perspective to decision-making.
The renumeration committee’s recommendations are also key in the King report. Decisions regarding the remuneration of directors will be made by this committee. Remuneration levels are to be approved by shareholders and should be based on the level of expertise, experience and skill of a particular director. Salary schemes will take into account the need for incentives.
In addition, annual reports should clearly show directors’ present and future benefits and should indicate separate figures for salaries, fees and any performance-related elements. A great deal of emphasis is also placed on the relationship between boards and shareholders and the need to keep shareholders informed of the operations of SOEs and their subsidiaries.
While a system of corporate governance is needed as a measure of control over the way in which SOEs are managed, a balance must be maintained between accountability and the freedom of managers to manage.
Judith February is the governance researcher at the political information and monitoring service at the Institute for Democracy in South Africa