/ 2 November 2012

Agent Provocateur: Hands off our parastatals

The public ought to have a say in how state entities such as SAA are run.
The public ought to have a say in how state entities such as SAA are run.

 Eight board members, who are highly regarded in their professional fields and have integrity and a skills set that would be hard to duplicate overnight, dramatically resigned just before the annual general meeting. They included the former chairperson, a senior female ANC leader.

But investors, ratings agencies and our usually astute financial journalists have been surprisingly blasé about the corporate governance aspects – well, at least publicly. In my view, these events violate several guidelines and accepted rules of conduct relating to corporate governance in board appointment processes.

SAA is not the exception. A pattern of undue shareholder influence and equally bizarre board appointments that are not rooted in the laws that govern these state-owned enterprises has played out in the last two years at Eskom and Transnet.

Although the government is the majority shareholder in SAA and other parastatals, the designated minister is required by law to give effect to several prescripts: the articles of association, the Companies Act, the Constitution as it relates to the use and allocation of public money, resources and conduct, and the Public Finance Management Act, which governs the shareholder-parastatal financial relationship with accountability provisions that include oversight by Parliament.

With this Act the directors general and ministers of public enterprises and the treasury give financial effect to what the Cabinet or ANC has decided is its strategic direction, and they are accountable to Parliament. If ideological differences arise among ministers and Pretoria bureaucrats we can expect odd, unco-ordinated strategies and repeated last-minute scrambles prior to annual general meetings for financial guarantees to prevent audit disclaimers.  

Unlike the case with private and listed companies, myriad laws govern how government shareholder oversight is exercised. Parastatals are owned by the people because they are funded through public money over which ministers and directors general have custodianship. Parastatals invest in projects or provide services when they secure guarantees underwritten by the government. And if they default, public money is used to cover that debt.  

So Public Enterprises Minister Malusi Gigaba and President Jacob Zuma are merely representative shareholders. They do not own parastatals, nor can the government treat them as their or the ANC's personal fiefdoms, in relation either to board appointments or strategic mandates.

An important feature of our law is that, unlike other countries that may have nationalised industries with no pretence of board or shareholder oversight, our parastatals remain rooted in corporate and company law whereby the board exercises fiduciary oversight over the company. When Parliament calls for accounting, the chairperson, board members, minister and director general have to account. So the congratulatory sentiment offered to a minister who is "hands on" is worrying – but not in education, health or housing. "Hands on" is a euphemism for too much control that is illegally or unprocedurally exercised.

Under our law, there are arms-length legal relationships that have to be respected. Ideally, for proper parastatal corporate governance we want ministers and the president to respect those relationships and focus on developing strategic visions for state intervention in certain sectors, entrusting parastatals and their boards with the necessary legal and financial support of the state to fulfil that mandate.

International best practice and our own corporate governance guidelines in the form of King III recommend that board appointments should be free from political interference and should not include active civil servants. They should strive for continuity through reappointing members for two terms at most and there should be a plan for rotation. Where fraud or criminal conduct is present, the early removal of members is governed by the Companies Act.

Of course, there is a fine line regarding the government's role in board appointments, reappointments and replacements – but that line must be transparent, open, rational and connected to a legitimate governmental objective within the law – and it cannot offend our Constitution. It is a hard balance, but well worth it if the state insists on being involved in key sectors of the South African economy, using public money and resources.

Reading between the lines
The official statement of the SAA board members who resigned records that there was a breakdown in the relationship between the shareholder and them – against a backdrop of a now confirmed rumour that the ­minister was not seeking their ­reappointment and the treasury was holding out on issuing a much-needed guarantee for SAA to continue operating as a going concern.

A few weeks later, SAA's chief executive stepped down too. The unofficial "read between the lines" version is that the chair and several board members felt that the minister and his department were inefficient in seeking a timely guarantee. Those who resigned said they had submitted all the necessary statements and documentation to the public enterprises director general well ahead of the scheduled annual general meeting.  

The walkout had the desired effect: a R5billion conditional guarantee was secured and the meeting was postponed. Whereas we now know that the minister was, in any event, intent on replacing more than half the board, we still do not know why. He has stated that he secured the guarantee because he did not want SAA to post a loss – but this is what the former chairperson had alerted the department to in advance and wished to avoid. Also, he was surprised to learn through the media of the mass resignations, yet has not said why he failed to inform the board members that he intended to replace them.

This goes to the nub of undue shareholder interference – why would a minister replace more than half the board of a company that is going through one of the worst periods in commercial aviation history? He has yet to offer cogent reasons.

Replaced unceremoniously
A similar pattern was seen at Eskom in 2011 when the entire board (save one person), including the chairperson, was replaced unceremoniously and prematurely. Again, no reasons were offered.

The same occurred with Transnet – within weeks of the minister taking office, a chairperson was installed and new board members and an acting chief executive, followed by a permanent one, were appointed. The acting chair then disregarded a legal ruling and reinstalled a suspended former freight rail head to another division in the company to rid itself of a political headache.

So be concerned: all the president's men with "pizzazz" are undermining corporate governance as they go about handing out positions and titles. Let us watch who gets appointed the next SAA chief executive, but let us do so critically and carefully.

We must insist on public participation in the nomination of board members and chairpersons of state-owned enterprises who are meant to be the custodians of infrastructure and companies owned and funded by South Africans. We must also pursue strategies to generate activism that makes these enterprises and the ­ministers who run them more accountable to the people.  

Fatima Hassan is a human rights lawyer and activist and a Tom and Andi Bernstein distinguished human rights fellow in residence at Yale University. She was the special adviser to the former minister of public enterprises