Lifeline for SOES with new leadership
The new minister of public enterprises brings much needed improvement in the governance of SOES
It is no secret that state-owned enterprises (SOES) were among the worst offenders as far as corporate malfeasance during the past few years is concerned, much of this linked to the Gupta family.
The deterioration in governance within SOES caused asset manager Futuregrowth to suspend funding of certain SOES in August 2016.
However, according to chief investment officer Andrew Canter, after engaging with the six largest SOES on issues of governance structures and practices, the asset managers resumed lending pension funds to four of them — subject to certain governance changes (and, in one instance proposed legislative change).
“The outstanding large SOES — Eskom and Transnet — have been at the centre of serious allegations and these continue to be investigated through various parliamentary and judicial processes,” Canter says. “But we are highly encouraged by the appointment of Pravin Gordhan (one of the more credible politicians in SA) to oversee those two troubled entities as the new public enterprises minister. Also, our analysts continue to engage in direct discussions with both Transnet and Eskom on governance and improved disclosure, and are finding those conversations co-operative. To date, however, we have not recommenced lending to Eskom or Transnet.”
Among the stated objectives of the King 4 report was that it should be broadly applicable to all types of organisations, including SOES.
“Specifically, the King committee was requested by many entities outside the private sector to draft King 4 in such a way as to make it more easily applicable to all organisations, public and private, large and small, for-profit and not-forprofit,” writes committee chairman Mervyn King in the report’s foreword.
This resulted in the inclusion of sector supplements for SOES, retirement funds, municipalities, SMES and nonprofit organisations in the report.
These supplements are intended “to help organisations across a variety of sectors and organisational types to interpret and implement King 4 as is suited to their particular circumstances”.
The terminology used in the report has also been adapted to reflect this broader focus. For instance, the substitution of “board” by “governing body”.
Specifically in the case of SOES, the governing body is the “accounting authority” as defined in the Public Finance Management Act. In cases where SOES are established in terms of specific legislation, King 4 defers to the prescriptions of such legislation.
Following their engagement with the six SOES, Futuregrowth produced a report titled “SOE Governance Unmasked”. In his foreword to this report Canter identified a number of broad areas for governance improvements, such as:
● The “who” matters. “An organisation can have all the trappings of governance such as board committees and policies. But if it has corrupt or ill-intentioned shareholders or leaders, then policies and practices are all at risk,” he says.
● Boards and subcommittees. All corporate governance begins with the board of directors, so its composition and operations must be appropriate.
● Governance policies. These should be in place and cover the major business areas, such as procurement and lending as well as key risk areas (such as remuneration).
● Internal watchdogs. “There is a raft of existing regulations in SA concerning whistleblowers, and yet those who are in the know are evidently not empowered to reveal the truth. Fear rules. Change is necessary,” Canter says.