Department of Public Enterprises

CORPORATE GOVERNANCE PRESENTATION 03 MAY 2001

PORTFOLIO COMMITTEE

CAPE TOWN

INTRODUCTION

• Agenda

• What is corporate governance?

• Need for Corporate Governance

• The roles of the Shareholder

• Clarification of the dual role of the Shareholder

• The role of the Board

• The fiduciary responsibilities of the directors

• Ethics and probity

• The need for executive and non-executive directors

INTRODUCTION contd/...

• Instruments to enforce good governance i.e. PFMA, Companies Act and Shareholder Compacts

• Performance Monitoring of SOE’s

• Corporate Governance and Cabinet

• Instruments to enforce good governance in Cabinet

• Relationship between Cabinet and SOE’s

• Conclusion

WHAT IS CORPORATE GOVERNANCE?

• Corporate governance is defined as “a manner is which power is exercised in the management of economic and social resources for human development” CACG GUIDELINES- Best Practice No. 1 July 2000 @ Page 1.

•“Corporate governance refers to the process by which organizations are directed, controlled and held to account. It encompasses authority, accountability, stewardship, leadership, direction and control exercised in the organization.” CACG GUIDELINES - Best Practice Guide No. 3 - February 2001@1.

What is corporate governance ?Contd/...

• Corporate governance is therefore about the promotion of efficient, effective and sustainable entities that contribute to society by creation of wealth and maximization the

shareholder value. • It envisage responsive and accountable entities.

• Management with integrity, probity and accountability.

• Recognition and the protection of the stakeholders rights, particularly the rights of the shareholders.

• Consultation, communication and legitimate participation by stakeholders is encouraged.

BACKGROUND

• Corporate governance is not a new phenomenon but has evolved with time, having been reinitiated in the 80’s in the Commonwealth Countries viz. New Zealand and Australia.

• In SA, good governance has been better developed in the private sector, through legislation and the King Report on Corporate Governance, 1994.

• In the public sector though, the Protocol on Corporate Governance introducing good governance in the public entities only came into effect in October 1997, and this document is currently being updated.

• Legislation eg, the Constitution,The Executive Members Ethics Act, PFMA, Companies Act, and The Code of Conduct for Members of Cabinet also

assist in shaping good governance.

NEED FOR CORPORATE GOVERNANCE

• Globalization of economies, financial investment, market convergence;

• Challenge of changing circumstances,locally and internationally;

• Preservation of shareholder value;• Addressing equity and transformation issues;• Imperative for business ethics and probity;• Accountability and transparency

THE ROLE OF THE SHAREHOLDER

• Board appointment , remuneration, induction.• Assessment of the board’s performance and address

issues of non-performance including dismissal of the board.

• Determination of the issues of policy and SOE mandates.

• Determination of the restructuring of the company.• Communication with the other shareholders.

ROLE OF A SHAREHOLDER contd/...

• To define the parameters or mandate of the board within which the board has to operate.

• To grant the board independence and autonomy to conduct the business of the SOE’s within a clearly defined mandate, so as to allow the board to be accountable for its action/inaction.

• To support the board’s decisions except where it can be shown that the board acted ultra vires its mandate.

Clarification of the Shareholder role

Contd/...

• Government has complicated roles within the Public Entities: the owner, regulator, oversight, stakeholder and the shareholder tend to overlap.

• These roles have to be clarified and be made clearly distinguishable to the board in order to prevent confusion.

• To the extent that these roles are confusing, they even pose a threat of a conflict of interest within the roles which could be detrimental to the enterprise.

• Responsible Ministries have to clarify their own roles relating to the entities.

Role of Shareholder-Oversight Minister

• Guardianship of state interests of the state;• Ensuring that the entities have a capability to function

effectively and efficiently;• Ensuring maintenance of integrity, probity and business ethics;• Monitoring Financial and socio-economic performance;• Guarantee delivery on government’s social, economic and other

programmes.• Safeguard and management of state ownership and business in

public entities.

The role of the Board

• To provide direction to the SOE’s/ Entities .• To appoint qualified, competent and capable executives.• To evaluate the SOE’s/ Entities risks.• To account for the effective and efficient utilization of the

entities assets thus maximizing the shareholder value.• To ensure that the entity operates within and observes the legal

framework.• To ensure that the entity operates ethically and undertakes its

social responsibility programmes.• To ensure the observance of the mandate by the SOE.

Ethics & Probity

• There is a need to acknowledge the need for reinforcing ethics within the Boards, not because this is unknown, but because unethical tendencies have a way of sneaking in when least expected.

• The Chairman as a nucleus of the Board has a responsibility to keep full control of ethics issues.

• Issues of ethics include disclosure of interests and developing a strategy of dealing with conflict of interests, once declared.

Fiduciary responsibility of directors

• These responsibilities are provided for in terms of the PFMA, the Companies Act and generally the Memorandum and Articles of Association of the entities.

• Duty of utmost good faith and care to ensure reasonable protection of the entity’s assets.

• To act with fidelity, honesty and integrity in the best interest of the entity in managing its financial affairs.

• To disclose any potential and real conflict of interest.

• To prevent any financial prejudice to the entity.

• For the purposes of the PFMA the Accounting Authority is the board.

The Need for Executive and Non-executive Directors

• There is a need for executive and non-executive directors in order to create a balance within the Board.

• Generally the non-executive directors should be in the majority to provide objectivity in the Board.

• The non-executive directors have the duty to acquaint themselves with the business of the Board to ensure that they are not manipulated by the executive members.

• The Chairperson must be a non-executive member of the Board and must be a nucleus of the Board.

• The Board needs to have sub-committees which will interrogate the matters before the Board.

Instruments of corporate governance

• The principles of corporate governance are incorporated in the following instruments:

• Public Finance Management Act;• Protocol on Corporate Governance;• Shareholder Compacts;• King Report on Corporate Governance;• Company Law and other legislation;

Public Finance Management Act

• Secures accountability and sound management of the revenue, expenditure, assets and liabilities of public institutions;

• framework for accountability of accounting authority or board;

• fiduciary duties of the accounting authority or board;

• outlines responsibilities of accounting officers or Chief Executive.

Liabilities of directors under the PFMA

• CEO commits financial misconduct if:• s/he fails to carry out responsibilities as set out in

s38;• permits an unauthorized expenditure/irregular

expenditure/fruitless & wasteful expenditure;• wilfully or negligently fails to exercise power

assigned to him or her ito s44;

Liabilities contd/...

• The Board/Council commits financial misconduct if:

• it willfully or negligently fails to comply with s50 etc;

• makes/permits an irregular expenditure or fruitless and wasteful expenditure;

• Every member of the Board is individually and severally liable;

Offences & Penalties

• Financial misconduct is a ground for dismissal or suspension;

• non-compliance is a criminal offence and will result on conviction in a fine or imprisonment not exceeding 5 years;

• and result in civil liability with process of recovery of gains

• The overriding words in the Act are “willfully and grossly negligent”

Shareholder Compacts

• Agreement between shareholder and the Board and regulates their relations,

• It addresses business issues as depicted in the business plans & strategic documents of the SOE’s whilst also addressing policy issues such as the dividends, tax, borrowing requirements, recapitalization etc.

• It captures gatekeeper clauses ie.employment equity, dividend, tax, borrowings, restructuring matters etc.

Shareholder compact Contd/...

• It has a potential of addressing issues between government, SOE’s and Labour;

• There is some skepticism with shareholder compacts particularly on the part of Labour, as it’s binding effect has not been tested. These require further negotiation but a solution is within reach.

• The compacts have not been signed, as the wording is being uniformalized, with annexures for industry specific issues.

Performance monitoring

• Why performance monitoring and evaluation of SOEs

• Need for performance monitoring

• Tools for performance monitoring

- performance monitoring indicators

- regular reporting

- evaluation measures/systems and models

• Benefits of Performance monitoring and evaluation

• Managing performance monitoring

• Role of evaluation

Performance monitoring and benchmarking mandate

Monitor and interrogate the financial performance of SOEs with a view to holding SOE leadership accountable for performance

Monitor, implement and advocate sound corporate governance practices ensuring improved ethics and probity in SOEs

Manage healthy relations between shareholder and SOEs Monitor other socio economic indicators of SOEs including empowerment

strategies Be the state’s custodian for the portfolio of SOEs and advise Government on

SOE performance and progress towards targets accordingly Develop databases of relevant benchmarks and SOE information to entrench a

performance mindset in the SOEs Provide reliable, accurate and current SOE information to DPE Programmes

and government for the purposes of strategy formulation and decision making

Directorate: corporate governance

Compare corporate governance protocol with PFMA requirements and best practice and revise as necessary.

Manage relationships between Government and SOEs.

Identify and define specific information needs and develop a database on corporate governance with respect to each SOE.

Provide advice to shareholder.

Report to Cabinet on the corporate governance performance of SOE’s.

Financial performance

Establish the financial performance regime between Government and each SOE and do financial evaluation

Monitor the financial performance of SOEs Understand why their performance is the way it is

Understand specific industry Compare with benchmark of similar company in industry

Compare SOE performance with best practice Recommend changes to SOEs where it makes economic sense to do so Maintain strong interface with socio economic division Ensure continuous checks and balances pre, during and post

Restructuring Report to Cabinet on Financial Performance of SOE’s

Socio-economic performance

Establish the socio-economic performance regime between DPE and each SOE

Monitor and evaluate this socio-economic performance in SOEs

Understand why their performance is the way it is Compare SOE performance with best practice but within the

context of the unique circumstances in SA Recommend changes where there is an imperative to do so Maintain strong interface with financial performance division

The Role of Cabinet in promoting Corporate Governance

• Corporate Governance is regulated in Cabinet by the Constitution, the Executive Members’ Ethics Act 82/1998, Draft Code of Conduct of Members of Cabinet.

• All these instruments seek to promote accountability, transparency, honesty, integrity and that the executive members must always act in good faith and in the best interest of good governance.

The Role of Cabinet in promoting Corporate Governance

• Cabinet therefore has a responsibility to ensure that good governance is not only confined within the boundaries of Cabinet.

• As the ultimate custodian of the state assets it has a responsibility to ensure that these assets are safe-guarded through proper and effective management.

• This can be achieved by Cabinet being able to interrogate the reports submitted to it on the SOE’s and giving clear direction on issues of policy to be applicable to the SOE’s.

The Role of Cabinet in promoting Corporate Governance

• The mandate of the SOE’s should be clearly defined and thereafter the SOE’s be given a degree of independence to structure and operate the business, the best they can within the confines of the mandate.

• It is imperative that government’s role(which is sometimes conflicting) in relation to the SOE’s be clarified so as to eliminate confusion, ie the social responsibility matters, the dividend and tax policy, the recapitalization matters.

Conclusion

• Corporate Covernance is not a matter of choice but is a must for State Owned Enterprises and Entities to be successful.

• As early as 1997, Government had already taken a view that corporate governance in State Entities was necessary, and through the Protocol a way was paved for good governance to prevail in state entities.

• The instruments of Corporate Governance have to be observed and implemented eg, the shareholder compacts, the reporting strategies, legislation etc.

PRESENTATION BY

MALIXOLE GANTSHO

CHIEF DIRECTOR:

PERFORMANCE

MONITORING AND BENCHMARKING

DEPARTMENT OF PUBLIC ENTERPRISE

3 MAY 2001

CSIR CONFERENCE CENTRE,PRETORIA