Time and time again, the Institute of Directors in South Africa (IoDSA) has raised its view that the deeply flawed process of appointing board members and executives to state-owned enterprises lies at the heart of the crisis SOEs are facing. If the right people are appointed to SOEs and public sector organisations, it will be much more difficult for them to be diverted from their proper purpose and lose sight of their vital role in the South African economy.
So how would one go about ensuring the correct appointments are made?
The first place to turn is the King IV report, which sets out what governance intends to achieve, and suggests actions to take. Its emphasis is not on rules but on goals, so there is latitude to exercise judgment in implementation. In particular, the supplement for SOEs outlines how to apply the main King report to these organisations.
SOEs face a fundamental challenge that private organisations do not: they have one dominating shareholder (the government), typically governed by founding legislation or regulation. The government is thus in total control over the SOE in a way that a more diverse shareholder body is not. A minister, who represents the government as shareholder, can thus flout the principles of good governance by appointing people to the SOE who do not have the skills needed to help it achieve its objectives, but who are politically important or, regrettably, prepared to toe the line in either facilitating, participating in, or overlooking unscrupulous actions for personal or political gain.
In short, this compromises one of the most important pillars of governance: the competence and independence of the board in discharging its legal duties to act in the best interests of the organisation, in good faith and for proper purpose, with the necessary level of skill, care and diligence.
This shareholder dominance can only be overcome if the shareholder itself takes a decision to ensure that the principles of good governance are adhered to.
In the case of board appointments, this would mean allowing a transparent process for deciding the criteria for appointment, and then allowing an independent nominations process to identify, vet and ultimately recommend the candidates needed to ensure the SOE has the mix of directors it requires. In terms of the founding legislation, the minister would typically have the final say, but by allowing an independent nominations process to unfold there is a much greater chance of the right appointments being made.
As we saw with SAA, getting this balance between the minister and board is far from easy, and requires the utmost finesse and good faith. The guiding principle should be the wellbeing of the organisation.
Lack of role clarity has bedevilled our SOEs, with ministers overriding boards and appointing their preferred CEOs, boards interfering in the operations of the organisation, and CEOs being more powerful than their boards because of their political affiliations to the shareholder
Similarly, the appointment of executives (including the CEO) can be, and typically is, dictated by the state. This sets up an untenable situation because the executives should be accountable not to the shareholder, but to the board.
Again, the shareholder needs to follow tried-and-trusted governance principles and allow the board to make the important executive appointments. It must be made explicit that executives report to the board, not the shareholder. Recent news reports of the minister declining the board’s preferred candidate for the Eskom CEO position are a case in point.
All of these governance practices ensure that the board, the executive and the shareholder understand clearly what their respective roles are and execute them as required. Lack of role clarity has bedevilled our SOEs, with ministers overriding boards and appointing their preferred CEOs, boards interfering in the operations of the organisation, and CEOs being more powerful than their boards because of their political affiliations to the shareholder.
The board is ultimately accountable for the organisation’s health and ability to achieve its goals. Getting those appointments right and allowing the board to appoint the executive team is half the battle. Once the shareholder and board agree how this process should be managed, the question of who to appoint remains.
Given the weight of responsibility that boards bear, and the complex environments in which organisations operate, the skills and experience required have become much more demanding. A solid career is no longer sufficient; specialised directorial skills and competencies are required. For this and other reasons, the IoDSA has long recommended that directorship be professionalised, and we have developed a directorship competency framework that allows directors to obtain and maintain the right kinds of skills. Directors can also work towards becoming certified or chartered directors.
Finding and nurturing the right directors is vital, but so is limiting their terms to ensure independence and bring in fresh blood. A feature of the public sector is that these “board rotations” are often carried out in a rote manner, with far too many directors being replaced at once, a process that robs the board of invaluable institutional memory. A proper succession plan that refreshes skills while facilitating the preservation of institutional memory is vital.
• Natesan is CEO of the Institute of Directors in South Africa
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