With malice aforethought
30 September 2014 15:40 (South Africa)
Opinionista Johann Redelinghuys

Government ownership: Watch out for the collapse of independence

  • Johann Redelinghuys
Independence is rooted in our sense of fairness. Increasing attention is given to boardroom independence because we don’t want any one shareholder to have an unfair advantage. When independent board members leave, a board becomes open to abuse and the unfair advantage of the major shareholder. 

In his latest book, Your Brain at Work, Dr David Rock tells us that embedded in our brain chemistry is a rooted human need for fairness. Even children have an intuitive understanding of it: just watch as one of them, sharply tracking how the rules of play are being observed on the playground shouts, “That’s not fair!” It is instinctive. 

When we are treated fairly we respond well. When there is a sense of unfair treatment we rebel. Think of what is going on in the mining industry and in bursts all over the economy. Yes, people want more money, but their outrage is driven by a sense of unfairness. They see the “fat-cats” getting all the benefits and the workers being abused by unfair practices.

There is, indeed, a sense of re-booting in the economy; a yearning for fair wages and a more equitable relationship between workers and owners of businesses. We also want a return to sound governance.

At the same time, we must not throw up our hands in horror when the government intervenes in the management or board governance of SAA, Transnet, Eskom or the SABC or any other state-owned enterprise. The government is the owner, and just like you and me, it can do with its asset what it chooses. It can also call the shots when it is a majority shareholder, even in the case of a listed company like Telkom. It is perfectly justified to exercise its rights of ownership and make whatever changes it sees fit. 

However, to keep balance and ensure fairness to minority shareholders, the board appoints independent directors. They are there to ensure sound governance in the interests of all. The King III report on corporate governance defined an independent non-executive director as someone who “is not a representative of a shareholder who has the ability to control or significantly influence management or the board”.

The government’s track record of appointing independent non-executive directors to watch over its assets is not great. They mostly go for stooge-directors who are clearly not independent to serve on the boards of state-owned enterprises and companies where they have a majority. What they do is clearly in contravention of a key pillar of the 2009 King III report as well as our own sense of what is right and fair. Business practice has come to value objective judgment, independent audit and the measurement of performance by a body that is not involved.  

One would have hoped that the appropriate minister for each of our state-controlled enterprises would show some respect. These companies are owned effectively by us, the taxpayers. Our needs and those of the general population require they provide the products or services they were intended for. If they are not functioning there is great deprivation and discomfort. If we don’t have power, or transport, or basic municipal services the country is, as the recent Economist article suggested, “in decline”.

While fortunate people can now have a range of private services such as medical care, education, policing, transport and entertainment and can increasingly rely on generators and solar panels for power, it would be a disaster for all of us in the country if Telkom, for example, was run into the ground, as it now rapidly seems to be doing.   

The disturbing issue for those of us that subscribe to King III, and who believe in sound independent governance, is that government has interfered in corporate boards and removed board members and senior executives who don’t toe a particular line. This results in the loss of any independence of judgment.

More disturbing for any taxpayer who funds these enterprises is that the people who make the decisions about the removals or discharges often lack even a rudimentary knowledge of business, let alone knowledge of that particular business.   

Communications Minister Dina Pule, bless her, spent her early career working for the ANC and all her time since then in various positions in the government. She has never run a business or had even the remotest involvement with making a profit. How could she be expected to have understood the benefit of the sale of 20% of the Telkom equity to South Korea’s KT Corporation? And what was the reason for blocking it, if not an ANC fear of losing its place at the feeding trough? 

So now we have a major listed company without a chairman, no quorum on the board and no CEO, and the sanguine minister reassuring us that all is in hand. We’ll see.

Trying to understand what is likely to happen as those taking charge prepare to appoint several new members of the board, we must remember that it was this very government’s interference which caused the departure of several perfectly competent non-executive directors. 

Ask Mark Lamberti. Then ask what kind of independent non-executive director will allow themselves to be appointed or “deployed” onto this board and who will stay to provide the necessary long-term stability? It has to be someone deep into the pocket of the ANC, who presumably will lack sufficient backbone to ask the difficult questions or to stand up to being bullied by the 38% government shareholder.

Inevitably independence is lost and fairness is no more. DM

  • Johann Redelinghuys
JohanRedelinghuysBW

Johann Redelinghuys is a partner at Heidrick & Struggles the international leadership consulting business, which bought the firm Redelinghuys & Partners of which he was the founder. He has been deeply involved in career management and executive search all his life. He is the chairman of the South African company and now heads up its board practice working with chairmen and CEOs focussed on CEO succession, strategic leadership review and board evaluation.

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