Opinionista Simon Mantell 28 February 2018

Governance at State-owned Enterprises – the argument for independent and capable minds versus useful idiots

It will be vital to populate SoE boards with hard-nosed and capable independent non-executive directors who have a sound understanding of legislation governing SoEs and who also have an excellent grasp of internal control and its practical implementation so that they are able to ask executive management the tough questions and obtain truthful answers.

Another Budget and another bad news story from a finance minister known more for his sartorial elegance than for his understanding of matters financial which are best illustrated by his comments post budget where he argued that “the private sector has to share in the risks, the debt burden and the responsibility to capitalise state owned enterprises (SoEs) and that a massive restructuring is required which will bring the private sector on board”.

Evidently Mr (Malusi) Gigaba is not alert to the fact that the private sector and the individual taxpayer, via taxes and the negative effects of ratings’ downgrades (largely as a result of SoE mismanagement) has effectively shouldered all the risk and debt burden of SoEs while the indigent and less fortunate continue to suffer economic hardship as a result of a reduced social budgets being available for the improvement of their lives.

Massive restructuring is indeed required to correct the governance and executive management failures as well as the endemic operational inefficiencies and disproportionately high salary and wage bills relative to the economic output of these SoEs. While the governance and executive management shortcomings can be more easily resolved it is unlikely that there will be a quick fix in employment and operational restructuring owing to the conflicting interests of the alliance partners in government.

The recent public hearings into the maladministration at Eskom included responses from evasive and smooth talking executive management to non-executive directors and a Cabinet minister whose astounding admissions display a lack of judgement and understanding of their respective governance and fiduciary duties which is not dissimilar to that of the proverbial useful idiot who hears no evil, sees no evil and is always “misled”.

Pathetic governance at SoEs has resulted in weak and at times dysfunctional internal control which has formed a cancerous alliance with procurement and corruption. The vast majority of expenditure at SoEs like Transnet, Eskom and SAA relates to procurement and it is in this area that many unscrupulous senior and executive management with tacit and sometimes overt assistance from the board have plied their parallel trade with corrupt private sector partners.

The spine of any entity is its internal control which, if properly functioning, ensures operational effectiveness and efficiency, reliable financial reporting, compliance with laws, regulations and policies. The high level of non-compliance apparent at our major SoEs confirms that internal control within these institutions is poor at best and non-existent at worst.

Internal control is the responsibility of executive management and ultimately the board of directors and yet, like drunken men, SoEs lurch from one financial year to another with neither executive management nor the board being held to account notwithstanding all the theory and codes on governance and accountability.

SoE Annual Financial Statements are repeatedly trotted out where directors brazenly confirm full compliance with the Public Finance Management Act insofar as internal control is concerned. There is no way to describe these representations as anything other than lies and given that the Companies Act draws no distinction between executive and non-executive directors, one has to ask why the non-executive directors participate in this charade?

Perhaps it is because of naivety, incompetence and ignorance or other underlying reasons like a board fees which are a useful meal ticket?

What is obvious though is that whenever the media identifies procurement and governance issues at these SoEs, the relevant board goes into a huddle and only reacts when the pressure of public opprobrium becomes too great. Inevitably, the board’s pressure release valve is the public relations exercise of appointing an independent investigation to placate the public and the media that the truth will out.

But, this where the skelmheid comes into play as executive management appoints the forensic service provider and simultaneously sets the scope of the investigation in such a manner that management effectively controls the investigative process so as to obtain the “desired outcome.”

In the unlikely event that executive management is unhappy with the forensic findings, then the fall-back position is to play for time via management providing piecemeal feedback on the original draft report. The draft report goes through various iterations and is never finalised (even years’ later) and the news cycle for the public and the media simply moves on.

The forensic service providers, ever eager for repeat business, sacrifice principle at the altar of fee income and become complicit in the process of smoke and mirror investigations, draft reports and the absence of hard hitting final versions. Like fat men at a smorgasbord, they feast on the largesse of SoEs and if they are ever questioned about the quality of their findings, then their favourite refrains are limited scope, client confidentiality and that fraud and corruption are so hard to identify and prove.

This writer argues that the procurement corruption in this country is so obvious and elementary that even a dim-witted investigator could join the dots which former finance minister Pravin Gordhan alluded to in 2017.

What all of the above means is that hundreds of billions of rand are wasted in irregular procurement and hundreds of millions of rand are wasted on sham forensic investigations resulting in no board and executive accountability best illustrated by the dearth of dismissals and the absence of any criminal prosecutions and/or convictions of senior and executive management in terms of Sections 83 and 86 of the Public Finance Management Act and other applicable statutes.

It is apparent that there are two separate tasks awaiting Gordhan as the newly appointed minister of public enterprises and these are the extremely complex financial and operational restructuring of SoEs and the less complicated restructuring of boards of SoEs.

Irrespective of how much financial restructuring takes place, it will amount to naught if internal control and accountability are absent. If the order of business in SoEs is to properly clear out the rotten apples at board and executive and senior management level, then it will require forensic investigations unlike the contrived ones explained above.

It will be vital to populate SoE boards with hard-nosed and capable independent non-executive directors who have a sound understanding of legislation governing SoEs and who also have an excellent grasp of internal control and its practical implementation so that they are able to ask executive management the tough questions and obtain truthful answers. These board members must also be prepared to go the extra mile and get their hands dirty by exercising exacting and independent oversight over the scope of work as well as the performance of forensic consultants appointed by executive management.

SoEs have run out of road as far as navel-gazing useful idiots are concerned and one hopes that Minister Gordhan will apply a most liberal scalpel in what will be the crucial board restructuring exercise in the months to come. DM

Simon Mantell runs a biscuit factory

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