IoDSA rings alarm bells on public sector governance

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The Institute of Directors in Southern Africa (IoDSA) is adding a governance view to the concern being expressed in recent new articles around proposed changes to the SABC’s Memorandum of Incorporation (MoI) by Minister Faith Muthambi. Parmi Natesan, Executive: Centre for Corporate Governance at the IoDSA, says that some of the reported changes do not align to governance best practice.

One issue raised by Natesan is the fact that the changes to the MoI has the potential to blur the governance roles played by the shareholder (the state) and the SABC board. In the private sector it is very clear that the shareholders hold shares in a company and appoint a board to direct and oversee the company on their behalf.

“The board could bear liability if its decisions are wrong, so it’s important that it has the power to make its own decisions,” Natesan explains. “Thus if shareholders interfere too much in the way that the company is run, then governance breaks down. This is unfortunately a common problem that exists in the public sector as boards become rubber stamps for the dominant shareholder—which results in poor board and ultimately poor company performance.”

Another adverse result is that these boards find it increasingly difficult to attract directors with the right levels of knowledge and skills. Individuals with governance knowledge would be reluctant to serve on such boards because they realise they will incur great responsibility and liability, whilst their true power to make the right decisions are restricted.

The MoI also permits the Minister to appoint the COO as acting CEO when the latter position is vacant, and also gives her the power to extend employment contracts for the CEO, CFO and COO.

Natesan points out that there is a danger of sacrificing general principles in order to achieve short-term goals. There’s widespread agreement that boards have to be responsible for executive appointments because executives are responsible and accountable to the board. When executives are appointed by the shareholder, they tend to feel accountable to the Minister, as the representative of the shareholder, and not the board. Again, as the IoDSA’s studies show, this causes significant confusion around role clarity and reporting lines within the governance structure.

A more complex, though related, issue is the power given to the Minister to recommend the removal of a board member. Shareholders have always had the power to remove directors but Natesan cautions that the dynamics are complicated when there is a single shareholder represented by a single individual. In the private sector, the fact that there are generally multiple shareholders ensures that alternative viewpoints compete, and the delicate balance between shareholders and board can be maintained.

“The fact that public sector corporations have only one shareholder who is politically driven, makes it much harder to strike the right governance balance, and this in turn compromises the board’s ability to do its job,” says Natesan. “If the single shareholder refuses to follow governance best practices in pursuit of short-term, political ends, it will fatally damage the ability of an entity to function effectively. South Africa is a global leader in corporate governance—we should practice what we preach.”

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