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The government’s undertaking to issue a board appointment framework for state-owned enterprises as part of its inclusive growth action plan should be warmly welcomed, and is long overdue.
State-owned enterprises are key enablers of economic growth in South Africa, and their lack of performance is linked to imperfect governance, particularly when it comes to appointing directors.
Board composition probably has the “greatest single impact on the future success of an organisation”, to quote a recent board appraisals benchmark study by the Institute of Directors in Southern Africa.
In line with that, principle seven of King IV – a report that includes a code aimed at achieving governance outcomes – emphasises that “the governing body [board] should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively”.
Most organisations perform extensive background checks and “due diligences” on potential employees, but it often seems as if this procedure is followed less stringently when it comes to director appointments.
This is unsatisfactory because boards guide the destinies of the organisations they serve, and there is a clear correlation between how well a board performs and who is sitting on it, as well as between an effective board and an effective management team and, ultimately, organisation.
Making sure that the right directors are appointed is less of a challenge in the private sector because the link between cause and effect is quite clear. Shareholders own shares in the organisation, and they have a clear stake in ensuring their investment is directed by the best people possible.
That link is, at best, blurred in the public sector because the “shareholder”, the government, does not necessarily have the same vested interest in the board’s performance – and does not necessarily suffer direct loss if the board underperforms.
This is because the government is essentially acting as a proxy for the country’s citizens, the beneficiaries, to whom the state-owned enterprise is supposed to deliver services. It is the citizens who bear the brunt of failure in the form of unsatisfactory services and even increased taxes to fund shortfalls.
State-owned enterprises are obviously hugely complex organisations, but one could argue that they share a common challenge relating to board composition.
This can be attributed partly to the fact that the government (represented by a minister), controls board appointments with no independent nominations process.
A formal nomination process would include an initial needs assessment, a call for proposed candidates, and thorough assessment of candidates’ knowledge, skills, experience, attributes and capabilities in light of the needs analysis, together with other suitability checks.
Then because there is no transparency for board appointments, nobody knows on what criteria they are appointed or who the relevant minister consults – hence the widely held view that they are “political appointments” – which seems to be code for “individuals with an agenda that may not be aligned to the best interests of the organisation”.
Interestingly, the institute of directors’ board appraisals benchmarking data also reveals that the public-sector directors themselves repeatedly raise the process of board nominations as a concern in the governance of their organisations.
To be successful, organisations need to have directors with the requisite knowledge, skills, experience and personal qualities. Experience has shown that the best way to achieve this is through a formal, independent process of appointment.
This is critical in any organisation, but particularly for state-owned enterprises because of their influence on the rest of the economy, and the difficulty of keeping political and economic goals separate.
It is critical that the government, as shareholder, and the board understand their respective roles, and that undue political interference in the appointment of directors is avoided.
Boards cannot be held accountable for the enterprises’ performance if they are unable to exercise their judgment freely and in the best long-term interests of the organisation.
Effective corporate governance can improve organisational performance over the long term, which has socioeconomic benefits for the country as a whole, but it will also contribute to reversing the perception of corruption that is swamping our public life.
• Parmi Natesan is the executive director of the Institute of Directors in Southern Africa
