The Passenger Rail Agency of South Africa is going through serious turbulence that’s symptomatic of broad corporate governance failures within the country’s state owned enterprises. Its acting CEO was recently fired by the board, following allegations that he raised his remuneration by more than 350%. Shortly afterwards the minister of transport dissolved the board. The Conversation Africa’s Business and Economy Editor Sibonelo Radebe asked Owen Skae to explain the causes.
What went wrong in the governance of the Passenger Rail Agency of South Africa?
This is just another example of the shareholder undermining the board, something that’s becoming an all too common dynamic within South Africa’s state owned enterprises. The trend can be seen in the frequent chopping and changing of state owned enterprise boards over the past few years. Names that come to mind are South African Airways, Airports Company of South Africa and the arms manufacturer Denel.
At best this leads to toothless boards, which may be trying to do their best but are undermined at every turn. At worst, it creates “zombie boards” which are simply there to rubber stamp the wishes of the shareholder and the powerful executives who don’t feel they are accountable to anybody. When that happens things can go horribly wrong.
What are the key tenets of healthy relations between the executives (CEO) and the board?
The starting point is to understand what the respective roles and responsibilities of board members are. As Mervyn King Chairperson of the King Committee (which drafted a set of codes on good corporate governance for the country) often points out, there is no single leader of an organisation. Rather, there’s a chairperson who leads the board, (or governing body as it’s referred to in King IV, and a CEO who leads the executive team.
What many people fail to grasp is that the board is not accountable to the shareholder. It is accountable to the organisation and is duty bound to act in its best interest.
The board safeguards the interests of the enterprise, thereby ensuring that sustainable value is created for all stakeholders, including the shareholder.
The board determines the policies and strategy of the organisation (based on input from the executives), and then delegates the authority to implement the strategy to the CEO and the executive team.
The board then has a monitoring and oversight role and will meet at regular occasions to engage with the executives. The board is also expected to establish committees to monitor key areas like remuneration, audit, risk, social and ethics issues.
It’s vitally important that the board doesn’t interfere or undermine the executive team. Trust is essential to allow the respective roles of the board and the executives to be carried out. At the same time, however, the necessary checks and balances must be put in place to ensure that the executives don’t go beyond the parameters and authority set by the board.
The CEO is of course the visible face of the organisation and hence often enjoys the highest profile. But it doesn’t change the fact that the CEO (the executives) report to the board.
Who should set a CEO/executive directors remuneration and why?
South Africa’s code on corporate governance recommends that the board establishes a remuneration committee. Its members should be non-executive and the majority must be independent non-executive directors. This is to avoid conflicts of interests which can lead to underhand deals.
The code also stresses that the committee should be chaired by an independent non-executive director.
The structure is designed to make sure that the CEO cannot determine his or her remuneration, as they are likely to have a conflict of interest in doing so.
The running of state owned enterprises is complicated because of the role of the political office (the line minister). How should this dynamic be navigated?
Whether it’s a private or public entity the bottom line is that the board – and not the shareholder – is the custodian of the corporate governance practices.
The shareholder approves board appointments. After that, the shareholder should allow the board to function and not undermine the workings of the board. The relationship between the board and the CEO must then be allowed to be conducted in terms of good governance.
How can the SOE situation be fixed?
The shareholder should ensure it elects board members who imbue the qualities of integrity, competence, responsibility, accountability, fairness and transparency. The board should then elect its chair, subject to the approval of the shareholder.
After that, the board must be left alone to discharge its duties and report to the shareholder as required in terms of legal, compliance and other relevant obligations. The shareholder should not have a direct line to the CEO as this simply undermines the relationship between the board and the executives.