Restoring trust in SOEs through the objective selection of board members

There’s an old joke about a boy who is asked by his mother how his day at school went. The boy said every child in his class was asked to tell a story about his father and what work he does. The mother then asked the child: “So what did you say dad does?” He replied: “I said he is a stripper at a nightclub.” In shock, the mother asked why he had lied. He replied that he did not feel he could tell his classmates dad worked for a state-owned enterprise (SOE).

The fact is that SOE employees often feel ashamed by the reputational damage incurred by their employers. This breach of trust extends beyond employees to other stakeholders: industry regulators, clients, suppliers and the whole of society feel the brunt of the loss in trust in SOEs. While it is well known that the vulnerability of SOEs is often exploited for dubious intentions, the greatest resultant “sin” is abuse of the money of taxpayers, who are the ultimate owners of SOEs. Responsible and accountable behaviour by SOEs fulfils the ethical obligation that such institutions have to the taxpayer.

The primary challenge is that the government is the sole shareholder of many of our SOEs. This gives the relevant minister, as shareholder representative, the unilateral right to appoint nonexecutive members of the board of directors for the SOEs that reside under their oversight. The practice makes sense, to an extent, as the government is the custodian of SOEs as assets to the country.

While we agree with the president that a nomination or deployment committee should be established, this function does not necessarily have to reside with the governing party. The net negative effect of this process is that the party can nominate its own people, and the country is consequently deprived of the best possible candidates to serve on boards of SOEs. A legitimate appointment process will require far more accountability and transparency than the current practice.

The extent to which the system is inherently problematic has been witnessed in the Zondo state capture commission of inquiry, where boards were shown to fall short of discharging their duties due to political interference. One of the more alarming examples is that of a former Eskom chair who was allegedly told to call off a board meeting. The said board member belonged to the governing political party, as did the government official who told him to call off the meeting.

During his testimony before the Zondo commission this witness defended the ANC’s use of cadre deployment as an accepted standard in the country. If board chairs had been independent and had sufficient positional power, they could have prevented such an obvious abuse of power. Government representatives have no right to interfere with either the board or the day-to-day running of an entity.

The Organisation for Economic Co-operation & Development (OECD) guidelines on corporate governance of SOEs recommends that board members should not have any existing ties to the highest levels of government and should be appointed on professional merit.

It should be a precondition for SOEs to carefully vet board nominees. It is imperative to ascertain — before any appointment to a board — that potential candidates have verifiable skills, experience and the capacity to discharge their duties with diligence (which should be the most crucial selection criteria). The so-called Icraft characteristics (integrity, competence, responsibility, accountability, fairness and transparency) established as guidelines in principle 1 of King IV (which also applies to SOEs) must be understood and translated into observable attitudes and behaviours to ensure legitimacy, adequate control and sound performance.

In SA it is the prerogative of a minister to influence decision-making by unquestioningly enforcing nominations, selection processes and appointments as prescribed by the governing party. Since the state is the main shareholder of many of our SOEs, some political interference seems inevitable. This does not absolve the state of the ethical obligation to the country to nominate their preferred board members in an objective and transparent manner.

The starting point for such nominations is to apply the precedents set with the recent transparent appointment processes applied to key functionaries — the Financial Sector Conduct Authority commissioner, the head of the National Prosecuting Authority, the SA Revenue Service commissioner, and (most recently) the chief justice.

The imminent appointment of an independent, competent and trusted public protector is likely to further bolster the notion of objective appointments.

For the positions mentioned above an independent panel of relevant stakeholders and experts were chosen to nominate suitable candidates, who were all subjected to the same rigorous screening and interviews. There were a few sparks of objection by certain stakeholders, but overall the process appears to have been both valid and legitimate. While we must give the president credit for taking steps in ensuring that a transparent process was followed in nominating and electing individuals to fill these positions, as well the Eskom CEO, other state-owned institutions need to follow a similar methodology for key appointments.

The OECD guidelines on governance in SOEs propose the after process for selecting board members:

• Set clear minimum criteria for board nominations;
• Informally vet or advise on ministerial board nominations; and
• Establish nomination committees.

This essentially means having nomination committees that consist of both government and non-governmental representatives. In centralised governments, nomination committees vet potential board members and provide the relevant minister with a shortlist of candidates. In more decentralised governments, permanent and independent agencies are formed. Their key responsibilities include vetting, nominating and interviewing potential candidates. These agencies also provide training to the incoming candidates. However, it is recommended that proper background checks, lifestyle audits and appropriate scientific selection methods be applied to complement the key responsibilities of the agency.

According to the OECD, standard practice is to use private sector guidelines when selecting board candidates. This applies particularly to commercial SOEs such as Eskom, Transnet and the Passenger Rail Agency SA. The OECD further recommends that SOEs follow the same practice followed by several listed companies, which entails having external nomination committees advising their annual general meetings. These committees may comprise both civil servants and private sector representatives.

SA has many capable and willing leaders who have the country’s best interest at heart. Numerous key professionals doing well in the private sector are willing to offer their skills and capacity to fix some of our SOEs where “fixing” has sustainable development and renewed trust as key outcomes.

SOEs have lost a lot of goodwill with the public. While we may not be able to fix our SOEs overnight, a good starting point would be the formation of strong and independent governance structures. This first step would not only give confidence to ordinary South Africans, but also to the world beyond our borders; a world that is increasingly sceptical about our ability to competently and ethically run our institutions.

• Prof Van Vuuren is executive director: business & ethics, and Qabaka a research specialist, at The Ethics Institute.