PIET DELPORT: Why the Eskom board will not be held accountable

For those excited about a clean-up of the Eskom board, hoping it might bring about even the tiniest improvement to the parastatal’s grim existence, there is bad news: the sad reality is that the board makes not a jot of difference.

To assume that it could is to assume the board of a state-owned company (SOC) operates with the same authority as any other corporate board. It doesn’t. The differences are fundamental and render the existence of SOC boards almost pointless.

It is trite law that the board of directors bears the ultimate responsibility for a company and its management. Irrespective of statutory provisions that have been in place since about 1844, the common law states clearly that the minimum categories of duties of company directors are twofold. They must act bona fide and in the interest of the company, and they must act with due care, skill and diligence.

This is not so difficult to understand — but in application it’s a bit more complex. If the directors do not comply with those duties, they are — independently and/or collectively — responsible to the company for loss and damage to it.

We listen, more or less, to endless explanations about Eskom’s inability to provide power to SA and the economy. One of the apparent reasons for this lack of generation capacity — apart from boilers being dropped by the Chinese manufacturers or new control rod mechanisms at Koeberg that don’t work — is the lack of maintenance at power stations. This, we are told, has been the case for decades.

So where was the Eskom board all this time?

The basic duty of a board is to ensure long-term sustainability for the company. This is a fundamental principle of corporate law and is even an anchor principle in the King 4 report on corporate governance. If you sit on the board, the duties apply — and the reason there are many people on a board is so they can exercise their combined wisdom in carrying out these duties. Critically, the directors are also required to exercise independent discretion.

So, while Eskom CEO André de Ruyter, COO Jan Oberholzer and a lot of other people were running out of fingers to plug the holes in the dykes, what was the board up to? Did the directors carry out their fiduciary duties and duties of care, skill and diligence? If so, how could the situation have come to this?

And if it’s accepted that the Eskom directors did carry out their duties and the entity is still failing, is it safe to say that no-one on the boards of the many private sector companies that have been plagued by “corporate scandals” should be held liable?

The dilemma with the Eskom board lies in a fundamental flaw that’s built into the legal structure of parastatals.

The concept of the SOC was, unfortunately, imported by the 2008 Companies Act. But it wasn’t thought through properly. The very name “state-owned company” is actually a misrepresentation, as the Companies Act defines it as an “enterprise” registered in terms of the Companies Act and listed as a public entity in terms of the schedules to the Public Finance Management Act (PFMA).

What this means is that “ownership” — whatever that may mean in company law — is not the test of what constitutes an SOC. Instead, that falls to the provisions of the PFMA.

Consider that Telkom is not 100% “owned” by the state, but is still an SOC. (Of course, one cannot “own” a company – one merely “owns” the shares and can thereby exert some control.)

The involvement of the PFMA in Eskom’s life is an additional, and substantial, complication from a governance perspective. The PFMA is the “ultimate” act if there is a conflict with the Companies Act.

In the context of the SOC, the “state” means the department of public enterprises and it is the public enterprises minister who exercises all the shareholding rights. A full 100% of the shares in Eskom (and in SAA) are owned by the state, which makes the regulation more problematic, because there is no accountability whatsoever to outside shareholders — not even AGM disclosure.

If the state owns a minority in an SOC, it has little control in company law. But the PFMA in any case gives ultimate authority in respect of a lot of powers to the minister, which means “control” is actually irrelevant.

If the state owns all the shares, it has total control over the SOC in terms of the Companies Act. This means the minister has unfettered control over the appointment and dismissal of the board. This has consequences for the exercise of “independent discretion”. It also makes a lot of the governance provisions, such as shareholder meetings, a farce. In addition, the minister has ultimate control in terms of the PFMA, especially when it comes to loans to the SOC.

The directors on the board are therefore, in effect, puppets of the minister. This does not, however, exonerate them from their duties to the company or their accountability for lack of proper governance under the Companies Act.

This governance reality needs to be considered in the context of the reconstitution of the Eskom board due to a lack of “skills and management capacity”.

The new board has been reasonably well received and commentators seem to assume public enterprises minister Pravin Gordhan has appointed directors with the necessary skills and capacity. But is this a realistic assumption given that all of the old boards, which successively failed Eskom, were also appointed by the minister?

Recall that the PFMA is the ultimate act if there is a conflict with the Companies Act. So, if the board of Eskom doesn’t carry out its duties of care and skill (or fiduciary duties), what will happen? And will the directors be held accountable?

The reality is that absolutely nothing will happen — because the duties are to the company, which means it is the directors who must then institute action on behalf of the company against themselves. This will certainly not be the case in the real world.

If the board doesn’t act, action can also be instituted on behalf of the company in terms of section 165 of the Companies Act by the shareholder (the minister). But, again, this is unlikely to happen because it was the minister who appointed the directors in the first place.

In addition, section 165 provides for a registered trade union to do so — but that’s unlikely too, given that wage increases are determined by the board. Finally, a third party may get leave from the court to institute action, as in the case of the Organisation Undoing Tax Abuse vs former SAA board chair Dudu Myeni. But this requires determination and involves jumping through numerous hoops, as the Myeni case indicated.

This is also why the SAA business rescue keeps dragging on for months (years, even) and may, according to Gordhan, only be finalised by the end of 2022. It’s because the ultimate powers and authority to manage the company don’t lie with the board.

In corporate business rescue, these powers are transferred to, and exercised by or under the authority of, the business rescue practitioners. However, for an SOC in business rescue this transfer isn’t possible because, under the PFMA, the ultimate powers lie with the minister. That makes any attempted business rescue a farce, because the minister makes the ultimate decision.

The business rescue practitioners raking in millions are, like the Eskom board, “toothless”. The ultimate “master” was (and still is) the minister.

So why do we keep shouting about Eskom’s board? It’s a waste of time. After all, those that came before were in breach of their duties and responsible for the demise of the utility — but weren’t held accountable for a single cent.

* Delport is a retired mercantile law professor from the University of Pretoria