‘We almost lost the country’

There are few organisations in South Africa that know as much about state-owned enterprises (SOEs) as Futuregrowth Asset Management. Not only is it one of the biggest local lenders, but over the last two years it has been involved in ongoing, in-depth engagements with these organisations.

This followed the August 2016 announcement by chief investment officer Andrew Canter that Futuregrowth would not be lending any more money to six major SOEs until it had conducted governance reviews. This involved scrutinising issues such as the composition of boards and board committees, who had authority to authorise loans or tender contracts, and how new board members were appointed.

The efforts made by Futuregrowth and the results they have produced have been a very important lesson in the influence lenders can exert in this space. They also revealed just how different the country’s SOEs are.

No standardisation

“It was surprising to us that not only are they not created equal, they each have unique founding legislation, different policies, guidelines, and principles,” Canter explains. “They really are all different. The standardisation of governance across the SOEs is remarkably little.”

Within a few months, Futuregrowth satisfied itself that it could lend to the Land Bank, the Industrial Development Corporation (IDC) and the Development Bank of South Africa (DBSA). The national roads agency (Sanral), Transnet and Eskom, however, are still off the list.

“The Land Bank, IDC and DBSA generally had very good governance structures,” says Canter. “Their boards were well composed – they had enough independence, and enough people on their boards to bring a balance of the skills needed to run those businesses, but then each one had its own problems.”

These issues ranged from how much money certain committees could lend out without needing higher approval, to introducing new policies for dealing with ‘politically exposed persons’, and staggering directors’ terms for continuity.

“Having identified some gaps, fixing these issues was not a fight,” Canter explains. “They recognised their importance, and in many cases it was already on the agenda. They were also all very willing to be more open around disclosure of governance policies, practices and people.”

Scrutinising the roads agency

Sanral, however, had its own particular problems.

“Sanral was trickier, not because of its internal operations – we believe it is a mission-driven organisation – but because the board is by statute only allowed to be eight people,” says Canter. “Our view is that you cannot run a business of that complexity, where you need technical engineering skills, procurement skills, financial skills and operational skills, with all the properly constituted sub-committees required, with only eight members of the board. Yet that is what the Sanral Act requires.”

In addition, some ministers of transport have exercised the absolute power given to them to dismiss and replace various board members without engaging either a board nominations committee or executive management.

“This practice creates a clear risk of misdirection,” says Canter.

Informing the public

Critically, Futuregrowth also insisted on better disclosures from SOEs.

“If you look at the Land Bank for example, nobody had ever seen its credit granting policy,” Canter notes. “It wasn’t public, and therefore you couldn’t see if or how it changed. What we agreed with these SOEs was that there had to be much more reporting on policies, procedures and practices, as well as changes to the board and board committees.”

In some cases it was agreed that information would appear via Sens releases, and in other cases in annual reports. Currently the requirements for such disclosures are minimal. This has, at times, allowed for wholesale changes to take place without anybody knowing about them.

“The best example I can give is that in June 2017 the minister of water, who was then Nomvula Mokonyane, fired the entire board of Umgeni Water,” says Canter. “Nobody knew about it. They didn’t have to tell the JSE. There was no press release. Literally two weeks later one of the credit ratings agencies even reaffirmed the company’s rating, and didn’t even mention there was no board of directors.”

Given that many of the issues at SOEs began with the degradation of their boards, making any such changes public is a vital issue. This also takes the question wider to the responsibilities of government and how it plays its role as shareholder.

Government playing its part

“One of our propositions to government is that there should be a super authority that oversees the governance of all the SOEs,” says Canter. “That body should ensure that there are standard reporting and governance rules for all of them.”

This would include specifics such as the professional qualifications needed to serve in certain positions, and the sizes of various sub-committees.

“These have to be brought to a certain standard,” Canter argues. “Who are the people who are appointed, how did they get there, and what are their professional credentials?”

To do the job of analysis and oversight, investors must also get more information.

“How was it possible,” asks Canter, “that there was no awareness that Eskom’s internal audit department was reporting directly to the CFO and not the board audit committee, for instance? That’s a clear demonstration of an appalling governance practice that, had it been disclosed, would not have been tolerated.”

Hopefully, progress will continue to be made in this respect.

“What I would like to hear is acknowledgement that we almost lost the country, and that we must make sure that we buttress the pillars of democracy so that it doesn’t happen again,” says Canter. “I haven’t heard that sentiment from anyone in government yet, but they are starting to ask some of the right questions.”

Source: moneyweb.co.za