Sound corporate governance, the system by which companies are directed and controlled, is globally recognised as a critical requirement for successful growth and development. SA’s King Code of Corporate Governance is world leading and regarded as one of the most comprehensive approaches to governance yet, SA is experiencing significant wasteful and irregular expenditure of state funds where poor governance of State-owned Enterprises (SOEs) is impacting our fiscus and financial flexibility.
At our recent Thought Leaders, we discussed the importance of corporate governance and insights into SOEs. First, we heard from Webber Wentzel Partner and Head of Public Law, Michael Evans, who shared that the King IV report defines good corporate governance as ethical and effective leadership by the governing body or board to achieve four outcomes – ethical culture, good performance, effective control and legitimacy. When looking at SOEs Michael said that a fifth factor, transparency, which is what is really required for the governance of SOEs, must be considered. He added that political appointees to the boards of SOEs often trigger a failure in corporate governance as appointees feel their first accountability is to the person that has appointed them, rather than to the company. He closed by saying that perhaps a state-owned entity such as the Department of Public Enterprises or dti, should look at creating a stewardship code for public entities to avoid SOEs accelerating SA’s downgrading process.
Next, we heard from Futuregrowth CEO, Andrew Canter. Since SOEs participate in strategic sectors such as water, transport, energy, etc. they are often the most visible entities in emerging markets. With this in mind, Andrew explained why good governance of SOEs matters: lower credit leads to higher cost of capital for the entire economy and when this happens, there is less competition and slower growth. While some of us show little anxiety towards ratings downgrades, Andrew highlighted that SA is one of only a few economies’ globally not showing growth. With foreigners holding 40% of SA’s entire bond market, another downgrade will see the country fall out of several global bond market indices.
Andrew went on to say that governance is not simply what is written down on paper, the ‘who’ does it, is as important as the ‘what’ is it. As the shareholders of SOEs, Andrew encouraged us to ask questions and pay attention to factors such as: who is on the board, who are they connected to, how big is the credit committee, how many independent directors are there, what are the skills sets of board members, turnover, amongst others – he referred to this as “upward” vs. “inward” governance assessment. Shifting focus to the JSE, Andrew shared that with respect to listed bonds, the JSE has a role to play in the governance solution in SA – with no reporting requirements other than annual financial statements, Andrew believes that the JSE is an enabler of corrupt practices across both the public and private sectors.
Finally, we heard from Bennie van Rooy, CFO of Land Bank, who shared his challenges and experiences from the perspective of an SOE. Pre-2008, the Land Bank was a distressed bank, plagued by collapsed governance, with many internal issues to overcome. Passionate about what they want to achieve for the agricultural sector, the bank began to restore and stabilise and Bennie said that a large part of the bank’s turnaround was its commitment to good governance. The bank implemented an independent board appointed by National Treasury, an independent credit and investment committee, as well as a policy on lending to politically exposed persons. Although challenging, Bennie said that through the process of implementing good governance, the bank could differentiate itself from other institutions and during an auction held last week, received bids for R5 billion even though it only set out to raise R1 billion.
The session ended with a Q&A and when asked how corporate Cape Town could make a difference, Andrew encouraged business leaders to impose rules of behaviour that is expected from a highly functioning society.