27 Nov Government should let state-owned companies appoint their own CEOs
by Matodzi Ratshimbilani
The testimony of the former minister of public enterprises Barbara Hogan before the Zondo commission on state capture has highlighted long standing incongruity that beset the directors of state-owned companies (SOEs).
Hogan testified how former president Jacob Zuma sought to influence the decisions of directors in SOEs under her watch and allegedly interfered in the appointment of Transnet’s CEO, one of the African continent’s biggest state-owned companies to the potential detriment of Transnet.
Transnet is incorporated as a company in terms of the Companies Act. Section 66 of the Companies Act confers on the directors the authority to exercise all powers and perform all functions directly or by delegation. In this regard the Companies Act makes no distinction between state-owned companies and private companies.
It is for this reason that the boards of private companies choose their managing directors or CEOs without interference from the shareholders. The logic is that because the role to manage and direct the affairs of the company is primarily that of the board, it should exercise unfettered discretion to appoint a suitable and qualified steward to run the company on a day to day basis at the behest of the directors.
Whereas the board has the legal powers to manage and direct the affairs of a company, it is impractical for the board to manage the day to day affairs of the company. Directors of private companies appoint suitable people of their choice to manage the affairs of the company on their behalf. The directors take responsibility of their appointees’ success and failures. In turn, the shareholders look up to the directors to act in the best interest of the company including their ability and wisdom to choose the right steward to act as a CEO.
In SOEs, the appointment of CEOs and finance directors is subject to veto by the shareholding minister who also requires the concurrence of Cabinet. In this way, the directors of state-owned companies are treated differently compared to those of private companies. The effect of this practice is that the directors of state-owned companies have limited abilities in appointing a suitable steward of their company on their behalf.
As it was apparent from Hogan’s testimony before the state capture commission, should the Cabinet members have ulterior motives, the directors will be saddled with less and/or undesirable candidates to manage and direct a company on their behalf.
These anomalous provisions are often contained in the respective state-owned companies founding legislation. These are the various acts that provide for the establishment of the various state-owned companies such as the Legal Succession to the South African Transport Services Act in the case of Transnet. Further, these kinds of provisions are also contained in the state-owned companies’ memoranda of incorporation.
The Companies Act prevails over memoranda of incorporation and the state owned companies founding legislation. If the Cabinet members so desire, these provisions would not constitute an impediment to allowing the directors of state-owned companies to appoint their desired CEOs.
The directors of state-owned companies have to contend with limited powers to hire and fire CEOs. Legally and in terms of the Companies Act in particular, the directors are not excused of their fiduciary and other duties notwithstanding that they operate with constrained ability to manage and direct the affairs of the companies.
Barring politics and the desire to control and exert power, there is no rational reason why the appointment of CEOs of state-owned companies should rest with members of Cabinet, including the president. The government as a shareholder retains the power to appoint and remove directors. One would hope that the directors appointed by the government as a shareholder are so appointed on merit and have the ability to appoint and remove suitably qualified CEOs who can be trusted to execute their responsibilities under the strategic direction of the directors.
If the government feel the need to second-guess its appointed directors, this may be a reflection on the quality of directors that are appointed to serve on the boards of state-owned companies. At worst, this maybe a reflection of the government insecurities, or an unhealthy desire to control the state-owned companies for ulterior purposes.
The government will do well to heed the call made by Hogan and other former government officials that political control of state-owned companies can expose these entities to untold harm if the control lands in the wrong hands.
The revelations by Hogan and others present an opportunity for the government to rethink the process of appointing state-owned companies’ CEOs.