05 Aug Opinion: The unenviable task of the chief restructuring officer
President Cyril Ramaphosa and the Minister of Finance have on several occasions in the recent past informed the nation that the mega state-owned enterprises will soon be under the helm of chief restructuring officers, of whom a lot is expected to turn around the fortunes of the beleaguered SOEs. On Tuesday, the appointment of Freeman Nomvalo as CRO of Eskom was announced.
However, previous announcements were scant on the details of what the role of the CROs at state-owned companies would be. The nomenclature of CROs seem to be borrowed from the United States (US) where the practice was abound after the 2008 financial crisis.
The difference between what happened in the US and the intended CROs for South African SOEs is that in most cases the CROs were appointed by funders who would have been empowered to do so in terms of the funding agreements they would have utilised to provide funding to American companies prior to the 2008 financial crisis. Another nuance is that South African CROs are intended for SOEs, of which the legal governance framework comprise of a myriad of related, unrelated and at times conflicting legislative frameworks.
Taking into account the legal role of directors and the delegated roles of executives, should the roles not be clearly defined down to minute and practical details, there is likely to be conflict between the directors, the CRO and the executives.
For starters, the directors will be beholden to an outsider who is not a director and they will remain answerable to their stakeholders. Most importantly their fiduciary and other duties will not be diluted. Simply put, the directors will remain legally answerable for decisions that they may not be entirely responsible for. If not carefully managed, the CRO may fetter the discretion of directors which goes against the fundamental tenets of directors’ duties.
Another significant stakeholder that the CRO will have to contend with, given that as matters stand they will be appointed by the government as a shareholder, will be the funders and holders of various securities employed by the SOEs in the capital markets to secure funding. The financing agreements and terms of the various bond programmes often contain onerous terms that would ordinarily not be accommodating to an outsider making decisions on behalf of an SOE. The lenders to SOEs and holders of their financial instruments wield extensive powers when significant changes are made on the governance framework of SOEs that are heavily indebted.
In the past 18 months, given the many widely reported financial problems within SOEs and the JSE revision of its bond listing requirements, more onerous terms will be applied to SOEs when they access the capital market. The CRO will be bound by the funding terms likely to the point that any decisions the CRO makes will be vetted by the financiers. This limitation may constrain even the most able CRO.
It’s true that the bigger SOEs such as Eskom and Denel which are listed in schedule 2 of the Public Finance Management Act (PFMA) have some latitude in undertaking financial commitments and to generally decide on their own affairs without too much involvement from the government as opposed to smaller SOEs listed in schedule 3 of the PFMA. The PFMA can be seen as restrictive on the ability of SOEs when making long-term financial commitments, or materially varying their long-term plans. A CRO schooled in the private sector may find the level of compliance required of SOEs when implementing important decisions to be restrictive given that in most instances decisions may need to be made on an urgent basis for them to have the desired impact.
It is noteworthy that the CRO cannot have the powers akin to those of a business rescue practitioner whose role is clearly defined in terms of the Companies Act. One of the most potent powers of the business rescue practitioner is that he/she has the powers to suspend legally binding contracts for the duration of business rescue. If the powers of the CRO could be any closer to those of a business rescue practitioner they would have a fighting chance to make decisions that may be felt within the SOEs.
It is understandable that the government has not opted to put any of the SOEs under business rescue, as such a move would trigger default provisions contained in important legal agreements such as funding agreements, and the various terms of the SOEs’ instruments in the capital market. The CRO will have to contend with the fact that their decisions will depend on the goodwill of the directors and the government as a shareholder.
For the idea of a CRO to work, a lot of thought needs to be invested on how this role, important as it may be, shall co-exist with other stakeholders such as the directors, executives, employees in the context of a highly legally regulated environment of SOEs.
Matodzi Ratshimbilani is an attorney and director of Tshisevhe Gwina Ratshimbilani Inc. Views expressed are his own.
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- Opinion: The unenviable task of the chief restructuring officer - August 5, 2019