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SA firms and SOEs need more than governance tick-boxes

Corporate governance must become part of a business' fabric

Sugar producer Tongaat Hulett is considering whether to sue several senior executives to recover bonuses and benefits they accrued while presiding over “undesirable accounting practices” at the company.

If the board decides to proceed with civil action, Section 77 of the Companies Act of 2008 — which makes provision for directors to be held liable for financial losses on their watch — will no doubt be crucial to the case. The board has the opportunity to send a strong message that corporate governance lapses will not go unpunished, and that executives will be held accountable even after they leave the company.

The board is also co-operating with the police and National Prosecuting Authority (NPA) to determine whether criminal charges should be brought against those involved in wrongdoing. This approach could set the tone for a new era in corporate governance where accountability and consequence management are prioritised.

Ensuring good governance in the private and public sectors is vital to the long-term health of the SA economy. However, we often find that executives involved in wrongdoing are let off the hook, even though their actions cost shareholders, pension funds and investors billions of rand.

Similarly, the NPA has said that just nine out of 293 cases of maladministration and fraud at municipalities have been finalised in court. National director of public prosecutions Shamila Batohi is on record saying public servants found guilty of wrongdoing have received light sentences that have had little or no effect as deterrents.

These examples tell us that governance failures are not a function of weak legislation or ineffective codes of best practice, but are due to poor implementation and a lack of political will.

In the corporate world, directors of companies are expected to adhere to their fiduciary duties as stipulated in the Companies Act, while the Public Finance Management Act and the Municipal Finance Management Act govern conduct in the public sector. Principles of good governance are also codified in the fourth iteration of the King Report.

Tongaat Hulett is under public scrutiny for overstating its profits and assets in its financial reports. A six-month investigation by PwC Advisory Services into alleged irregularities at the company found that a host of senior executives — including former CEO Peter Staude, who retired in October 2018 — “initiated or participated in undesirable accounting practices”.

The PwC report highlighted shortfalls in governance practices, inefficient oversight, weak financial discipline and reporting practices, and problems with record keeping.

Media commentators were quick to draw comparisons between the Tongaat Hulett probe and the scandal that engulfed Steinhoff International in December 2017. Steinhoff’s share price plummeted 95% after the company announced it had discovered “accounting irregularities requiring further investigation” and that CEO Markus Jooste had resigned. One of the biggest casualties of the Steinhoff meltdown has been the Government Employees Pension Fund, which reportedly suffered an unrealised loss of nearly R20bn.

Corporate governance should never be a tick-box exercise, but we see it devolve into a meaningless concept when the independence of oversight bodies is compromised. Usually this happens when senior executives and long-serving board members become too chummy or familiar with one another. This situation can be avoided if board members stick to the principles of independence set out in King IV.

The accounting and auditing profession has seen its fair share of scandal in the wake of state capture investigations involving state-owned enterprises and the Gupta brothers.

In my experience, serving as a member of an audit or risk committee for public sector entities, I found that in some instances our recommendations for corrective measures were disregarded by department heads due to a lack of political will or budgetary constraints.

This particular issue was highlighted by auditor-general Kimi Makwetu in his report on the financial outcomes of the country’s municipalities for 2017/2018. According to Makwetu, the overall decline in municipal audit results shows that local government officials are slow to implement his recommendations or are disregarding them.

If the provisions of the Public Finance Management Act and the Municipal Finance Management Act are strictly adhered to, I doubt we would see government departments, municipalities and state-owned enterprises incurring more than R60bn in irregular expenditure.

If people knew they could go to jail for not complying with the law, we would not have a situation where 31% of SA’s 257 municipalities are not financially viable — meaning they are technically bankrupt. As at the end of 2018, at least 24 municipalities had been placed under administration since 2016.

Though wasteful expenditure is a huge drain on state resources, the greatest risk to the SA economy is undoubtedly the financial crisis at Eskom. The state-owned power utility is in debt of about R450bn, barely surviving on government bailouts, like the R59bn it was recently allocated.

Newly appointed CEO Andre de Ruyter (the 13th person to take the reins since 2009) has his work cut out to turn around the parastatal. His success will ultimately depend on whether he gets the political support he needs to clean house at Eskom, which will serve as a litmus test for other ailing state-owned enterprises (SOEs).

Perhaps the recent placing of SAA under business rescue is the first test to see if the government has the will to take the harsh decisions necessary to turn around ailing SOEs, including Eskom.

The examples I have pointed to suggest that SA firms and state-owned enterprises are taking a lax approach to governance. If we are to turn the situation around it must start from the top with ethical leadership and a strong commitment to consequence management and accountability.

We might then be able to avoid another Steinhoff or Tongaat Hulett debacle coming at the expense of investors and pensioners.