South African State-Owned Enterprises (referred to as “SOEs” hereinafter) have been plagued with financial mismanagement and ineffective corporate governance. SOEs are unique in that the South African Government is the sole shareholder of these companies with the Minister who holds the share in a SOE on behalf of Government such as the Minister of Public Enterprises. Various parties play a role in the governance of SOEs.
Oversight over SOE’s vests in Parliament, the Executive and the Boards of SOE’s. Parliament exercises its role through evaluating the performance of SOE’s by interrogating their annual financial statements. The Public Finance Management Act (hereinafter referred to “PFMA”) governs the standards for financial management of SOEs.
The Companies Act
The Companies Act (hereinafter referred to as “the Act”), established the term ‘state-owned company’, which is defined in Section 1 as an enterprise that is registered in terms of this Act as a company, and either is listed as a public entity in terms of Schedule 2 or 3 of the PFMA and is owned by a municipality, as contemplated in the Local Government: Municipal Systems Act, 2000 (Act No. 32 of 2000).
Section 66(1)2 of the Act requires a SOE to have a Board of Directors, which has the authority to exercise all of the powers and perform any of the functions of the SOE, except if limited by the Companies Act or Memorandum of Incorporation. The Board of a SOE should comprise at least three Directors. The Board of Directors is accountable to the shareholder for the performance and affairs of the SOE.
The Act sets out standards of Directors’ duties, namely to act:
- In good faith and for proper purpose;
- In the best interests of the SOE; and
- With the degree of care, skill and diligence that may reasonably be expected of a person who carries out the same functions as a Director in relation to the SOE and who has the knowledge, skill and experience of that Director.
Public Finance Management Act
SOEs fall within the ambit of the PFMA, which means that they need to comply with additional provisions over and above those of the Act. The individual Directors and the Board as a whole, carry full fiduciary responsibility in terms of the Act and PFMA.
The PFMA provides that the board of a SOE must exercise the utmost care to ensure reasonable protection of the assets and records of the SOE; and act with fidelity and in the best interests of the SOE in managing the financial affairs of the SOE. On request, the Board must disclose to the Minister to which the SOE is accountable and seek, within limits, to prevent any prejudice to the financial interests of the state.
While the King IV Report is not legally binding, its principles have been used as a benchmark against which the conduct of Directors should be measured3 and was found to be binding on state-owned entities4. King IV emphasizes that SEOs must act with independence in the best interests of the entity.
With all these governing structures in place, SOEs should be performing well and adding value to our country. SOEs should be managed according to the principles of the King IV Report, i.e. transparency and accountability. Furthermore, Directors should comply with their fiduciary duties as required by the Act and PFMA, by doing so SOEs can be catalysts for sustainable value creation and/or growth for South Africa.
Written by Sixolile Timothy, Professional Assistant, Attorney, Schoeman Law