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SOE Governance

Unmasked
A learning journey
Contents Authored by
Page 3
Olga Constantatos
Foreword: The role of investors
Tarryn Sankar
in society by Andrew Canter
Page 9 Assisted by:
Introduction and background Angelique Kalam
Page 12 Conway Williams
Our SOE journey Gershwin Long
Page 13 Iqeraam Petersen
Chapter 1: Governance beyond Ringetani Ndlovu
the board of directors Sarah de Villiers
Page 17 Wafeeqah Lagerdien
Chapter 2: The PFMA as the first
line of defence
Page 20 Contact our
Chapter 3: Boards and their client
sub-committees
Page 26 relationship
Chapter 4: Committees and team
decision-making
Page 32 Thembela Mandla
Chapter 5: Conflict management T +27 21 659 5450
Page 35 C +27 82 895 8976
Chapter 6: Reporting and thembelam@futuregrowth.co.za
disclosures
Page 38 Ziyanda Tshaka
Chapter 7: King IV and its use in T +27 21 659 5460
bolstering governance at SOEs C +27 83 666 0392
Page 42 ziyandat@futuregrowth.co.za
Chapter 8: SOE reform and Marilyn Gates-Garner
what’s next? T +27 21 659 5453
Page 43 C +27 82 466 0868
Conclusion marilyng@futuregrowth.co.za
Page 44
Steffen Josephs
Summary of governance
T +27 21 659 5466
outcomes
C +27 83 327 3543
Page 45 sjosephs@futuregrowth.co.za
Glossary of terms & references

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Foreword: The role of investors in society
Fixing governance standards

What is the role of investors in the degradation governance failure - and therefore the need
of South Africa’s governance standards, for governance checks and balances - apply
and how can they help repair the damage? equally to both public and private companies.
This preamble lays out some of the structural
reasons why investors failed to buttress The problem with agents
governance standards, and suggests some We often employ professionals as “agents”
solutions. who, in various degrees, are empowered to act
in our interests. This can range from attorneys
The allocation of capital and asset managers to business managers
Investors represent a vital part of a modern who care for shareholders’ assets. In fact,
economy in that they allow their savings to employees of the government or SOEs are
be channelled toward productive enterprises. “agents” appointed by citizens to care for the
Asset managers often are entrusted to fulfill assets of the nation. However, where business
this key role of allocating capital. Investment managers are charged with looking after
should always be done in accord with others’ interests there is potential for conflict
risk-return principles and be based upon between what is good for the agent versus
reasoned analysis. In recent years investors’ what might be best for their constituent
research has moved beyond mere macro- investors. This is the well-known “agency
economic, industry and financial analysis problem” which must be managed with rules,
to include a range of indicators about reporting, contracts, oversight and culpability
the sustainability of businesses. We have in order to maintain ethics, efficiency and
learned that environmental failures, social trust.
mismanagement, or poor governance can
destroy companies. While investors often rely The need for systems of checks and balances
on laws, codes and watchdogs (e.g. regulators, to address the “agency problem” is not
auditors, ratings agents) to give some comfort, new in human affairs: When, for example,
a core problem remains that “bad actors” can, governments are instituted to act on behalf
and regularly do, break the rules of law, ethics of citizens, they are guided by constitutions;
and sustainable practice in the pursuit of controlled by laws and regulations; overseen
personal gain. Time and again we have seen by a range of institutional watchdog agencies
the overarching pursuit of near-term profit on alert for malfeasance; policed by a free and
leading corporate decision makers away from unfettered press that can make misconduct
sustainable choices and onto the shoals of public; and are ultimately accountable to an
disaster. alert and reactive populace who can institute
change when necessary.
Recent events in South Africa’s state owned
enterprises (SOEs) and some large private Likewise, investors are one of the pillars of
companies have shown us that the risks of oversight for the nation, but they often forget

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that duty and they seem to operate in a protect their own specific clients’ interests
flawed sub-system that impairs them from while failing to address structural problems
exercising their oversight role. We need to in markets and regulations that hurt all their
understand those impediments. clients and all investors. For example, who is
responsible for ensuring capital markets are
In overseeing companies the agency problem fair, or ensuring the efficacy of standards of
is subtle: While a CEO may own shares reporting on governance by entities with listed
alongside other investors, she might argue bonds or shares? The answer is that – even
for a corporate jet to satisfy her own desires, while exchanges, analysts and ratings agents
or may be driven by the structure of her earn fees, asset managers buy the instruments
bonus scheme to seek short-term gains or to for investors, and regulators simply tag along
take on undue risks. Thus, while alignment - no one in particular takes responsibility for
(e.g. through shareholding) may appear ensuring the overall market system is safe and
to solve many ills for shareholders, what is suitable. As a result, it is not safe and suitable.
really required is a “web” of oversight by Regulators – whose job is specifically to look
stakeholders and watchdogs. after all investors - tend to be understaffed
and overburdened by a system which has
In the realm of investing there is a chain of been shaped by the motives of various players
agents notionally acting for investors – but who are able to deploy “divide and conquer”
corporate managers, asset managers, auditors, tactics for self-gain and to overcome the
ratings agents, and exchanges are all profit principles of fairness and accountability.
seeking parties who may not always hold
investors’ interests at the pinnacle of their In sum, there is a general presumption
concerns. Even among genuine fiduciaries that “someone” will create a protective
– those who hold their investors’ interests as environment for investors, but no party
paramount - there may be conflict between actually takes responsibility to ensure that
the need and desire to perform multiple layers such an environment exists. The belief that
of analysis and oversight while concurrently regulators, ratings agents, exchanges or others
meeting investors’ relentless demands for are overseeing the governance of companies
lower costs and fees. – or that the well-intentioned King Code
serves to protect investors - is simply untrue.

There is a general Thus, the mantra of “caveat emptor” (“let the


buyer beware”) fails to protect investors when
presumption that others are acting on their behalf or when
there is a systemic insufficiency of standards,
“someone” will create a transparency or honesty.

protective environment Investors fail to learn from history


for investors, but no Governments are formed by initial negotiation
between citizens, and then systematically
party actually takes improved over the decades and centuries

responsibility to with additional laws, court rulings, controls


and oversight. By contrast, economic,
ensure that such an corporate and market practices have evolved
over time without a guiding vision and have
environment exists. systematically failed to embed the learnings
from past failures or malfeasance. It has
Perhaps most pernicious, it is possible for been observed that “progress in the field of
well-intentioned agents to credibly act to finance is cyclical not cumulative” (James

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Grant): Investors fail to learn from history, don’t must not forget how close the nation came
improve processes for learnings, and thus tend to the precipice.
to repeat the mistakes of their forebears.

While investors now acknowledge that


South Africa has, not
governance of investee companies is
important, and that assessing governance is
for the first time in its
part of an analyst’s job, the actual tools and history, looked into the
methods deployed are relatively weak. For
example, many investors employ governance
abyss and has chosen not
checklists: “Does a company have an audit
committee?”, “Is the chair of the remuneration
to jump. But we may still
committee independent?” and so forth. Such be standing at the edge,
tick-box, “yes/no”, governance assessments are
merely a beginning, and fail to address
and in the years to come
the real, deeper measures of sound
governance - or to help in assessing the
we must not forget how
challenges of “governance policy” put into close the nation came to
“governance practice”.
the precipice.
Investors have been so placated that when
governance failures occur these events can Poor governance has tangible costs
be palliatively attributed to a “once off”, a “lone The systemic implications of poor governance
wolf”, or a “bad actor”, rather than being are not merely academic or emotional, but
seen more truthfully as repeating systemic have real-world, on-the-ground consequences.
failures that can, and should, be addressed Any first year economics student can tell us
and remedied. that the three vital factors of production in an
economy are land (resources), labour (skills),
South Africa looks into the abyss and capital (access to finance). To compete in
In recent years, South Africa has faced the global economy for opportunities, growth
an alarming decay of governance in its and jobs requires accessing these three factors
government departments and its SOEs: It is at a competitive cost. The cost-of-capital (the
now clear that there has been a systematic return demanded by investors) is a function of
programme to capture and pillage the the risk investors take.
nation for personal financial gain. Worse, the
plundered wealth of the people was actively The notable governance failures by some
used to subvert the nation! We have just SOEs and corporations is a clear sign that
witnessed the near-death of South Africa’s South Africa is a risky investment destination
young and legitimate democracy. Only – which results in increases in the country’s
the combined efforts of well-intentioned cost-of-capital, and that reduces economic
individuals - genuine national heroes - in growth and opportunity for all. While the
politics, agencies, the SOEs and the judiciary, economic theory may sound arcane, the
alongside participants in civil society, such as damage is clearly demonstrable. It has been
the press, academia, the public, and financiers, estimated that up to R100 billion1, which is
have allowed the darkness to come to light. approximately half of our fiscal deficit, may
South Africa has, not for the first time in its
history, looked into the abyss and has chosen
not to jump. But we may still be standing 1 https://www.businesslive.co.za/bd/national/2017-08-03-
pravin-gordhan-says-r100bn-lost-to-state-capture-could-
at the edge, and in the years to come we have-doubled-social-grants/

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have been misappropriated by government enhance governance standards and thus
and SOE malfeasance. That means South improve investor oversight and the capital
Africa’s government deficit spending (and allocation mechanism of the economy: This
government borrowing) is higher, and the will be beneficial to all of society - citizens,
national debt as a percentage of the economy communities, companies, markets
is that much worse. Adding insult to injury, and investors.
none of that stolen money has been invested
for service delivery or for future prosperity. As a During the past 18 months, by direct
result, South Africa’s global credit quality has engagement with some South Africa’s
deteriorated, confidence has been shattered, largest SOEs, the Futuregrowth analytical
there has been a paucity of capital investment, team has undertaken a greenfields effort
and the cost of borrowing to fund houses, to understand what governance is - how it
education, infrastructure and businesses has really works in practice - and ascertain how
risen - for all South Africans. The economy is it can be reshaped and improved. We have
not growing, and is not globally competitive. learned to make governance “real” – to take it
The cost of governance failures is real, tangible beyond tick-boxes and dig down into tangible
and terrible. governance in practice.

Investors have been We believe that these learnings can be


embedded in various regulations and, notably,
so placated that when market listing requirements: Governance
reporting at present is remarkably vague, and
governance failures should be vastly improved so that investors

occur these events can can play their suitable role in oversight and
the allocation of capital to sustainable, well-
be palliatively attributed managed entities.

to a “once off”, a “lone We have identified the following broad

wolf”, or a “bad actor”, categories for governance improvements:

rather than being -- The “who” matters: An organisation can


have all the trappings of governance
seen more truthfully such as a board, committees and policies

as repeating systemic - but if it has corrupt or ill-intentioned


shareholders or leaders then policies
failures that can, and and practices are all at risk. In the first
instance, improving governance means
should, be addressed and improving the selection and appointment

remedied. process of individuals on boards,


board sub-committees, and executive
management. In the case of SOEs, it also
Can we improve governance? implies improving the selection process of
With the learnings of recent history and a shareholder representatives (e.g. ministers
bona-fide national crisis, we can now marry and their advisors). Thus, one has to look
the ideas of a) sustainable investing, b) the at the nomination and appointment
importance of robust governance, c) the processes: Does the company have a
necessity of governance checks and balances, properly constituted board nominations
and d) the inherent weaknesses of capital committee? Does the candidate vetting
markets. We can now move to incrementally process incorporate detailed fit-and-

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proper checks? Are candidates vetted procurement, credit and remuneration
for personal or political connections or committees - need particular attention.
conflicts? Is candidate vetting done by a
qualified, independent party? -- Governance policies: Any organisation
should have governance policies
Insiders invariably know covering the major business areas (e.g.
procurement, lending) as well as key
the truth and it is self- risk areas (e.g. remuneration, dealing
with politically exposed persons (PEPs),
evident that confidential conflicts of interest). Details of those
whistleblowing policies must be interrogated for
suitability: Can a CEO alone approve
mechanisms should a billion Rand acquisition? Can an ex-
employee tender for work one month
always be in place, that after leaving the company? Under what
such reports do not circumstances can the company do
business with a PEP?
land in the hands of
-- Internal watchdogs: Even the best
company managers, governance arrangements will degrade
that regulators react without active oversight. There are always
witnesses to poor governance - such
with diligence, and as executives, auditors, employees, and
suppliers - who almost universally fail
that whistleblowers be to speak up. Insiders invariably know
properly protected (if the truth and it is self-evident that
confidential whistleblowing mechanisms
not actually rewarded) should always be in place, that such
reports do not land in the hands of
by society. company managers, that regulators react
with diligence, and that whistleblowers
-- Board of directors and board committees: be properly protected (if not actually
All corporate governance begins with rewarded) by society. Reporting lines are
the board of directors, so its composition critical: For example, it is shambolic for
and operations must be appropriate: an Internal Audit department to report
Are there enough members and the to the Chief Financial Officer (yes, that
right mix of skills to deal with the happens!). A cursory review shows there
business complexity? Are there enough is a raft of existing regulations in South
independent professionals? How does Africa concerning whistleblowers, and yet
the board deal with skills continuity and those who are in the know are evidently
turnover? Are the quorum requirements not empowered to reveal the truth. Fear
and voting thresholds sufficient? How rules. Change is necessary.
are conflicts of interest dealt with?
Are members recused appropriately? -- Transparency and reporting: Investors,
The board and committees should bankers, ratings agents, regulators and
be structured to disable conspirators the public are “always the last to know”
by dint of membership, experience, when governance goes wrong, and are
independence, and questioning. “High- often surprised: “How could this have
risk” board committees - such as the audit, happened?” is the common refrain.

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This may arise from wilful ignorance, Empowering the good, disempowering
but is compounded by an utter lack the bad
of disclosure and transparency about The governance challenge was considered
matters of governance. To stay alert, by Justice Albie Sachs in the drafting of
external parties need complete and South Africa’s post-apartheid constitution.
timely reporting of details about the He describes having to envision, and plan for,
membership and operations of boards, the human capacity for perfectibility – for
committees and executives, as well as good people to actually accomplish noble
the governance policies and practices, and beneficial goals – as well as the human
and any (and all) changes to any of these capacity for corruptibility – for bad people to
items. The investment market standards do evil, cruel and self-serving things.
of reporting on governance matters are
pathetic and weak, seem designed to
pull the wool over investors’ eyes, and are
Governance standards
overdue for radical improvement. are not primarily there
Everything on this list is simple corporate
to control the ethical,
hygiene. Not a single item of governance
policy, practice or disclosure could be
but rather to constrain
construed as competitive information: the unethical.
Attempts to avoid better governance
standards and greater transparency should be Indeed, in our experience, people of good
treated with jaded and cynical eyes. intent are happy to discuss and embrace
reasonable governance standards which
Why this report? embody checks, balances, and transparency.
Our work has led us into direct dialogue and By contrast, people of bad intent shun such
negotiation with some of South Africa’s largest standards, and rebel against openness. We
SOEs and their shareholding ministers. While must be clear: Governance standards are
we have made some headway, it is evident not primarily there to control the ethical, but
that the task of reforming SOE and corporate rather to constrain the unethical.
governance is not something that should be
done by one (or even a few) players, but by The best outcome is to ensure governance
the concerted action of a wider group of standards and practices are principled, robust,
engaged parties. and sustainable, such that they don’t impair
the work of the perfectible, but serve to
Thus, the broad purpose of this paper is to emasculate the corruptible.
share some of our learnings, so that others
who are concerned about protecting South
Africa’s young democracy, improving the
standards and efficiency of South Africa’s
capital market, and creating an environment
of prosperity and opportunity, can build on
our work.
Andrew C. Canter
February 2018

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Introduction and
background
The essence of governance is oversight. For the best amongst us, oversight buttresses our
integrity and helps us stay on the “straight-and-narrow”. For the worst amongst us, oversight is
a critical barrier to misconduct. Any discussion about corporate governance often begins
and ends with the board of directors. That is a far too narrow view: Corporate governance is
better understood as a “web” of oversight by various stakeholders (e.g. shareholders, directors,
employees, regulators, suppliers, financiers, auditors, corporate secretaries) as well as a range of
policies, practices, protections and disclosures. While this report focuses principally on
the internal corporate governance of SOEs, we believe that there is a systemic need to
deeply understand, assess, and strengthen the entire web of governance of both SOEs and
private companies.

At the end of August 2016, Futuregrowth governance risks inherent in the SOE sector.
made a public statement that we would The events subsequent to our public
suspend lending to certain SOEs until we announcement in August 2016 have re-
could conclude in-depth governance reviews. affirmed our view that good governance is
This followed a creeping sense of governance much more than a mere tick-box exercise.
degradation at various SOEs as observed in Crucially, the “who” and the “how” of
worrying media headlines. While seen as governance deserves appropriate scrutiny and
controversial at the time, subsequent events disclosure. Good governance is inextricably
have highlighted just how critical the issue of linked to Responsible Investing, and in our
good governance at SOEs is. view, it is key to ensuring that public entities,
mostly funded with public money, are
In the 18 months since this announcement, sustainably managed for the long term
Futuregrowth has been working with the six and are able to deliver on their
named SOEs (Land Bank, DBSA, IDC, SANRAL, developmental mandates.
Eskom and Transnet) to conduct a detailed
governance due diligence. The public letters
containing the results of our completed
SOEs, by their very
governance due diligence for Land Bank (26 nature as publicly-
September 2016), IDC (4 November 2016),
DBSA (21 November 2016) and SANRAL
funded entities, are
(5 July 2017) are available on the not subject to the same
Futuregrowth website.
market discipline or
We believe this is an opportune time to shareholder oversight as
share some of our learnings after designing
and implementing what we believe is a other entities.
robust analytical response to the systemic

9
As we began our detailed engagements with such policies can be a quagmire requiring
the SOEs, it became evident that no party specialist information, and that the absence
had previously considered SOE governance of share incentives in SOEs should, in theory,
in a detailed way: investors, rating agents, simplify the risks arising from director and
financiers and the public had all taken for executive remuneration. That does not imply
granted that the legislative controls were that board and executive remuneration
robust and sufficient. In considering various should not be broadly considered for efficacy,
analytical tools we found some “tick box” standardisation, and good sense. And,
governance, but not a lot of deep analytical of course, directors’ emoluments should
methods on which we could build. Thus, continue to be fully and transparently
our work became a greenfields exercise in disclosed.
learning about SOE governance: It’s been a
learning journey. The Futuregrowth team is We have often been asked why we chose to
not forensic or governance auditors, and we focus on these SOEs in particular. Our scrutiny
were naturally limited in our ability to assess of these six arose from them being regular
the veracity of the governance of the more issuers of debt on public capital markets.
troubled SOEs. Issuers of listed equity and debt are subject to
the discipline of markets as well as to public
comment and opinion. By definition, issuing
Issuers of listed equity listed instruments means taking money
and debt are subject to from the public, and we believe that requires
much higher standards of information,
the discipline of markets transparency and scrutiny. Futuregrowth, as
as well as to public a developmental investor acting on behalf
of our clients’ funds, has been a substantial
comment and opinion. funder of national development through the
By definition, issuing SOEs, and our clients are holders of SOE debt.

listed instruments Further, SOEs, by their very nature as publicly-

means taking money funded entities, are not subject to the same
market discipline or shareholder oversight as
from the public, and we other entities. The web of control governing

believe that requires SOEs is different from private firms in that


participants’ economic interests may be
much higher standards distorted for personal gain or patronage,

of information, and SOEs can easily be subject to political


pressures. Each SOE has a unique mandate
transparency and to fulfil, often occupies a near-monopoly
position (e.g. water, electricity, transport), may
scrutiny. be able to pass its costs onto consumers, and
does not necessarily have to make a profit to
We decided to avoid the thorny question of stay in business. SOEs can become a burden
board remuneration, taking the view that on the state, and therefore all citizens. These

10
factors all serve to elevate the importance of
appropriate governance policies, processes
It is untenable for
and procedures for SOEs. investors to allow the
Futuregrowth is a partner in funding national
nation’s savings to
development. We have been proud to play be absconded, and
a role in channelling South Africa’s pension
fund savings toward national development for it is incumbent on
the past twenty years. We fully recognise that responsible investors to
South Africa’s SOEs play various critical roles
in national development. Notably, we believe play their appropriate
SOEs should offer functions that the private
sector cannot. Among these might be:
role in allocating
capital to sustainable
i. a subsidy by way of a lower required
return-on-equity;
enterprises.
ii. the ability to take in, and channel,
government funds towards specific We remain grateful to those entities that
desired outcomes; productively engaged with us, and for their
iii. a longer time-horizon for returns; ongoing co-operation and willing assistance.
iv. the ability to mobilise large-scale capital
for developmental and infrastructure
projects and initiatives;
v. the task of creating enabling
environments for development;
vi. the cross-subsidisation to test new ideas;
and
vii. the ability to take greater risks than any
private company.

Clearly, the SOEs take on human, social and


national imperatives. Without derogating from
the SOEs’ developmental goals, our analytical
focus is on sustainability and efficiency. The
simple fact is that every wasted or stolen Rand
is a Rand which cannot build a road, buy a
locomotive, electrify a house, or educate a
child. It is untenable for investors to allow the
nation’s savings to be absconded, and it is
incumbent on responsible investors to play
their appropriate role in allocating capital to
sustainable enterprises.

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Our SOE journey
EVENTS THAT LED TO INCREASED
FOCUS ON SOE GOVERNANCE

interference, lender irregularities, etc. gave us


pause to reconsider our initial assessments of We agreed on the following actions:
The broader investment In light of the media governance at six SOEs (Land Bank, DBSA, IDC, 1. We would draft a letter to be sent
Cabinet Lekgotla team met to discuss two Transnet, SANRAL, Eskom) and we felt that we to the CEO and Chairperson of the
announced the new new upcoming deals (to (if anything) do we do given the needed a body of evidence, which we did not six SOEs highlighting our concerns
SOE Coordinating IDC and Land Bank) and latest news?”. A robust discussion have, to support continued investment in
Council, with no a rollover of an existing followed - particularly around these entities. We could not recommend a around our questions.
explanation for the role exposure to Land Bank our governance concerns about new investment in any of the six SOEs with this 2. The analytical team would obtain the
or mandate of that was maturing in the political uncertainty impacting the uncertainty. This was a unanimous decision by information we needed to assess the
this body. next few days. forward-looking view of the SOEs. all who attended. governance at these entities.
BEFORE 25 AUG 2016 29 AUG 2016 We spoke to Land
AUG 2016 Bank and the
arranging bank
A letter was released about our decision to

PROCESS STARTED
- Governance at SOEs had A letter was released no longer participate
been on our radar for a while, Public reopening of lending Futuregrowth’s analytical 30 AUG in the new deals.

DUE DILIGENCE
Brian Molefe, of lending to IDC. Protector, Thuli to Land Bank. team converted our A Futuregrowth
political interference, inter- who was implicated in (futuregrowth.co.za/ Madonsela’s 2016
(futuregrowth.co.za/ broad issues to a press release and a We initiated a self-
departmental inconsistencies, the Public Protector’s newsroom/futuregrowth- State of Capture newsroom/futuregrowth- questionnaire and we client letter about imposed embargo on
policy confusion, etc. report, resigned from report was engaged with those our decision was the listed instruments
- We have assessed and continue Eskom. lending-to-the-idc) released. lending-to-land-bank) SOEs that were willing. released. of the six SOEs.
to assess the Boards and
internal committees of the
SOEs.
- 11 NOV 2016 7 NOV 2016 2 NOV 2016 26 SEP 2016 1 SEP 2016 31 AUG 2016
in our engagement with
National Treasury, a lot of

12
talk about plans to improve A letter was released The report “Betrayal of the
the governance at SOEs, Promise: The Anatomy of State Minister of the reopening of lending to
including independence of lending to DBSA. Capture” by the State Capacity Sunday Times and Minister of Water Affairs and Sanitation, SANRAL. (futuregrowth.co.za/
Board members, ability to (futuregrowth.co.za/newsroom/ Research Project, convened City Press issued Public Enterprises, Ms Nomvula Mokonyane, newsroom/governance-improvements-
withstand political pressure, futuregrowth-lifts-lending- Ms Lynne Brown, unilaterally decided not are-key-to-futuregrowth-s-funding-of-
actions on corruption, fruitless/ suspension-on-the-development- reference to Eskom and #Guptaleaks emails announced new to extend the term of the south-african-national-road-agency-
wasteful expenditure, tender bank-of-south-africa-dbsa) Transnet was released. and articles. interim Eskom board. board at Umgeni Water. ltd-sanral)
irregularities, etc. but with no
visible, concrete action.
- At the time, we tolerated this 26 MAY 2017 28 MAY 2017
21 NOV 2016 23 JUN 2017 30 JUN 2017 5 JUL 2017
because, while there was no 11 JUL
forward momentum, there was Eskom’s annual
also no negative news. A Business Day article 2017
- That changed in the last few A meeting was A letter was sent to by Carol Paton about Minister of were released with a
weeks of August 2016, with held between Futuregrowth, the Minister of Water Affairs and Umgeni Water governance Finance, Mr Malusi
A meeting ENS and representatives Sanitation from ENS on behalf worries was published. Gigaba, appointed three
tender irregularities at PRASA of concerned investors from the Department of of Futuregrowth expressing (futuregrowth.co.za/ DBSA directors - not in
regarding Umgeni Water Affairs and Sanitation concern about the Minister’s media/2259/headless-umgeni- accordance with DBSA’s Mr Anoj Singh,
and Eskom, irregular payments 25 JUL
Water was held at the (DWS), Umgeni Water and unilateral action in dismissing water-worries-large-investors. normal nomination the Eskom CFO,
to “consultants” by Transnet, the Minister’s legal advisor. the board at Umgeni Water. pdf) process. was suspended. 2017 Parliament
board interference at SAA, etc. starts preparations
The trend was worrying. for its inquiry into
- We highlighted this worrying Eskom and some of
trend at our credit committee 18 SEP 2017 17 SEP 2017 8 SEP 2017 17 AUG 2017 4 AUG 2017 27 JUL 2017 its dealings allegedly
meeting in the last week of linked to state
August. Our concern was that capture.
Minister Lynne The JSE gives Eskom until the end
political interference at SOEs A meeting was Brown appoints two Eskom announces a delay
was on the increase. of January 2018 to submit its interim
A City Press article about An interim board new Eskom board in the release of its interim results, failing which Eskom bonds may
- On this basis, we had to Umgeni Water was between certain investors, was appointed members, leaving results for the six months
formulate a forward- be suspended; A new Eskom board is
published. (futuregrowth. ENS and representatives at Umgeni Water incumbent acting chair ended 30 September 2017, appointed, chaired by businessman
looking view. co.za/newsroom/water- from the DWS, Umgeni by the Minister of Mr Zethembe Khoza and Mr Jabu Mabuza; Eskom releases
and-sanitation-ministers- Water and the Minister’s Water Affairs and six other board members of the NERSA tariff for the its interim results in time to avoid
meddling-could-cost-sa-r3bn/ legal advisor. Sanitation. in place. suspension of its bonds by the JSE.
24 SEP 2017 27 SEP 2017 29 SEP 2017 11 DEC 2017 21 DEC 2017 JAN 2018 FEB 2018
At Eskom, Mr Matshela Koko
(former head of generation), Mr
Anoj Singh (former CFO) and Mr
Prish Govender (former head of
Governance beyond the board group capital) resign.
of directors Boards and their sub-committees
King IV and its use in bolstering
Committees and decision-making Reporting and disclosures
governance at SOEs
Chapter 1: Governance
beyond the board
of directors
A typical governance review considers the
governance structures and processes within KEY THEMES
a company and how these are managed
and disclosed to stakeholders. There is a 1. SOE governance vests in Parliament,
central focus on the board of directors and the executive authority, and the SOE
the manner in which it performs its fiduciary board of directors.
duties. Key considerations typically include: 2. Potential for conflicts arise
between King IV principles and
i. how a board and its sub-committees are often nuanced and outdated SOE
constituted; enabling legislation.
ii. the authority levels of the board, sub- 3. Responsible Investing implies
committees and members of executive allocating capital to those sectors
management; and entities that adopt transparent,
iii. how conflicts of interest are managed; sustainable policies and practices.
and
iv. the level of transparency and disclosure of
the above. We realised that a central focus on the board
of directors in our governance reviews for SOEs
These considerations form part of our annual was not appropriate, since the governance of
Environmental, Social and Governance SOEs is reliant on Parliament, the executive
(ESG) risk assessments performed on all our authority (i.e. the ministry responsible for
counterparties, where our starting position that SOE) as well as the board of directors.
is that the board of directors is the primary Our analytical approach needed to evolve to
governing body. consider these aspects more explicitly.

In August 2016, the announcement of a SOE This chapter outlines our key learnings arising
Coordinating Council (following a Cabinet from extending our focus beyond the board
Lekgotla) raised numerous questions for us. of directors to the legislative governance
It arguably also highlighted certain flaws framework in which each SOE operates. We
in the market’s and our own approach to also considered the layer of governance
understanding SOE governance. that exists between the board and its
executive authority.
While we understood that the creation of
this SOE Coordinating Council arose from the The key question we sought to answer was:
recommendations of the Presidential Review Where does the decision-making authority
Committee (PRC) on SOEs, which were and accountability for SOEs ultimately rest?
approved by Cabinet in 2013, the mandate,
terms of reference and decision-making We looked at this from a legal as well as a
powers of this SOE Coordinating Council were practical perspective, given that responsibility
not clear. for governance oversight vests in three distinct

13
areas, namely Parliament, the executive government department). A nominations
authority and SOE board of directors, which committee is provided for in the IDC and the
may or may not be aligned (see diagram on DBSA’s enabling legislations, but not in that of
page 17). SANRAL or Land Bank.

An SOE’s existence is established by It may be argued that nuanced enabling


entity-specific enabling legislation, which legislation has always been a characteristic of
is promulgated when the SOE is first the South African SOE sector, but our
established. It may then be revised in primary concern is when these nuances
subsequent years. We discovered that much of are not consistent with good corporate
this legislation was promulgated some governance practices.
time ago.

A key learning has been how varied and Most SOEs portray
nuanced these enabling legislations are across
the various SOEs, and that they are not always
themselves as being
aligned with good governance principles. This separate from government
may be partly due to the fact that governance
standards have evolved in the time that has - with separate decision-
elapsed since promulgation of the legislation.
making bodies, separate
SANRAL is the only one of the four SOEs annual financial
we reviewed that has governing legislation
explicitly stating that its board should statements and separate
comprise eight individuals. The enabling
legislation of Land Bank, DBSA and the IDC
mandates and operations.
requires that the boards comprise between Why should we not
five and fifteen directors.
hold them to the same
One of our recommendations to SANRAL
was to increase the skills mix on its board
standards as other entities
to include a greater depth of financial skills. that seek funding from
However, due to the prescriptive wording
of its enabling legislation, it will require a public capital markets?
legislative process to allow for more than eight
individuals to be appointed to the board. As an example, SANRAL’s enabling legislation
provides the Minister of Transport, as the
Our review further revealed that each SOE’s executive authority, the right to appoint and/
enabling legislation held a different view on or replace SANRAL’s Chief Executive Officer
the importance of a nominations committee. (CEO) as well as the Chairperson of the Board.
This committee comprises principally In the corporate world, these powers would
independent non-executive directors and normally be in the purview of a board.
is responsible for nominating appropriate
individuals for appointment to the board. Because the SANRAL Act1 contains weak
These nominations are then considered protections relating to the appointment
and approved by the executive authority (as
represented by the minister in charge of that 1 The South African National Roads Agency Limited and
National Roads Act, Act 7 of 1998

14
of directors, the Chairperson and the CEO, performance targets set, and where necessary,
we have recommended the establishment effect any remedial action.”2
of a board nominations committee. This
committee should be comprised of suitably We liken the shareholder compact to a
qualified and independent individuals performance contract, agreed between
who would then be responsible for the executive authority and the board, and
recommending board appointments to the designed to hold the board accountable
executive authority. for delivery of the mandate. One of our
key learnings here is that the terms,
One of the key challenges in looking beyond key performance indicators (KPIs), and
the board of directors to the overarching measurements against set targets are not
legislative framework is that of grappling with routinely disclosed as part of the Integrated
instances where the law is inconsistent with Annual Report by all SOEs – even though they
governance recommendations (which are often form part of the SOE’s strategic plan.
voluntary by nature).
Further, not all SOEs are measured in terms
Being a Responsible of financial KPIs. As an example, none of
SANRAL’s KPIs are financial. And when SOEs
Investor implies that do have financial KPIs, there are no specified

we make decisions to implications for failing to meet the agreed


targets. So how does the executive authority
allocate capital to those hold the board accountable when there is no
specified remedial action for non-compliance
sectors and entities with the shareholder compact?

that adopt transparent, In our view, the consideration of governance


sustainable policies policies, practices and reporting is integral
to any investment decision, regardless of
and practices. whether or not the SOE issues debt with an
explicit RSA government guarantee. Most
In our view, the board of directors of the SOEs SOEs portray themselves as being separate
(and not institutional investors) is best placed from government - with separate decision-
to advocate for a stronger alignment of its making bodies, separate annual financial
enabling legislation with developments in statements and separate mandates and
corporate governance best practice. operations. Why should we not hold them to
the same standards as other entities that seek
The executive authority bears the primary funding from public capital markets?
responsibility for appropriate SOE oversight
and accountability to Parliament. The layer of While we have a deeper appreciation for the
governance that exists between the board of a fact that explicit government guarantees are
SOE and its executive authority is embodied in nuanced and offer investors differing degrees
the shareholder compact. of protection, being a Responsible Investor
implies that we make decisions to allocate
The shareholder compact should enable the capital to those sectors and entities that adopt
shareholder to monitor “…the extent to which transparent, sustainable policies and practices.
the board as a whole and individual directors
achieve the objectives and any specific 2 Protocol on Corporate Governance in the Public Sector,
Department of Public Enterprises

15
FOUNDING LEGISLATION OF VARIOUS SOEs

1. The South African National Roads Agency Limited and National Roads Act, Act 7
of 1998
2. Eskom Conversion Act, 13 of 2001
3. Development Bank of Southern Africa Act, 13 of 1997
4. Industrial Development Corporation Act, Act No 22, 1940 as amended
5. Land and Agricultural Development Bank Act, 2002
6. Legal Succession Act to the South African Transport Services Act, No 9 of 1989
7. Water Services Act, No 108 of 1997

OVERSIGHT OF SOEs

National Assembly
Oversight role through
committee structure (SCOPA):
financial management; portfolio
committee: service delivery

Executive (Cabinet) National Treasury


Macro-policy Financial oversight

Executive authority
Policy implementation and Policy ministry
shareholder oversight and Policy implementation
management

Regulator
SOE Independent price
regulation

Board of directors;
board committees;
policies

Executive
management

16
Chapter 2: The PFMA as
the first line of defence
We did not explicitly consider the Public diligence process, our focus was on reviewing
Finance Management Act No 1 of 1999 (PFMA) the internal governance and control
at the time of our SOE governance due mechanisms that ensure the SOE boards
diligences. This important piece of legislation are appropriately constituted and discharge
has been effective from 1 April 2000, but in their fiduciary duties effectively. We initially
the almost 18 years since its enactment, it has failed to consider, however, the safety nets
not been utilised effectively to hold public available when the board is not appropriately
servants accountable for how they spend constituted, fails to discharge its fiduciary
public money. duties effectively, and/or the executive
authority fails to hold the board accountable.
The PFMA aims “to regulate financial
management in the national government In considering this question, we found that
and provincial governments; to ensure this crucial piece of legislation is not always
that all revenue, expenditure, assets and adhered to. And that, critically, very limited
liabilities of those governments are managed use has been made of the mechanisms within
efficiently and effectively; to provide for the the PFMA to hold directors and members
responsibilities of persons entrusted with of executive management accountable.
financial management in those governments; For example, criminal cases could be made
and to provide for matters connected against transgressors, but to our knowledge,
therewith” (PFMA preamble). this has never happened.

Notably, the PFMA details the extraordinary This chapter will focus on those provisions
power vested in the Minister of Finance to of the PFMA that we believe deserve greater
hold the shareholder representative (usually scrutiny when conducting a governance due
the cabinet minister for the relevant ministry) diligence for an entity to which the PFMA
and others in the entity to account. is applicable.
At the inception of our governance due

THE PFMA APPLIES TO:

17
The role of internal and external audit in when accounting officers and accounting
ensuring basic compliance with the law authorities are found guilty of misconduct or
cannot be overestimated. As an outsider to “willfully or negligently” not complying with
the entity, reliance on these key control and the PFMA. Sanctions include disciplinary
oversight bodies is crucial and questions proceedings, suspension or dismissal, as well
need to be asked about the role both play in as criminal sanction, imprisonment for up to
monitoring and ensuring compliance. five years, and the imposition of fines (PFMA,
sections 81-86).
Similarly, ratings agencies and funders
can play an important role in covering, in
more detail than they currently do, the
Given the important
extent of analysis and review undertaken by roles of the accounting
management and the board to ensure the
company is compliant with the law. officer and the
The accounting authority of a public entity
accounting authority,
is usually the board of that entity, and has it is critical that
an overarching fiduciary responsibility. It has
a “duty to exercise utmost care …, act with
the qualifications,
fidelity, integrity and honesty and in the best experience and integrity
interests of the public entity in managing the
financial affairs” (PFMA, sections 49-50). of these individuals are
The role of an accounting officer as defined in
interrogated and found
the PFMA includes, inter alia, the responsibility to be beyond reproach.
to ensure there is an efficient and transparent
system of financial and risk management and Interestingly, if the accounting authority is
internal control. The accounting officer should the board of the entity, which is the case
also ensure that the SOE’s procurement and for the SOEs we reviewed, “every member
provisioning system is fair, cost-effective, and is individually and severally liable for any
transparent, and take appropriate steps to financial misconduct of the accounting
prevent fruitless and wasteful, or unauthorised authority” (PFMA, section 83:2).
expenditure (PFMA, sections 36-44).
When conducting a governance due diligence,
Given the important roles of the accounting we believe it may be worth reviewing
officer and the accounting authority, it is each board member’s awareness of their
critical that the qualifications, experience and responsibilities and obligations under the
integrity of these individuals are interrogated PFMA – and what education or training the
and found to be beyond reproach. entity provides in this regard.

The PFMA, if utilised appropriately, provides Any board evaluation process should critically
a measure of protection and certainty examine each member’s conduct for the
that public finances should be managed period under review, to ascertain the risk of
prudently and with a duty of “utmost care”. It joint and several liability of the board as a
also provides guidelines on the disciplinary whole for financial misconduct.
proceedings and penalties that should apply

18
We have two recent examples of material Public Enterprises, Ms Lynne Brown, and, in
transgressions of the PFMA: Umgeni Water’s case, it relates to the Minister
of Water Affairs and Sanitation, Ms Nomvula
-- Eskom’s qualified audit report for the Mokonyane.
financial year end 2017 highlighted a
number of instances of non-compliance Further, the entire boards of both Eskom
with the PFMA in respect of irregular and Umgeni Water could be held jointly
expenditure, procurement and contract and severally liable under the PFMA. The act
management. provides for a fine or imprisonment of up
-- At Umgeni Water, the Minister of Water to five years, in instances where accounting
Affairs and Sanitation’s unilateral officers and accounting authorities are found
dismissal of the entire board and irregular guilty of failing to comply with the PFMA
appointment of an accounting officer is (PFMA, section 86).
a clear transgression of the PFMA and
the Water Services Act1 (Umgeni Water’s The mechanism to hold people to account
enabling legislation). is available. However, there appears to be a
chronic lack of political will to enforce the

There appears to provisions of the PFMA, and public officials


are not being held accountable. This has
be a chronic lack of contributed to the current perception of a
culture of impunity in the governance of SOEs.
political will to enforce
the provisions of the KEY QUESTIONS
PFMA, and public We consider the following questions as a starting
point in engaging SOEs on the PFMA:
officials are not being
held accountable. This 1. What is the level of awareness of,
compliance with, and responsibility
has contributed to the for, the provisions of the PFMA
within the shareholder ministry,
current perception of a the board, sub-committees and

culture of impunity in management?


2. What is the nature of internal and
the governance of SOEs. external audit testing relating to
compliance with key legislation?
3. How are transgressions of law dealt
Both these examples raise an important with by the board and the executive
question about the level of knowledge and authority?
compliance at the very top of the governance
chain within each SOE and its shareholder
ministry. In Eskom’s case, this relates to
the CFO, Mr Anoj Singh, who has recently
resigned from Eskom, and the Minister of

1 Water Services Act No 108 of 1997

19
Chapter 3: Boards and
their sub-committees
A board has oversight responsibility for the There are a number of differences between
financial sustainability of the entity, as well the board appointment process at SOEs and
as corporate ethics, social responsibility, that of listed corporates:
strategy and stakeholder management. A
well-functioning board is therefore critical Mandate
to ensuring the long-term financial and SOE mandates typically have a developmental
operational sustainability of entities, be they focus which needs to co-exist alongside
private sector corporates or SOEs. commercial considerations, including
the need for less reliance on the fiscus for
It is accepted market practice among support. This is particularly true in the current
JSE-listed equity companies to follow the economic environment where the
practice of shareholders voting for board ability of the fiscus to provide bail-outs is
members. In contrast, SOEs do not have a severely constrained.
wide body of public shareholders voting for
incoming board members. Instead, SOEs Corporate mandates, in contrast, have a
are reliant on one individual shareholder clearer commercial focus.
representative in the form of the relevant
responsible minister. South African history is
littered with examples of cabinet ministers There is also no
making wholesale changes to SOE boards,
sub-committees and executive management
disclosure from the
which can, and have, become a gateway to various ministers about
malfeasance.
the process followed
3.1: Board appointment process in making board
It is important to re-iterate that although the
appointment of board members remains
appointments.
the prerogative of the executive authority, we
believe that a well-functioning nominations The authority to appoint directors
committee, as a sub-committee of the board, The authority to appoint SOE board members
is beneficial. It is likely to strengthen board lies with the executive authority. This is the
members’ independence by providing input responsible shareholder minister, and varies
around skills deficits and giving the executive depending on the SOE and the sector it falls
authority some guidance on appropriate under. At Land Bank and DBSA, the Minister of
candidates. After all, who is better placed to Finance is the executive authority; at the IDC
nominate incoming board members than it is the Minister of Economic Development; at
the existing board, who know its own SANRAL it is the Minister of Transport; and at
strengths and weaknesses? Eskom and Transnet it is the Minister of Public

20
Enterprises. During our reviews, we found that limited and often not formalised. There is
there is limited public notice of the board also no disclosure from the various ministers
nomination and appointment process, and about the process followed in making board
– with the exception of DBSA - it is not clear appointments. This is a significant lack of
what criteria (skills, experience, qualifications, transparency which erodes good governance
etc) are used in making board appointments. practices.

In the case of listed corporates, directors Even with a nominations committee, as


are appointed by vote of a diverse range of DBSA has, the process for appointing
shareholders, after public notice is given via board members can be deviated from at
SENS of any changes to the board. This is an the discretion of the relevant minister. This
established and regular practice and, in our occurred as recently as July 2017, when
view, should be adopted by the SOE issuers on certain board appointments were made to
the JSE, in the interests of good governance. the DBSA board that did not follow the usual
nominations process. Only three of the seven
We identified a number of key issues to directors nominated for reappointment by the
consider when assessing an SOE board. These nominations committee were reappointed
are listed below. by the executive authority (in this case, the
Minister of Finance, Mr Malusi Gigaba). An
The role of the SOE in the additional six new non-executive directors
appointment process were appointed, of whom only two were
Boards must be accountable to stakeholders nominated by the nominations committee.
but we believe that well-functioning boards

What process did


are able to self-assess, self-plan and manage
their requisite skills set, as well as select the
Chairperson and CEO – rather than have
their shareholder be the sole arbiter for the
the minister follow
selection and appointment of these key in appointing these
positions. A well-functioning board should
have a nominations committee which
directors, and were
allows current (principally independent appropriate fit-and-
non-executive) board members to consider
the requisite mix of skills, independence,
proper, background
and service terms that are needed, and to and conflicts checks
nominate appropriate individuals to fill these
positions.
done?
Our due diligence revealed that only the The question we have is why? Why did the
DBSA has a formal nominations committee, Minister of Finance not follow the DBSA’s
while the IDC has a Board Human Capital own established policies and procedures
and nominations committee. At the other for these six appointments? What process
SOEs, the engagement that the incumbent did the minister follow in appointing these
board members have with the executive directors, and were appropriate fit-and-proper,
authority regarding board appointments is background and conflicts checks done?

21
As institutional investors, we are being asked also a public capital market, we believe the
to provide capital on a long-term view to same standards should apply.
the DBSA and other SOEs without having
any insights or answers to these questions. Director continuity
In our view, good governance requires The maintenance of relevant skills and
that deviations from the agreed policies institutional knowledge is essential to
and processes should be accompanied by ensuring the long-term sustainability of SOEs.
additional disclosure of the reasons for The expiry profile of director’s terms is thus
such deviations. a key consideration. Failure to appropriately
stagger directors’ terms could place the SOE
Fit-and-proper, background and at risk of high director turnover in a short
conflicts checks time frame. This could result in a loss of
A key weakness we identified was a lack of institutional knowledge and, ultimately, in a
clarity and disclosure of the existence, extent lack of consistency in long term strategy. In
and timing of probity checks (including our view, high director turnover is a sign of an
confirmation of skills, experience, fit-and- entity in turmoil, which increases credit and
proper checks and conflicts of interest governance risks.
disclosures) performed by the executive
authority in appointing individuals to Our reviews found that the expiry profile
SOE boards. In our view, the timely public of directors’ terms was generally well
disclosure of the nature and outcome of spread, with the exception of the DBSA and
probity checks is a key step towards rebuilding SANRAL. In SANRAL’s case, five of the eight
trust with the investor community. This directors’ terms expire on the same date
disclosure is common practice in equity (31 March 2018).
markets and, given that the bond market is

CASE STUDY: OUR FINDINGS FOLLOWING OUR REVIEW OF THE DBSA BOARD

What we like What can be improved


1. A good-sized board, with 14 board 1. The Chair and Deputy Chair’s terms expire
members. on the same date (December 2018).
2. An appropriate mix of skills and 2. Better staggering of director’s term
experience, including experts in expiry dates (e.g. 8 director’s terms expired
accounting (e.g. chartered on the same day, 30 June 2017).
accountants), law and 3. Appointments to the board were made
development finance. by the Minister of Finance in July 2017 that
3. The Chair and Deputy Chair are did not follow the DBSA’s own established
independent non-executive directors. nominations process.
4. Of the 14 board members, 12 members 4. The quorum requirements for DBSA is set
are considered independent non- at 5 board members, which we consider
executive directors. low for a board of this size.
5. An appropriate mix of diversity in terms 5. Board decisions are made by majority
of age, gender and race. which means as few as 3 board
members can make decisions.

22
At the DBSA, we found that both the
Chairman and Deputy Chairman’s terms WHAT TO LOOK FOR WHEN ASSESSING
expire at the end of December 2018, and this A BOARD SUB-COMMITTEE:
is after seven non-executive directors’ terms
expired in June 2017. Subsequently, six new 1. Appropriate number of members
board members were appointed to the DBSA with a good mix of experience, skills
and technical specialists.
board in July 2017, signifying a potential
2. A charter or terms of reference that
loss of institutional memory and possible
indicate the committee’s mandate,
implications for the strategic direction of the
composition, roles, procedures,
entity. We continue to monitor the situation authority-levels and meeting
and will be alert for any signs of further processes.
governance weakening at DBSA and SANRAL. 3. Appropriate quorum requirements.
4. Appropriate approval and voting
3.2: Board and sub-committee mechanisms and thresholds.
decision-making 5. Appropriate Rand-limits of decision
The board of any entity delegates specific making authority, before escalation
functions to the various board sub- to the full board.
committees. These sub-committees report to 6. An established practice of referring
complex, unusual, conflicted or very
the board of directors and are governed by
large transactions to the board for
clearly defined mandates, authority limits and
further approval or ratification as
terms of reference.
appropriate (e.g. transactions with
PEPs).
Principle 8 of King IV clarifies that the 7. Decisions made by executive
objective of these delegation arrangements management and sub-committees
is to promote independent judgment, assist of the board that are high risk
with the balance of power, and to assist with and/or high Rand-value require
the effective discharge of the board’s duties. an additional layer of approval or
ratification by the board.
Through our reviews of the SOEs, we noted
that the nature and mandates of board sub-
committees across SOEs vary. This may be undertook, our view is that SOE boards should
informed by the fact that King IV does not establish, at a minimum, the following sub-
prescribe the nature of board sub-committees committees to effectively discharge their
– it merely recommends that there is minimal duties and fiduciary responsibility:
overlap and that these sub-committees
promote effective collaboration and balance i. Audit and risk
of power. Further, each SOE’s particular This committee provides a vital oversight
enabling legislation may also inform the and monitoring function over the internal
nature of board sub-committees, while the and external audit function, financial
PFMA only requires the establishment of an reporting, statutory and regulatory
audit committee.1 compliance, and the identification
and assessment of risk. The Treasury
Based on the governance due diligences we Regulations2 require the board to

1 PFMA section 38(1)(a)(ii) 2 Treasury Regulation 27.1.1

23
establish an audit committee and it committee should also be required to
should be constituted with a majority3 approve transactions over a specified
of non-executive members who are threshold, which should be set at an
financially literate. appropriate Rand-level. This committee
should further refer certain investments to
ii. Human resources and nominations the board for approval or ratification.
This committee oversees policies and
procedures related to human resources This committee should be composed of
and organisational structure. It is typically individuals with the appropriate financial,
responsible for succession planning and business, banking or related skills, and
executive management, performance should have an adequate mix of members
management and other related matters. who are independent of management.
The nominations aspect of these duties Lending-related governance is covered
includes identifying and proposing more fully in chapter 4.1.
individuals to serve on the board and
executive level. Only two of the SOEs An example of limits of authority for the DBSA
Board Credit and Investment Committee (BCIC)4
we reviewed (DBSA and IDC) have an
established nominations committee as a South Africa MS1 -MS105 Above MS105
sub-committee of the board.
Municipal clients R1 000 million R500 million
Other public sector R500 million R250 million
iii. Social and ethics State supported
R500 million R250 million
This committee supports the entity’s programmes
role in ensuring that the code of ethics Private sector All All
is applied at all organisational levels. This
What we like
may include monitoring compliance with
There is an established practice of notifying
applicable policies, which may include
the board of all BCIC decisions at subsequent
fraud detection and management, and
board meetings.
whistleblowing. What we don’t like
The threshold for delegating decisions to
iv. Investment/credit management (at R1bn for MS1-10 and
This applies to lending entities e.g. IDC, R500m for greater than MS10) is too high.
DBSA and Land Bank. This committee
sets the overall credit strategy which
includes risk management and ensuring v. Capital projects and procurement
that the investment mandate is This applies to entities with large
appropriately applied. This committee procurement budgets e.g. SANRAL, Eskom
is vital in monitoring the investment and Transnet. This committee’s duties may
portfolio, overseeing large and complex include oversight of the implementation
transactions, dealing appropriately with of the capital programme, monitoring
conflicted transactions, and reporting compliance with procurement policy,
to the board on portfolio performance reviewing procurement budgets, oversight
and compliance matters. The investment and approval of large or complex
procurement transactions, and oversight
3 Treasury Regulation 27.1.4
4 Source: DBSA Integrated Annual Report 2017, page 49
5 DBSA internal risk weighting: MS 1-7 is low risk, MS 8-13 is
medium risk and MS 14 and above is high risk.

24
of asset maintenance, performance and changes to decision-making authority levels
requirements. This committee may also (i.e. changes to the Rand-values that can be
have the power to approve budgetary approved) should be disclosed as and when
deviations up to a certain threshold. they happen, preferably via SENS.
Governance related to procurement
decisions is more closely examined in Most of the boards we interviewed indicated
chapter 4.2. that although decision-making practice is
purportedly by simple majority, in practice
Our governance review revealed that changes they tend to apply a more consensus-
to the decision-making authority levels of based decision-making model. Our
sub-committees are usually only disclosed recommendation is that the application of a
in the Integrated Annual Report. This means consensus-based model should be codified in
that a material deterioration in governance the terms of reference of each sub-committee,
could occur, with investors only being and the voting threshold should reflect this.
notified when the Integrated Annual Report This allows all views to be taken into account
is released, often up to six months after year and curbs power imbalances.
end. Our recommendation for all SOEs is that

KEY QUESTIONS highest standards of ethics, integrity,


We consider the following questions as a starting point independence and accountability?
in engaging SOEs on the board appointment process: 3. Are the results of the probity checks
publically available?
1. What is the appropriate sized board 4. What are the reasons provided for
for this entity, considering the mix the established board appointment
of skills, experience and technical procedures not being followed?
expertise required? 5. How has the expiry profile of directors’
2. What fit-and-proper, background, terms been staggered to ensure
qualification, reference and conflict the retention of relevant skills and
of interest checks have been done institutional knowledge?
to ensure that the individuals
appointed to the board meet the

25
Chapter 4: Committees
and decision-making
4.1: Investment/credit -- the disclosure and treatment of related
In any lending business, decisions taken party transactions, transactions with PEPs
around credit are important to understand and potential or actual conflicts.
the long-term sustainability of the business
and the inherent investment risk therein. Cognisance has to be taken of deals with
Bad lending decisions lead to losses and an PEPs and evidence garnered as to the true
impaired balance sheet. independence of the decision-making.
Documentation, disclosure schedules and
In reviewing the lending practices of the escalation of concerning factors and conflicted
lending SOEs, namely the IDC, DBSA and decisions need to be evident.
Land Bank, we had to recognise their
developmental mandates and how these exist We delved into the details of how credit
alongside risk and return considerations. and investment decisions are brought to
the investment/credit committees, how the
Central to our investigations was the initial decisions are made, and who the decision
framework of the lending mandate. We makers are. We specifically sought to assess
looked at how government policy influences whether the processes are sufficiently
investment strategy, how lending decisions comprehensive to ensure the mandates and
are made, and how this influences the lending governance in lending decisions are free of
philosophy, processes and criteria. conflicts and done in accordance with the
entity’s policies and mandate.
The investment/credit committee composition
and autonomy are paramount. Aside from
a well-articulated mandate from both the The DBSA did not
executive authority and the board, we looked
to assess critical processes such as conflict-
have a policy to
of-interest disclosures and actions, decision- manage the risks of
making thresholds, and how exceptions
and challenges to the above are addressed,
lending to PEPs.
disclosed and ratified.
We found that, at the IDC, the current
Key focus areas included: directors’ Conflict of Interest Policy allowed
directors to engage in borrowing from the IDC
-- an assessment of investment/credit (e.g. via investments in entities or projects in
committee members’ qualifications, which that director has an interest). At the
experience and independence; time of our review, the board had already
-- how deals are sourced including whether taken a decision to amend this policy, in
deals are independently and appropriately acknowledgement that such practices create
sourced; and unacceptable conflicts of interest.

26
The proposed revised policy, which we have and approval processes at the IDC when
not had sight of, is currently being redrafted purportedly, legal agreements were manually
to prohibit directors from doing business with adjusted to delete key protection clauses for
the IDC. Futuregrowth will assess the revised the IDC. The IDC’s PEP policy, which has been
policy once finalised, to affirm that it supports in place since 2009, is intended to mitigate
objective decision-making and is in line with these risks, and our recommendation is that
best practice corporate governance. annual disclosure of all deals to PEPs should
be included on the IDC website and in their

Land Bank agreed Integrated Annual Report.

to entrench certain The DBSA did not have a policy to manage the

improvements to risks of lending to PEPs. We recommended


that an adequate policy, including appropriate
their bond loan public disclosure on an annual basis of all PEP
deals, is implemented as a priority.
documentation, their
Domestic Medium Another finding from our DBSA review was
that the minimum composition of the board
Term Note Programme. credit and investment committee, as per the

A possible consequence terms of reference, was not being met. The


terms of reference of DBSA’s Board Credit
of these improvements and Investment Committee (BCIC) requires it
to consist of nine directors, whereas DBSA’s
is that Land Bank latest Integrated Annual Report reports that

has been able to issue the BCIC comprises eight members.

longer-dated debt and Land Bank was the first SOE to which we

at more competitive re-opened lending. A key reason for this was


their commitment to additional disclosures
funding rates than and reporting requirements - for example,
regular public disclosure of directors’ turnover,
before. directors’ dealings in contracts, and the
management and disclosure of contracts with
We found unique risks (both financial PEPs and other conflicts of interest. Land Bank
and reputational) that arise from the IDC agreed to entrench certain improvements
concluding lending arrangements with PEPs. to their bond loan documentation, their
These risks have eventuated in the recent Domestic Medium Term Note Programme
past, such as when the IDC loaned R250m (DMTN). A possible consequence of these
to Oakbay Resources and Energy Limited improvements is that Land Bank has been
(an entity that would be regarded as a PEP- able to issue longer-dated debt and at more
related entity) to purchase the Shiva uranium competitive funding rates than before.
mine. Subsequent events required the
restructuring of the loan, including converting Our Land Bank review identified certain areas
debt to equity, and also highlighted for improvement which were discussed with
weaknesses1 in the delegation of authority and agreed to by the board. Although not
exhaustive, these recommendations included:
1 https://www.fin24.com/Companies/Investment-
Holdings/how-idc-was-forced-to-invest-in-oakbay-20171208

27
-- lower Rand-approval limits at certain Infrastructure expenditure over the medium
investment and credit committees; term (for the next three years, up to the
-- increasing the quorum requirements for 2019/20 financial year), per Minister Gigaba’s
the board and sub-committees; October 2017 MTBS, is estimated at over
-- higher voting thresholds for decision- R948bn3, of which some R402bn will be spent
making on the board and the various sub- by SOEs.
committees; and
-- improved and more regular public The numbers are big. As such, proper
disclosure of key indicators and governance around procurement decision-
information. making by national government, provincial
government, government departments and
4.2: Procurement SOEs is paramount in ensuring that this is in
Procurement spend is estimated at accordance with the entity’s mandate and in
R1.5 trillion2 across all spheres of government compliance with legislation (including
(former Minister Pravin Gordhan, Treasury the PFMA).
budget vote, May 2016). The February 2017
Budget indicated that over R432bn of this The SOEs we focus on in this chapter include
was earmarked to be spent by SOEs over the Transnet, Eskom and SANRAL, which all have
medium-term expenditure framework, with large capex budgets. In addition to the capex
the main line items being energy (R235bn), requirements shown in the table below,
water and sanitation (R125bn), and transport Eskom, in the financial year ended 28 March
and logistics (R327bn) (refer to the table 2017, also spent over R82bn4 in primary energy
below). costs. Although the IDC, Land Bank and the

2 http://www.thesait.org.za/news/287976/Opinion-Treasury- 3 M Gigaba, MTBS, 25 October 2017


Dept-Budget-Vote-201617-.htm 4 Eskom Integrated Annual Report 2016/17, Chief Financial
Officer’s Report, page 74

Public-sector infrastructure expenditure and estimates


R billion Outcomes Estimates MTEF Total
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Energy 69.6 67.8 65.9 75.0 78.3 81.9 74.3 234.5
234.5
Water and sanitation 25.8 29.5 31.5 37.2 39.3 41.2 44.9 125.4
125.4
Transport and logistics 77.8 92.4 81.3 91.4 104.6 105.7 117.4 327.7
327.7
Other economic services 13.0 13.0 13.2 16.0 12.6 12.9 13.0 38.5
Health 10.0 8.7 10.3 11.0 11.2 11.9 12.5 35.6
Education 13.7 15.4 18.0 17.3 17.6 15.8 16.7 50.1
Human settlements1 17.0 17.1 18.3 18.3 20.0 21.1 22.3 63.4
Other social services 12.9 13.1 16.3 15.6 16.1 16.6 17.5 50.2
Administration services2 5.0 5.2 6.5 7.9 7.1 7.2 7.5 21.7

Total 244.8 262.2 261.2 289.8 306.7 314.3 326.1 947.2


National departments 11.9 13.5 14.5 16.6 16.7 16.0 15.0 47.7
Provincial departments 55.2 56.4 60.6 62.3 64.1 65.1 68.9 198.2
Local government 47.1 53.2 54.7 58.2 56.7 59.1 63.9 179.6
Public entities3 15.4 19.2 17.8 22.0 23.9 23.6 24.9 72.3
Public-private partnerships 3.9 4.0 4.3 4.8 5.1 5.5 5.9 16.5
State-owned companies3 111.2 115.8 109.3 125.8 140.3 145.0 147.5 432.8
432.8

Total 244.8 262.2 261.2 289.8 306.7 314.3 326.1 947.2

1. Human settlements includes public housing to households and bulk infrastructure amounting to R63.4 billion over the MTEF period. /
2. Administration services include infrastructure spending by the Department of International Relations, the Department of Home Affairs,
the Department of Public Works, Statistics South Africa and their entities. / 3. Public entities are financed by capital transfers from the fiscus
and state-owned companies are financed from a combination of own revenue, borrowings and private funding. / Source: National Treasury

28
DBSA do undertake some procurement transaction size and complexity. It is usual
spend, as lending institutions, our focus was to allow small Rand-value procurement
more on the governance around their lending decisions to be made by individuals, and
practices which is examined in chapter 4.1. then to require more decision-makers for
transactions with higher Rand-values.
Our due diligence reviewed how government
policy influences procurement strategy Material procurement decisions or decisions
and process, and we examined the various that require the application of broader input
procurement decision-making bodies and (as in the case of large or long-term supplier
committees’ mandates and authority limits. contracts or high-value fixed asset spend)
It was important for us to establish that there should be reviewed and approved by a
was a fair and transparent procurement sub-committee of the board that includes a
process that complied with the law, number of independent members.
particularly the PFMA and the entity’s
own procurement rules. In looking at the
procurement policy, we also tried to assess
“Sunlight is the best
whether the internal policies were adequate disinfectant” and, as
and appropriate, how exceptions were dealt
with and whether there was adequate such, we encourage
oversight and disclosure. increased public and
At the time of publication of this report, our timely disclosure of key
governance reviews for Eskom and Transnet
have not been concluded. The examples
procurement decisions,
provided of improvements to procurement conflicts of interest,
governance are from our SANRAL due
diligence conclusions. transactions with PEPs,
It seems trite to state that all procurement
and all deviations
decisions should be made in the best interests from policy.
of the company, should represent value for
money, and should be for the company’s Many SOEs make procurement decisions
benefit. However, we have many examples that require technical input, and we looked
where this is not the case at SOEs. Further, to assess if the people making procurement-
all actual and perceived conflicts that could related decisions had the appropriate
impede independent decision-making need technical skills. If they did not, we looked at
to be appropriately disclosed and managed. whether this technical expertise was accessed
As such, the composition of all procurement from other well-known industry technical
decision-making bodies deserves consultants or experts. PRASA’s purchase
close scrutiny. of locomotives that allegedly5 were not the
appropriate size for our railways may have
Procurement decision-making usually follows been avoided if technical input had been part
a tiered process with appropriate limits of of the decision.
authority – where lower amounts are approved
by a variety or collection of individuals, and
decisions are escalated to higher committees
5 https://mg.co.za/article/2017-06-23-00-hawks-slow-prasa-
and ultimately the board, depending on the probe-slammed

29
In addition to technical skills, members of Large procurement decisions are required to
procurement decision-making approval be made by tender, and good governance
committees should be financially skilled, requires that the tender process is not
given that contracts often include a forex or manipulated to achieve a predetermined
hedging component. outcome, and that transparency, fairness, and
value for money criteria are applied. Public
Naturally, people on these committees disclosure of all procurement that is done
should have no conflicts of interest – either outside of the usual tender processes should
through their family members, their own be a requirement – together with the rationale
other interests, or due to their other board or for deviating from the usual policy and
executive positions. In practice, this usually confirmation that National Treasury approval
means that any conflicted decision-maker is has been obtained for the deviation (when
recused from all decisions and information required under the PFMA).
related to the conflicted matter. In addition,
these decisions – when there is a conflicted Another key reporting item to monitor is
member - should be reviewed by a higher amendments to contracts after the initial
approval body, with the ultimate authority for award (e.g. deviations to quantity or price, or
material transactions being the board. This is the addition of another supplier or adviser to
to ensure that the appropriate information is the deal). At the very least, such amendments
disclosed and used in making the decision. should be approved by a higher approval body
In addition, a good practice is to disclose (preferably the board sub-committee) and
the transactions concluded with conflicted disclosed in the Integrated Annual Report.
individuals in the entity’s Integrated Annual
Report. One of our recommendations to The recent REIPPP Programme stands as an
SANRAL is that they adopt this practice. example of how a transparent and well-run
procurement programme can be run. To
It is important to have independent members date, over R200bn of procurement has been
(i.e. people who are not involved in an completed through this programme and to
executive function at the entity and who our knowledge, there has not been a single
are truly independent) on any board sub- allegation of inappropriate decisions
committee tasked with procurement or corruption.
decision-making.
An interesting development to watch will
It is not considered good governance when be the centralisation of all government
one of your so-called “independent” board and procurement through the Office of the Chief
sub-committee members is also a director Procurement Officer within National Treasury.
at one of your major suppliers. This was the The individual holding this position, and
case at Eskom, where Mr Mark Pamensky, a the governance around decision-making at
member of Eskom’s board and Investment this level, needs scrutiny to ensure that the
and Finance Committee until his resignation requirements of the PFMA are met.
in November 2016, was also a board member
at Oakbay Resources. Until August 2017, Because individuals can be influenced, we
Oakbay Resources owned Tegeta Exploration believe that procurement decision-makers
and Resources which was a key supplier of should declare all gifts, hospitality, and
coal to Eskom. The conflict of interest that this entertainment provided by suppliers on
presents is clear. at least an annual basis. Good governance

30
demands that the company has a policy In an era where alleged SOE procurement
limiting such gifts. This usually means setting transgressions are the subject of daily
a nominal Rand-value threshold for each headlines, investors and funders to these
employee and supplier, and ensuring that entities want to ensure that the money
employees disclose any and all such gifts borrowed from public capital markets
or entertainment to internal audit or the (essentially your and my pension fund) is
company’s compliance department. We appropriately spent. With the public eye
also believe that this disclosure, for directors, increasingly on this key item, governance
executives and other key procurement processes around procurement will continue
decision makers, should be made in the to be scrutinised, and calls for better and more
Integrated Annual Report. timely disclosure will continue to grow.

“Sunlight is the best disinfectant” and, as such,


we encourage increased public and timely KEY QUESTIONS
disclosure of key procurement decisions, We consider the following questions as a starting
point in engaging SOEs on committees and
conflicts of interest, transactions with PEPs,
decision-making:
and all deviations from policy. We will
continue to require this of all public capital
1. How does the executive authority
market debt issuers.
influence investment/credit and
procurement strategy and process?
At SANRAL we found that this area of 2. What is the investment/credit
procurement governance needed some and procurement committee’s
improvement. Specifically, we agreed with autonomy in setting and executing
SANRAL that they would disclose trends in all their mandates?
“emergency, non-competitive” procurement 3. What is the composition of the
(i.e. procurement that does not fall within the investment/credit and procurement
usual tender requirements and processes). committees? Are they adequately
It is noted that the regulations related to comprised of appropriate
emergency procurement have since changed. independent members and with
appropriate financial skills and
SANRAL also did not have a policy for dealing experience?
with procurement with PEPs. We believe that 4. How are exceptions to established
this is vital to cover potential risks associated policies and governance dealt with?
with SANRAL’s large-scale procurement Are these publically disclosed?
programme. After our review, SANRAL agreed 5. How are conflicts managed,
to disclose, annually, all transactions with reported and disclosed?
PEPs. SANRAL also agreed to implement 6. What is the quantum (Rand-
amount) of decisions that can be
a “cooling off” period of 12 months, during
made by the various investment/
which ex-directors and managers would be
credit and procurement
prohibited from doing business with the
committees? Is this level
company. These policies were previously not
appropriate? Do large complex or
in place.
unusual transactions require Board
approval/ratification?
Due to the large sums involved, procurement
is an area where weak governance practices
could expose an entity to significant risks.

31
Chapter 5: Conflict
management
Why is conflict management so important? Alignment of interest ensures that directors
For a private corporate, the chairperson, board and management, as fiduciaries, act in good
and shareholders will have an economic faith and in the best interest of the entity they
interest in seeing the company succeed. serve. Conflicts of interest arise when private
Furthermore, the company must remain interests or personal considerations affect,
profitable for it to survive. Companies Act or are perceived to affect, a decision-maker’s
requirements and the company’s focus on judgment. A lack of impartiality may result in
profitability will often, although not always, financial loss, and legal and/or reputational
mean that conflicts are appropriately damage to the entity and its board of
identified and disclosed. directors. Thus, as a part of our governance
review, it was critical that we examined how

SOEs are different, the entities manage, mitigate and disclose


conflicts – both actual and perceived.
in that political Conflicts in SOEs may arise in various ways:
appointees may be in
charge of decision- -- Employees/directors or their relatives
could have direct or indirect interests (in
making and patronage the form of ownership, kick-backs or other

may skew decision- incentive arrangements) with companies


transacting with the SOEs. These
making away from transactions include supplier relationships
as well as lending and investment
what is in the best relationships between the SOE and the

interests of the entity. company in which the employee or


director has an interest.
-- Directors could have cross-directorships
SOEs are different, in that political appointees with other entities transacting with the
may be in charge of decision-making, and SOE. This situation arose in the case of
patronage may skew decision-making away Eskom, where one of the directors (Mark
from what is in the best interests of the Pamensky, now resigned) was also a
entity. Reliance on the public purse may director at a major supplier of Eskom.
also lessen the board and management’s Ideally, before board and sub-committee
focus on sustainability, as there is the appointments are made, the appropriate
possibility of a government bailout or a tariff conflicts checks should be done. Where
adjustment if decisions made by the board conflicts are unavoidable, appropriate
and management result in negative profit and disclosure and recusal from decisions with
cashflow consequences. the conflicted entity should be rigorously

32
adhered to. It could be argued that
sometimes this is not enough to mitigate
The appropriate
the conflict, and the best course of action management of
--
is for the conflicted member to resign.
PEPs may act in accordance with a all conflicts is an
political agenda that is not in line with
the best interests of the SOE. Transactions
important piece of the
with PEPs therefore deserve greater information investors
scrutiny, transparency, appropriate
controls, and detailed, timely and public
need, to assess whether
reporting. decision-making at an
The primary way to detect conflicts is via entity is indeed “in the
employee or director declarations and
disclosures. These should be updated at
best interests of the
least annually, and this control demands a entity”.
heavy reliance on employees’ and directors’
integrity in disclosing all conflicts of interest. Qualitative factors that may influence whether
It also requires a rigorous internal compliance a relationship is considered material include
system that can, on a regular basis, verify and its strategic importance, the competitive
check for conflicts that may exist but not be landscape, the nature of the relationship
disclosed. This review function should check and the contractual or other arrangements
whether there are any linkages between governing it.
employees/directors, their families, and
vendors and suppliers. All conflict checks Furthermore, while there may not be an
should include a director or employee’s actual conflict, the perception of one could be
spouse, direct family members and extended enough for an entity to avoid the transaction.
family (including step-family members). Perception is influenced by whether an
independent observer would question
It seems obvious to state that conflict of whether a director or executive’s professional
interest checks should be conducted prior to actions were influenced or motivated by a
any board or executive appointments. And potential personal financial gain.
while it may be obvious, our work has revealed
that this important step is either not done at A further shortcoming we found at the time
all, or done in such a way that conflicts are not of our governance reviews, was that certain
uncovered before the appointment is made. entities (IDC and SANRAL) did not have a
“cooling-off” policy. This is a policy which
When assessing disclosed conflicts, one prevents an outgoing director or executive
would usually review the materiality of the from transacting with the entity for a set
amounts involved, relative to the individual’s period of time. This is another example of an
wealth and/or income. However, given the inappropriate conflict as the outgoing director
nature of SOEs and the large quantum of may possess internal information that could
money involved in lending and procurement inappropriately advantage a future transaction
decisions, any conflict is likely to be material between them and the entity. We recommend
for the individual concerned. that all entities implement an appropriate

33
cooling-off period. SANRAL has subsequently that bondholders need access to reliable,
done so. timely and detailed information in order to
allow for appropriate long-term investment
If a conflict is identified and it is considered decisions. The appropriate management
material, there are ways to mitigate the risk. of all conflicts is an important piece of the
For example, by implementing a requirement information investors need to assess whether
that conflicted executives or directors recuse decision-making at an entity is indeed “in the
themselves from the decision-making process, best interests of the entity”.
or implementing a cooling-off period.
Disclosure of all contracts with directors and
management is standard practice in JSE-listed KEY POLICIES A SOE SHOULD HAVE TO
entities. We believe that this discipline should MITIGATE POTENTIAL CONFLICTS:
be extended to all debt capital market issuers,
which includes the SOEs we reviewed. 1. Conflicts of interest policy which
defines what conflicts are for that
Many of the internal governance policies at entity and how these are managed,
the SOEs we reviewed state that they require disclosed and reported.
directors and executives to act with integrity, 2. A PEP policy which defines what a
fidelity, honesty and in the best interests of PEP is, and how transactions with
the entity. Headlines over the past two years PEPs are managed, reported and
disclosed.
indicate otherwise. Our governance review
3. A “cooling-off” policy which
highlighted that the implementation of these
prescribes that a period of time
policies is important – specifically how issues
must elapse before outgoing
are escalated, what remedial action is taken,
directors and executives of an SOE
and an assessment of whether the action and
can conduct business with that
reporting was adequate to mitigate
SOE. The policy should also detail
the conflict. how these instances are reported
and disclosed.
Generally, we found that the SOEs do not 4. A policy which details the
provide adequate transparency, disclosure delegation of authority limits. This
and reporting of conflicted transactions in should specify an appropriate Rand
their Integrated Annual Report. We believe amount of deals/transactions that
that appropriate conflict management, certain individuals and committees
including detailed and timely disclosure, is can approve. For example, it is
an important tool that to date has not been wholly inappropriate for a CFO
adequately used. We were able to agree to be able to sign-off on deals
on varying degrees of improvements to the valued at hundreds of millions of
public reporting on conflicts at the DBSA, Rand without investment/credit or
Land Bank, SANRAL and the IDC. This is an procurement committee and board
important step in ensuring that decisions approval.
made are in the best interests of the entity 5. A contentious issue policy that
and in line with the law. describes the management and
escalation of contentious matters
The six SOEs we reviewed are all debt issuers and decisions.
in the public capital market, and it is our view

34
Chapter 6: Reporting
and disclosures
The SOEs and corporates that raise capital on
KEY THEMES
the public capital market (the JSE) are bound
by the JSE Debt Listings Requirements (DLR).
1. The rules governing debt capital
It is our view that the disclosure and reporting
market issuers are weaker than
requirements detailed in the DLR are woefully
those governing equity market
inadequate, fail to promote governance
issuers.
standards and make long-term investment 2. Repeated attempts by investors
decision-making difficult. to improve listings standards and
public disclosure requirements have
The lack of liquidity in the South African bond been met with resistance.
markets, and the stale pricing, means that the 3. In order to access public capital
decision to invest in SOE and corporate bonds markets, issuers should subject
has to be made with a long-term view, as themselves to a higher degree of
exiting these investments is not easy. scrutiny and commit to a greater
level of transparency and disclosure
It has long been Futuregrowth’s mission to than is currently happening –
improve the DLR and align its requirements they are borrowing from people’s
more closely with the JSE Equity pension funds!
Listings Requirements (ELR), which are 4. The JSE has been slow to support
comprehensive and have established practices debt investors’ calls for better
of disseminating information via SENS. This protections.
chapter will provide some background to the 5. The JSE has not been proactive
DLR, our view of the short-comings and some at monitoring issuers to ensure
of our recommendations. compliance with requirements.

While not strictly part of our governance


review at the SOEs, our initiatives in this No 19 of 2012 (FMA). Through this, the JSE
space are aimed at an overall improvement “provides for the listing, trading, clearing and
in the standards governing South African settlement of debt securities in a transparent,
debt capital markets. To the extent that they efficient and orderly market place”1.
are implemented, our recommendations
will strengthen reporting and disclosure To achieve this, the JSE has a set of rules
requirements, which will give all investors and procedures governing new applications
relevant information that is currently not for entities wishing to raise capital on debt
available to the market. capital markets. These rules detail the ongoing
obligations of issuers and are contained in
The South African Debt Capital Markets
operate in terms of the Financial Markets Act
1 Debt Listings Requirements, Objectives

35
the DLR. Its main objectives are to “contain makers and placement agents for other
the rules and procedures governing new issuers’ bonds. Simultaneously, banks are large
applications and continuing obligations lenders directly to corporate entities and it
applicable to issuers of debt securities. They is globally recognised that bank loans have
are furthermore aimed at ensuring the stronger protections and more security than
business of the JSE is carried on with due listed bonds. In short, banks are quite willing
regard to the public interest.” to sell bonds to pension fund investors that
they themselves would not buy. The inherent
Issuers on the JSE equity markets are subject conflict of the banks’ role in capital markets is
to a different set of requirements, the ELR. an open secret. The opaque nature of the debt
capital markets plays in their favour, despite
Our over-arching view on the DLR, as repeated attempts by investors to demand
amended in October 2017, is that it remains better protections and increased disclosure.
skewed in favour of the issuers, has very weak
reporting standards, and fails to provide Futuregrowth has been active in this space
adequate investor protections to allow for for more than a decade, attempting to
long-term investment decisions. For example, illustrate the shortcomings of the debt
the ELR requires a much higher level of market, with specific reference to its
disclosure from directors, management functioning and the inadequate legal
and advisers, and any changes to directors’ protections afforded to investors.
declarations must be made publically
available within a specific timeframe.
Schedule 13 of the ELR also includes extensive
Banks are quite willing
questions that must be answered on the to sell bonds to pension
directors’ experience and integrity. These
provisions do not exist in the DLR. fund investors that
Our view is that flexibility for issuers and
they themselves would
access to the debt capital markets have not buy. The inherent
historically taken precedence over ensuring
that appropriate investor protections and
conflict of the banks’
rights are embedded in the requirements. role in capital markets
Furthermore, the investor community is an open secret.
is fragmented. A central tenet to this
fragmentation remains the role of the banking We have provided input on how to improve
sector in the initial set-up, and also in terms of market standards, made recommendations
the development and continued functioning as to what would improve investor rights and
of the bond market. protections, and highlighted how this would
benefit both the issuer and the market as a
Banks have been instrumental in setting the whole. Improving market standards would
ground rules for the debt capital markets over be beneficial to all, not only in terms of giving
the years, but they are inherently conflicted investors a platform for voicing their concerns,
as they are (individually and collectively) but also to allow for a more transparent
amongst the largest issuers of debt on the transmission mechanism for investor/
bond market and they often act as market- issuer dialogue.

36
Despite taking time to gain traction, we have
DISCLOSURES
started to see the beginnings of a subtle shift
Disclosures we believe should be a requirement for
in thinking by the asset management industry. public capital market issuers (and thus part of the
An increasing number of investors are calling regular disclosures required by the DLR):
for a fundamental change in how the debt
capital markets operate and are demanding 1. Annual public disclosure of the
better investor protections and disclosures. board and all sub-committee’s
charters, including terms of
In recent years, we have engaged with the reference, mandate, decision-
various role players, primarily the Association making levels, and quorum
for Savings and Investment South Africa requirements.
(ASISA) and the JSE, to improve market 2. Annual public disclosure of all
standards from various angles. This includes current and previous directors’
our participation in the proposals for and executives’ dealings with the
standardised legal terms, whereby we, along company.
with other asset managers, proposed standard 3. Disclosure of all board and
sub-committee (including all
terms for the legal documentation used
procurement and investment/credit
by bond market issuers. During the public
committee) member changes via
participation process on the recent changes
SENS at the time of the change,
to the DLR, we engaged with the JSE (through
including reasons for the changes,
its Issuer Regulation Division) with the view
details of CVs, experience, results of
of setting the appropriate reporting and
conflicts and fit-and-proper tests for
disclosure standards for a well-functioning incoming members.
bond market. 4. Annual disclosure of board and
sub-committee nomination and
Our view remains that the listing requirements appointment processes and who
are the appropriate platform for embedding the decision makers are.
adequate investor protections and disclosures. 5. Annual public disclosure of the
This will ensure that all issuers are subject to entity’s conflicts of interest policy,
the same standards of reporting, and that all contentious issue policy and PEP
investors have equal access to information to policy, including details of how
make investment decisions. these policies have been applied,
deviations from the policies, and
remedial action taken to address
deviations.
6. All public disclosures to be made
via SENS.

37
Chapter 7: King IV and
its use in bolstering
governance at SOEs
The King IV Code on Corporate Governance debt on the JSE must disclose how they
provides a framework based on a principle- have implemented the King Code. However,
and-outcome based approach to apply good this requirement is currently not included
corporate governance practices. While the as part of an existing issuer’s continuing
King Code is embedded in the Companies obligations. We believe this reporting should
Act and the JSE-listings requirements, its be an ongoing obligation of all capital market
principles based approach does not provide issuers1.
any detail on the best practice application of
these principles. Thus, we consider that the King IV includes a sector supplement specific
King Code is a well-intentioned and sound to SOEs. In the table below we attempt to
foundation on which stakeholders can build link the principles applicable to SOEs to the
much more detailed governance practices work done in our governance review, and the
and policies. conclusions and recommendations made in
previous chapters of this document.
The shift from King III to King IV includes an
increased focus on integrated businesses and The sector supplement applies to all public
risks, and a need to satisfy ALL stakeholders, entities listed in Schedules 2 and 3 of the
including employees, the providers of capital, PFMA and hence includes all entities that
the environment and others. According to currently issue debt on the JSE.
the recently amended DLR, new issuers of

1 DLR section 4.12(h)

Leadership,
Ethics and Futuregrowth comments and
Principle
Corporate references to previous chapters
Citizenship
Principle 1 The accounting authority This is reinforced by the PFMA and the over-arching idea
should lead ethically and that SOEs should be managed in an ethical and effective
effectively. manner in order to execute on their mandate. The
executive authority and the board are responsible for
leadership, ensuring accountability, and for providing the
correct tone from the top. Refer chapters 1, 2 and 3.

Principle 2 The accounting authority Similar to Principle 1, the executive authority and the
should govern the ethics board are responsible for establishing an ethical culture.
of the SOE in a way that Part of this, in our view, requires an unrelenting drive to
supports the ensure accountability and for appropriate sanction for
establishment of an breaches and transgressions. Refer chapters 1, 2 and 3.
ethical culture.

Principle 3 The accounting authority A responsible corporate citizen seeks to ensure that all
should ensure that the stakeholders are considered. The executive authority and
SOE is and is seen to be the board need to ensure compliance with the PFMA, the
a responsible corporate shareholder compact, the entity’s mandate and all other
citizen. applicable legislation. Refer chapters 1, 2 and 3.

38
Strategy,
Futuregrowth comments and
Performance Principle
references to previous chapters
and Reporting

Principle 4 The accounting authority Key tools to ensure this principle is adhered to include
should appreciate that ensuring PFMA compliance, ensuring the shareholder
the SOE’s core purpose, compact includes appropriate KPIs and, importantly, cor-
its risks and opportunities, rective action to be taken for non-compliance and under-
strategy, business model, performance. Refer chapters 1, 2 and 3.
performance and
sustainable development
are all inseparable
elements of the value
creation process.

Principle 5 The accounting We believe that in addition to appropriate financial and


authority should ensure Integrated Annual Reporting issued by the SOE, timely
that reports issued by the SENS notices for public capital market issuers are an
SOE enable stakeholders accepted norm for disseminating potentially price-
to make informed sensitive information to the market in a fair and
assessments of the SOE’s transparent manner. Refer chapters 2 and 6.
performance and its
short, medium and long-
term prospects.

Governing
Structures and
Delegation

Principle 6 The accounting authority We believe that this includes the board and sub-
should serve as the focal committees, and the appointment processes to ensure
point and custodian of that appropriately qualified, experienced, non-conflicted
corporate governance in and ethical people are appointed. Crucially, an
the SOE. understanding of the roles and responsibilities of
Parliament as well as the executive authority are a key
part of assessing the accounting authority. Refer
chapters 1, 2, 3, 4 and 5.

Principle 7 The accounting authority This is covered in more detail in chapters 3, 4 and 5 where
should have the we detail the considerations that should be given to the
appropriate balance of composition of key decision-making bodies.
knowledge, skill,
experience, diversity and
independence for it to
discharge its governance
role and responsibilities
objectively and effectively.

Principle 8 The accounting authority Processes and procedures around decision-making and
should ensure that its delegation of authorities are key to ensure compliance
arrangement for with this principle. Refer chapters 3 and 4.
delegation within its own
structures promotes
independent judgment,
and assists with balance
of power and the effective
discharge of its duties.

39
Principle 9 The accounting authority This responsibility requires clear accountability and
should ensure that the corrective action taken for transgressions and missed
evaluation of its own targets. Targets need to be clear, measureable, and have
performance, and that of regular feedback loops to ensure adherence with this
its committees, its chair, principle. We would argue that the executive authority has
and its individual a large role to play here and should take the appropriate
members supports remedial action if the accounting authority is not fulfilling
continued improvement this function. Refer chapter 2 and 3.
in its performance and
effectiveness.

Principle 10 The accounting Similarly, the board and sub-committee delegation,


authority should ensure decision-making, authority thresholds, composition and
that the appointment of, experience have a clear role to play here. Refer chapters
and delegation to, 3 and 4.
management contributes
to role clarity and the
effective exercise of
authority and
responsibilities.

Governance
Futuregrowth comments and
Functional Principle
references to previous chapters
Areas

Risk Governance
Principle 11 The accounting In terms of legislation, there are differences in board and
authority should govern sub-committee requirements for the SOEs based on their
risk in a way that supports individual founding legislations. The PFMA requires the
the SOE in setting and board to form an audit committee2 but does not go
achieving its strategic further. We would argue that the executive authority
objectives. needs to set the SOE’s strategic objectives via the
shareholder compact and manage delivery thereof,
through a series of appropriate and measureable KPIs for
the board and executive management. We believe the
executive authority and National Treasury (via the PFMA)
need to use the tools available to ensure that boards and
executive management are held accountable for their
actions.
Apart from the statutory requirement for an audit
committee as per the PFMA, King IV does not put forward
specific requirements for the range of “must have”
committees. Through our governance review process, we
have found that in order to effectively discharge their
duties and fiduciary responsibilities, SOE boards should
establish sub-committees in addition to an audit
committee. These would include committees to oversee
board and sub-committee nominations and
appointments, procurement decisions, lending decisions
and remuneration decisions. This is further detailed in
chapters 3, 4 and 5.

Technology
and
information
governance

Principle 12 The accounting authority Although technology did not form part of our
should govern technology governance review, we believe that there should be
and information in a way clear KPIs to ensure that the governance and risk
that supports the SOE management for technology is outlined, to support the
setting and achieving its SOE in meeting its strategic objectives.
strategic objectives.

2 PFMA sec 38(1)(a)(ii)

40
Compliance Futuregrowth comments and
Principle
governance references to previous chapters
Principle 13 The accounting authority A key shortcoming for the SOEs we reviewed is a chronic
should govern lack of accountability and enforcement of sanction when
compliance with laws, codes and internal processes are not complied with.
applicable laws and We discuss this in chapters 1, 2 and 3. We believe the SOEs
adopted, non-binding can do better at disclosing any breaches and non-
rules, codes and compliance, corrective action taken, and the results of any
standards in a way that Auditor General, external audit or external consultant find-
supports the SOE being ings and recommendations. We also believe the executive
ethical and a good authority, National Treasury and the Minister of Finance
corporate citizen. should better use the sanctions available to them in the
PFMA to hold directors and executive management
accountable.

Remuneration
governance
Principle 14 The accounting authority We did not focus on remuneration, but we believe that the
should ensure that the shareholder compact should have measureable KPIs for
SOE remunerates fairly, the board and executive management, which are linked
responsibly and to their remuneration. Provision should be made for bonus
transparently so as to claw-backs in the event a board member or
promote the executive management member is guilty of material
achievement of strategic breaches of governance.
objectives and positive
outcomes in the short,
medium and long term.

Assurance

Principle 15 The accounting authority The roles of internal and external audit are key to ensure
should ensure that an effective control environment is maintained. To the
assurance services and extent matters are raised by internal and external audit,
functions enable an the board and executive management need to take
effective control action. Our view is that this is not addressed with the
environment, and that degree of urgency it deserves – as an example, and
these support the following Eskom’s recent qualified audit report, it appears
integrity of information as if a lender had to demand accountability from the CFO
for internal decision for the qualified audit. Our view, supported by King IV, is
making and of the SOE’s that the board should have taken this action
external reports. independently of, and prior to, any demand from a lender.
This is covered in chapters 2 and 3.

Stakeholders

Principle 16 In the execution of its Throughout this process, we have emphasised the
governance role and importance of transparency and appropriate, timely
responsibilities, the and public disclosure to enable appropriate decision
accounting authority making by funders to these entities – this is covered in
should adopt a chapter 6.
stakeholder-inclusive
approach that balances
the needs, interests and
expectations of material
stakeholders in the
best interests of the SOE
over time.

41
Chapter 8: SOE Reform
and what’s next?
Many countries have conducted reviews include a better alignment of remuneration
of their SOEs with a view to clarifying the to performance outcomes and the possibility
appropriate balance of roles played by the of bonus claw-backs when governance is
state, the appropriate ownership policy and breached or performance does not meet the
implementation thereof, and the state’s role in agreed criteria.
the corporate governance of these entities.
SOEs IN OTHER COUNTRIES
South Africa’s Presidential Review Committee
on SOEs (PRC) was established in May 2010
China: A State owned Assets Supervision
and conducted a 24-month macro review of
and Administration Commission of the
all 715 SOEs. The PRC’s preliminary findings
State Council (SASAC) is responsible for
were submitted in July 2011, and 21 principles
overseeing the ownership, supervision
guiding SOE reform were accepted by Cabinet
and monitoring of SOEs.
in 2013. To date, no meaningful SOE reform
Singapore: A state-owned holding
has been implemented.
company, Temasek Holdings, is the
central ownership and monitoring
In our view, the financial, operational and
agency for SOEs and can be
overall governance environment of SOEs has
characterised as a national wealth fund.
deteriorated materially since 2013. The need
France: The Agence des Participations
for meaningful, and prompt, SOE reform is
de l’Etat is an agency of the government
now significantly more acute.
responsible for managing the State’s
holdings in 70 firms.
One of the key areas of reform that our
New Zealand: A semi-autonomous
governance due diligence has highlighted
body attached to the Treasury, Crown
is the lack of a standardised director
Company Monitoring Advisory Unit,
appointment process. In our view, all SOEs
monitors the performance of SOEs and
should apply probity tests and conflict of
provides advice to line ministers.
interest checks that ensure board appointees
Canada, Sweden: An overarching
are suitably qualified, ethically-minded and
legislative framework for SOEs sets out
independent. Importantly, this vetting process
objectives for the management of SOEs.
should be applied consistently by all SOEs and
the results should be made public.

We did not explicitly focus on remuneration


in our governance due diligence, but the
development of standardised policies
dealing with board performance and
remuneration is another key area of SOE
reform we will be monitoring. This should

42
Conclusion

Looking back over the past 18 months, we entities, our view is that they are borrowing
have realised that our concerns around SOE public money and therefore should be open
governance, as expressed in August 2016, were to the scrutiny of public capital markets,
but a scratch on the surface. We had no way of and to the standards of transparency and
knowing the extent of the allegations revealed disclosure that investors demand.
by the information that emerged subsequent
to our announcement. This started with Significant improvements in SOE governance
the release of the “State of Capture” report practices are urgently needed – not only to the
by the Public Protector and continued in disclosures made, but also to the standards
2017 with the #Guptaleaks revelations, the of accountability, transparency, compliance
publication of the document “Betrayal of the with the law, and oversight by the executive
Promise: How South Africa is being Stolen” authority. The inconsistencies in standards
by a team of academic researchers, and the between various executive authorities (as
ongoing Parliamentary and other enquiries. represented by different ministries) need
New revelations and allegations are released to be urgently resolved, and a common
almost daily in the press and on social media understanding of acceptable practices,
platforms. transparency and behaviour needs to be
adopted, and practiced across all entities.

For governance to We hope that this document has shed some

be properly effected, light on the questions investors should be


asking more consistently of all entities that
South Africa’s SOEs access public capital markets. More crucially,
for governance to be properly effected,
need the appointment South Africa’s SOEs need the appointment

and retention of and retention of people of the highest


competence and unimpeachable integrity.
people of the highest They also need greater accountability, more
effective consequence management for
competence and transgressions, and much higher standards of

unimpeachable transparency and public disclosure.

integrity. We can and must do better, our future


demands nothing less.

SOEs have a unique mandate: they are


responsible for the deployment of large sums
of money, and they are at the forefront of
ensuring sustainable development for South
Africa and its people. As lenders to these

43
Summary of our
governance review
outcomes
Land Bank DBSA IDC SANRAL
Did they Did they Did they Did they
Did they Did they Did they Did they
agree to agree to agree to agree to
Outcomes already have already have already have already have
implement implement implement implement
this? this? this? this?
this? this? this? this?
Amendments to legal documentation
DMTN amendment to protect the stability
of the relationship with the shareholding        
ministry
Board structure and composition
Appropriate board size  n/a  n/a  n/a  
Balanced and appropriate mix of skills on
 n/a  n/a  n/a  
the board and sub-committees
Sufficient members on the ARC (including
 n/a  n/a  n/a  
people with specific auditing skills)
Staggering of director terms        
A nominations committee    n/a  n/a  
Board decision-making
Appropriate quorum and voting thresholds
       n/a
for board and sub-committees
Regular public reporting on changes to key
policies, terms of reference for board and        
sub-committees
Regular public reporting of all conflicts of
interest of board members and    n/a    
management
Annual disclosure of the number and
quantum of deals approved at the various
      n/a n/a
credit, investment and procurement
committees
Limitations to the delegated authority of
particular credit, investment and        
procurement committees
Timely and public reporting (via the
website, Integrated Annual Report and
SENS) of all changes to the board and sub-        
committee terms of reference, mandate
and authority levels
Conflict management
A conflicts of interest policy that prevents
current directors (directly or indirectly via
      n/a n/a
their investments or projects) from
transacting from the SOE
An appropriate PEP policy  n/a  n/a    
Disclosure of all transactions with PEPs in
the Annual Integrated Report and/or  n/a      
website
A cooling-off period restricting former
directors from conducting business with        
the SOE
Governance reviews
3rd party governance assessments, the
n/a n/a      
results of which are made public
Relationship with executive authority
Public reporting of KPI’s, shareholder
       n/a
compact and targets

44
Glossary of terms &
references
Glossary of terms
Defined in the PFMA as being the board (if the entity has a board or other
controlling body), or the CEO (if there is no controlling body for that entity).
Accounting authority
National Treasury has the ability to appoint an accounting authority in
exceptional circumstances. Refer to section 49 of the PFMA.

Every department and every constitutional institution must have an accounting


officer. This is identified as either i) the head of department must be the
Accounting officer
accounting officer for that department; or ii) the CEO of a constitutional
institution must be the accounting officer.

ASISA Association for Savings and Investment South Africa

Constitutional
Includes the Human Rights Commission, the IEC and the Public Protector.
institution

A detailed three-year plan detailing the strategy of the SOE, how it hopes to
Corporate plan achieve the stipulated strategic objectives, as well as its vision, values and
mission statement.

DBSA Development Bank of Southern Africa

The legislation that provides for the establishment, control, functions, power
Enabling legislation
and funding of a SOE.

The cabinet member who is accountable to Parliament for the SOE or in whose
portfolio it falls, and/or the member of the provincial executive council who is
responsible for exercising financial and operational oversight on behalf of the
Executive authority
shareholder (the Government of the Republic of South Africa). The
powers of the executive authority are prescribed in the PFMA, as well the
enabling legislation of the respective SOE.

Fruitless and wasteful Expenditure which was made in vain and would have been avoided had
expenditure reasonable care been exercised. (PFMA)

IDC Industrial Development Corporation of South Africa Limited

Expenditure other than unauthorised expenditure, incurred in contravention of


or that is not in accordance with a requirement of any applicable legislation, in-
Irregular expenditure cluding a) the PFMA, or b) the State Tender Board Act, or any regulations made
in terms of that Act, or c) any provincial legislation providing for procurement
procedures in that provincial government. (PFMA)

JSE Johannesburg Stock Exchange

Land Bank Land and Agricultural Bank of South Africa

Material Non-Public Information is information not generally disseminated to


MNPI the public that a reasonable investor would likely consider important in
making an investment decision. (i.e. to buy, sell, or hold securities).

PEPs Politically exposed persons and their affiliates.

45
REIPPP Renewable Energy Independent Power Producer Procurement

Responsible investment is an approach to investing that aims to incorporate


Responsible investing environmental, social and governance (ESG) factors into investment decisions,
to better manage risk and generate sustainable, long-term returns1.

SANRAL South African National Road Agency SOC Limited

SENS Stock Exchange News Service

An agreement between the relevant executive authority at national or


Shareholder compact
provincial government level, as the majority shareholder and the entity.

(a) In relation to a national department, means the cabinet member who is


accountable to Parliament for that department; (b) in relation to a provincial
department, means the member of the Executive Council of a province who
is accountable to the provincial legislature for that department; (c) in relation
Shareholder executive to a national public entity, means the cabinet member who is accountable to
Parliament for that public entity or in whose portfolio it falls; and (d) in relation
to a provincial public entity, means the member of the provincial Executive
Council who is accountable to the provincial legislature for that public entity or
in whose portfolio it falls. (PFMA)

Refers to a) overspending of a vote or a main decision within a vote;


b) expenditure not in accordance with the purpose of a vote or, in the case of a
main division, not in accordance with the purpose of the main division. (PFMA)
Unauthorised In this context, a vote means one of the main segments into which an
expenditure appropriation act is divided and which a) specifies the total amount which is
usually apportioned per department in an appropriation act; and b) is
separately approved by Parliament or a provincial legislature, as may be
appropriate, before it approves the relevant draft appropriation as such.

References
-- Governance oversight role of State Owned Entities (2005)
-- JSE Debt Listings Requirements
-- JSE Equity Listings Requirements
-- Protocol on Corporate Governance in the Public Sector (DPE, 2002)
-- Public Finance Management Act, No.1 of 1999
-- State-owned companies: The new Companies Act, PFMA and King III in perspective
(PWC, August 2012)
-- King IV Report on Corporate Governance for South Africa, 2016

References to Ministers and the Budget numbers were accurate at the time of writing
this report and have subsequently changed with the February 2018 Budget and cabinet
reshuffle of 26 February 2018.

1 https://www.unpri.org/about/what-is-responsible-investment

46
FAIS disclaimer: Futuregrowth Asset Management (Pty) Ltd (“Futuregrowth”) is a licensed discretionary financial services provider, FSP 520, approved by the Registrar of the Financial Services
Board to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. The fund values may be market linked or policy based. Market
fluctuations and changes in exchange rates may have an impact on fund values, prices and income and these are therefore not guaranteed. Past performance is not necessarily a guide to
future performance. Futuregrowth has comprehensive crime and professional indemnity in place. Performance figures are sourced from Futuregrowth and I-Net Bridge (Pty) Ltd.

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