Recent CIPC warnings to state-owned companies raises the spotlight on public sector governance

The recent warnings issued by the Company and Intellectual Property Commission to five state-owned companies demonstrate once again just how seriously boards need to take their governance role, says Parmi Natesan, Executive: Centre for Corporate Governance at the Institute for Directors in Southern Africa (IoDSA).

As reported in Business Day Live, the CIPC warned the boards of the South African Express Airways, South African Forestry Company, South African Broadcasting Corporation, South African Post Office and the Central Energy Fund that they risked being declared delinquent or of being placed on probation if they failed to address their non-compliance with the Companies Act.

A finding of delinquency will adversely affect the long-term reputation of these directors, effectively calling their fitness for office into question. It could also results in these directors being disqualified in terms of the Companies Act, from taking up Directorship positions in the future.

"The CIPC has indicated that it intends to be proactive in holding these companies and their boards to account,” observes Natesan. Governance best practice, as denoted in King III Principle 6.1, is for the board to take ultimate accountability for ensuring compliance with laws and regulations. "Compliance with the law is not optional, and directors need to make sure that the companies that they are overseeing are doing so.”

Natesan points out that the IoDSA’s 2014 benchmark study of board performance shows that public-sector boards, by their own admission, are lagging those in the private sector in most areas.

Aside from the board, Natesan says that in the public sector, the audit committee should play a big role in ensuring that the company, inter alia, complies with the applicable legislation. However, audit committees in the public sector generally need to be strengthened, as is indicated by the high percentage of public-sector entities whose financial statements are disclaimed annually by the Auditor-General—for example, only 48 percent of audited organisations obtained an unqualified audit opinion in 2011-12, while 94 percent were found to be materially non-compliant with legislation. The CIPC said it is particularly concerned about irregular expenditure, which points directly to a lack of quality audit committee oversight.

"The long and short of it is that audit committees have a vital role to play in assisting their boards with discharging their duties as regards to compliance. In the public sector, particularly, audit committees sometimes face several challenges which make it difficult for them to adequately fulfil their responsibilities,” says Natesan. "As this latest development shows, boards in both the public and private sectors will bear the consequences of their audit committee’s lack of performance, and should thus be looking for ways to improve it—such as participating in the Public Sector Audit Committee Forum, a forum created to strengthen Audit Committees in the public sector.”