SOE boards: It matters who gets appointed and how they get appointed
Wednesday, 03 July 2019
Chief Justice Mogoeng Mogoeng, during his address at The Directors Event in Sandton, highlighted the issue of board and other leadership appointments in the public sector. “I think we should begin to think about tests that people must be subjected to before they can be elevated to positions of high responsibility,” he said.
“It is the president who appoints people who head state-owned companies or enterprises. If you appoint a rotten apple at any level, you don’t even have to split hairs to understand what is going to happen to that entity.”
According to Parmi Natesan, CEO of the Institute of Directors in Southern Africa: “The Chief Justice’s statement brings to the fore two major challenges in director appointments in the public sector; flaws in the appointment process and leadership competencies not being sufficiently considered.”
The appointment process
In the private sector, a nominations committee – or failing that the board themselves – would typically be responsible for conducting due diligence on prospective non-executive directors and making recommendations to the shareholders for the appointment. Appointment of executives, on the other hand, would be the responsibility of the board alone.
By contrast, director appointments in the public sector are largely led or solely influenced by one single individual – the relevant Minister – especially in the case of non-executive directors. Whilst executives like the CEO are interviewed and shortlisted by the board, there is often still interference with this process during the initial recruitment process.
"It is critical that the Ministers ensure that thorough due diligence is performed and that existing boards are consulted to determine the skills and experience needed before making any non-executive director appointments,” recommends Natesan. “It is equally critical that Ministers allow the board to appoint executives without undue influence. In addition, Ministers should consider a staggered rotation process to provide continuity and institutional memory within boards.”
According to the King IV report on corporate governance, the board should consider the collective knowledge, skills and experience required by the board, the diversity of the board, whether the candidate meets the appropriate fit and proper criteria before nominating a candidate for appointment. This thorough consideration is sometimes lacking in the public sector, in favour of political pressure.
"Although the Minister is under no legal obligation to consider the recommendations made by a board or a nominations committee, it would serve the organisation well if the processes for nomination, election and ultimately, the appointment of members to the board are transparent and sufficiently aligned to the needs of the organisation.”
Appointments in the public sector are sometimes based on political connections rather than the necessary knowledge, experience and integrity.
“Boards are only as good as the people who serve on them,” explains Natesan. “One of a Minister’s key responsibilities is, therefore, to appoint effective and ethical individuals to the boards they oversee. This is absolutely critical for the success of these entities.”
“It would serve any public sector organisation well if its board members possess the relevant competencies that meet the needs of the organisation and the role board members are required to play in meeting those needs. This would lead to public trust in the appointment process and the individuals themselves.”
“During 2018, the government gave an undertaking to finalise a framework for board appointments to state-owned entities, as part of National Treasury’s Inclusive Growth Action Plan,” says Natesan. “The IoDSA made several recommendations related to our director competency framework at that stage, and we keenly await the release of the finalised guide.”
Natesan points out that the ongoing tribulations at most state-owned institutions – as well as within the private sector – strengthen the IoDSA’s argument that building a cohort of professional directors is imperative in order to strengthen our economy’s ability to grow. To that end, the IoDSA has formal Chartered Director (SA) and Certified Director designations that provide a framework for directors to acquire and demonstrate the specialist skills, experience and integrity needed to discharge their duties with mastery – the very tests needed prior to individuals being elevated to directorship positions.