SHAREHOLDER MANAGEMENT MODEL: STATUS REPORT & WAY FORWARD

1. SHAREHOLDER MANAGEMENT MODEL: STATUS REPORT & WAY FORWARD PRESENTATION TO PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES 07 JUNE 2006

2. Outline of Presentation • SOE context • Shareholder Management: Historical • Shareholder Management: Current • Rationale for SOE • Current Classification • Strategic Intent • Shareholder Reserved Rights • Board Appointment & Remuneration • Accountability to Parliament • Planning & Reporting Schedule • Shareholder Status & Capacity • Shareholder Management Model • Process Forward

3. SOE context +

4. SOE context A-G

5. Shareholder Management: Historical • Historical perspective: • Parastatal era: no shareholder-enterprise distinction, exclusive state ownership, governance (performance management & accountability) weak, unaccountable interference by executive • Corporatization era: shareholder-enterprise role distinction & corporate governance introduced but slow assumption of shareholder control rights & loss of mechanisms to align commercial direction with strategic intent of the state • PFMA era: mainly focused at improvement in financial management (accountability & sound management of revenue, expenditure, assets & liabilities) • Privatization of some enterprises: different models ranging from complete privatization to minority shareholding by the state (eg Aventura, Safcol, Telkom); strategic interest of state not always aligned with corporate structure

6. Shareholder Management: Current • Challenge is focused at shareholder empowerment: • Rationale for state ownership • Classification of SOE • Definition of state’s intent with shareholding in an SOE & transparent communication of intent • Definition of shareholder reserved decision-making & Updating Shareholder Agreements, Memoranda & Articles • Alignment of Board of Directors composition & remuneration with enterprise mandate • Improvement of Board accountability • Improved accountability to Parliament • Integrity of reporting & decision-making at shareholder & enterprise level • Status & capacity of shareholder oversight entities

7. Rationale for SOE • Natural Monopoly • Market Failure • Developmental requirements Where shareholding is purely for financial returns consideration may be given to shareholding via vehicles such as IDC or disposal

8. Current Classification • PFMA classification of “public entities” with reference to: • Definition of “public entities” & “national/ provincial government business enterprises”; and • Schedule listing. • PFMA listing: • Schedule 2: Major Public Entities & “ownership control” subsidiaries; all DPE-SOE are Schedule 2 entities; ownership control subsidiaries at least 20 (overall about 40 subsidiaries) • Schedule 3A: National Public Entities • Schedule 3B: National Business Enterprises • Schedule 3C: Provincial Public Entities • Schedule 3D: Provincial Business Enterprises • No definition of major public entity, but characteristics match definition of “national government business enterprise” • “national government business enterprise” • Juristic person (company) under ownership control of national executive • Operational & financial authority to carry on business activity • Provides goods & services according to ordinary business principles • Financed fully or substantially from sources other than Nat. Revenue Fund, taxes or other statutory money

9. Current Classification • “ownership control” • Appoint/remove all or majority of directors; • Appoint/remove CEO; • Cast all or majority votes at board meetings; or • Control all or majority votes at general meetings. • “National public entities”: Board, commission, corporation, fund or other entity: • Established in terms of national legislation; • Fully or substantially funded from Nat. Revenue Fund, taxes or statutory money • Accountable to Parliament • Distinct difference between national public entities & national government business enterprise: sources of funding • Difference between Schedule 2 and 3B in practice: Schedule 3B entities are generally more dependent on national revenue fund, tax or statutory money

10. Classification - conclusion • Current classification of SOE in terms of PFMA is potentially confusing and directly linked to the financial management objectives of the PFMA • No definition of major public enterprises • Schedule 2 (major public entities) and Schedule 3B (national government business enterprises) possibly same definition • DPSA re-classification model distinguishes between Government Business (departments, government agencies & public entities) and Government Enterprises • Government Business Enterprises further classified as State Corporations and State Owned Enterprises (difference whether established by own legislation) • Classification of Government Business Enterprises require further refinement and simplification to include all state strategic interest but distinction between ownership control and reporting & accountability requirements in relation to shareholding & reserved rights • Considering distinction between State Owned Enterprises & State Reporting Entities • New classification model and distinguished oversight to be empowered through SOE legislation and amendment to PFMA

11. Strategic Intent • Performance targets of SOE are determined in absence of communication of strategic intent • Strategic Intent = economic return to be achieved • DPE developed strategic intent statements for all SOE • Mechanisms being considered to instruct strategic intent in a transparent & accountable manner, eg. “ministerial charter/ strategic intent obligation” to be published in Gazette • Legislative mandate required • Enterprise performance targets to be aligned with strategic intent

12. Shareholder Reserved Rights • Companies Act provides for standard reserve rights such as approval of Annual Financial Statements, dividends, appointment of directors • In addition, reserved rights over and above rights in terms of the Companies Act and/or in relation to shareholding are secured through PFMA and possibly shareholders agreements, Memoranda & Articles • In the case of 100% state shareholding the key issue is the decision-making parameters of the Board vis-à-vis the shareholder; PFMA currently reserves shareholder decision-making rights in relation to: • borrowing powers • significant & material transactions • establishment of subsidiaries • PFMA reserved rights require further precisioning with reference to significance & materiality (dileneation of Board & shareholder authority”), procedures and criteria for exercising such rights

13. Shareholder Reserved Rights • Where the state is a minority shareholder, the reserved rights relate to both the parameters of decision-making of the Board and other shareholders; examples of latter include rights to: • Appoint Chairperson & CEO • Decisions on capital investment • Control management contracts based on performance • Call options for shares if performance targets not met (eg. Investment & service delivery) • Pre-emptive rights to purchase shares • Material disposals, acquisitions & mergers • Ownership of intellectual property

14. Shareholder Reserved Rights • Interventions to improve definition & exercise of shareholder reserved rights: • Significance & materiality, criteria, format & process guidelines for transactions (done) • Guidelines for borrowing powers (working with NT towards a guideline) • National Treasury Regulations already specify requirements for establishment of subsidiaries - DPE is developing guidelines for shareholders agreements as well as Memoranda & Articles to supplement the requirements • Dividend policy: NT developing in consultation with DPE • Board appointments – see next slide

15. Board Appointment & Remuneration • No guidelines exist regarding the size of SOE Boards, considerations & criteria for Board appointment and their remuneration • Guideline to acknowledge the unique differences between the SOE in terms of: • Size of business • Complexity of business • Market or sector related comparisons • Actual performance • Thus, the guideline will not aim towards uniformity but harmonization with reference to the same criteria and benchmarks • Key interventions are: • Board Remuneration Guidelines (done) • SOE Board skills profiling and shadow database (under way)

16. Board Accountability • Current mechanisms to communicate performance areas & targets not effective: • Corporate Plan: PFMA requires submission but not approval • Shareholder Compacts: annual (short-term) instruments requiring rationalization & harmonization • Quarterly Reports • Annual General Meetings: agenda mainly focused to ensure compliance with statutory obligations in terms of Companies Act: annual financial statements, dividends, appointment & remuneration of directors • Direct reference to strategic intent is absent & consistent flow of integrity of reporting from Corporate Plans – Shareholder Compacts – Quarterly Reports & Annual General Meeting lacking

17. Board Accountability • Key interventions: • Draft Corporate Plans be required for comment & final plans be approved by shareholder – corporate plans to focus on end of 3-year performance targets within framework of strategic intent • Annual Shareholder Compacts to focus on annual targets within framework of 3-year plan • Quarterly Reports to focus on demonstrating that SOE is on track to meet annual & 3-year targets • Strategic Planning general meeting with Board scheduled after the AGM to convey expectations of the shareholder for the preparation of the Corporate Plan for the next year • Board Induction Programme

18. Accountability to Parliament • Accountability through submission of Annual Financial Statements & Annual Report (retrospective assessment) • Submission of Shareholder Compacts considered (forward looking expectation & benchmark for assessing achievement with reference to Annual Financial Statements & Annual Report) • Publication of strategic intent & submission of Shareholder Compact to Parliament should improve the integrity flow of reporting on performance

19. Planning & Reporting Schedule

20. Planning & Reporting Schedule (future)

21. Shareholder Status & Capacity • Lack of intra-governmental role & function definition (policy makers/ regulators/ shareholders) increases oversight challenge of shareholder departments especially in case of natural monopolies: enterprise level, industry & sector level efficiencies often blurred • Concurrency & convergence of jurisdiction within government to be clarified to avoid duplication & improve intra-governmental coordination • Asymmetry of information generation & availability and resources between SOE & shareholder departments constrains effective oversight • Developing conceptual framework for government-wide shareholder management and to serve as drafting framework for SOE legislation & recommendations for PFMA amendment • DPE function shares some characteristics of a holding company profile – proposals being developed to improve oversight balance • Within DPE developing governance workflow

22. Shareholder Management Model • Shareholder Management = combination of people/entities, legal rules, management tools & process and healthy personal relationships • Managing Relationships: • Other shareholders • Board of Directors • Parliament • Intra-Governmental Objectives • In terms of Rights & Duties: • Constitution • Public Finance Management Act (PFMA) & National Treasury Regulations (NTR) • Companies Act & Regulations • Founding document: Memorandum of Association (Memorandum) • Contract between Shareholders and Board on respective rights & duties: Articles of Association (Articles) for example reserved shareholder decision-making • Agreement between shareholders on their respective rights & duties: Shareholders Agreement (SHA) for example minority shareholder rights (golden shareholding)

23. Shareholder Management Model • Applying Effective Performance Management Tools: • Corporate Plan • Quarterly Reports • Shareholder Compacts • Annual Financial Statements • Annual Reports • Through: • clear & transparent instruction • Integrity of information • Informed decision-making • Within statutory time-frames APPROACH IS NOT TO RE-INVENT BUT TO STRENGTHEN EXISTING RIGHTS & DUTIES THROUGH CLEARER DEFINITION OF INTENT & ACCOUNTABILITY CHAIN

24. Process Forward • Conceptual Framework to serve as basis for Government-wide consultation • Consultation within Government • Draft Legislation & implementation of reforms not requiring legislative change • Key aspects to be addressed in legislation • Classification • Strategic Intent Interventions with reference to types of entities • Mechanism to issue guidelines for consistency in approach to corporate structure, SOE shareholder rights & performance monitoring & reporting • C-operative governance principles within Government • Reporting to Parliament

25. Thank you