Presentation to the Portfolio Committee-November 2002

1. Presentation to the Portfolio Committee-November 2002 Performance Monitoring and Benchmarking

2. Contents • The Protocol on Corporate Governance in the Public Sector • Governance Status of SOEs

3. …1 • The Protocol on Corporate Governance in the Public Sector

4. The Protocol • Introduction : The Protocol in Context • Nature and Intent • Application • The Role of the Board • Role of the Shareholder • Mandate of the Board • Shareholder and Board Relationship • Reporting • Monitoring and Compliance • External Audit • Socio-Economic Issues

5. Introduction • The Protocol in Context • Government has significant investments in strategic state owned entities such as Eskom, Transnet, Denel and Telkom. • good corporate governance = accountability and transparency = ensures effective management of Government’s shareholding interests in these SOEs. • In 1997 Government adopted the Protocol on Corporate Governance in the Public Sector.

6. Introduction contd/… • The 1997 Protocol however, did not address certain key issues and concerns of SOEs. • The Protocol therefore needed to be revised in order to specifically deal with the unique environment within which the Boards of SOEs operate.

7. Nature and Intent • The Protocol is an aspirational document. • It is a guide to assist in the practical implementation of the rules and regulations which apply to SOEs. • The Protocol + the PFMA + Shareholder Compact = framework developed to regulate the relationship between Government as Shareholder and the SOE Boards; • The purpose = to amplify and not to place it in juxtaposition to the King II Report.

8. Application • The Protocol is applicable to all public entities listed in Schedule 2 and 3 (B) and (D) of the PFMA and subsidiary companies of these entities. • It is remains applicable for as long as Government retains an interest in the SOE. • It makes provision for its diminished application after Govt has disposed of 51% of the Shareholding and the PFMA no longer is applicable, but where Govt retains a significant interest.

9. The Role of the Board • Guiding Principles the directors of a SOE should ensure:- • the development of business strategies, policies and procedures; • that the SOE’s activities are conducted so as to minimise any divergence of interests; • SOE’s are managed in the best interests of the SOE; and • SOE’s and their officers maintain the highest standards of integrity, accountability and responsibility;

10. The Role of the Board • Guiding Principles • The board should have a charter setting out its responsibilities, which should be disclosed in its annual report. • Required standards of disclosure should be satisfied.

11. The Role of the Board • The role of the Board is elevated in the Protocol. • The Board should provide strategic direction to the SOE. • The Board should be aware of all applicable legislation, regulations and policies that govern it and should identify all risk areas and manage those risks. • The Board is required to determine levels of materiality to determine its scope of delegation of authority, which should be clearly set out in writing. • The Board should annually review its performance and the performance of each director.

12. Role of the Shareholder • Guiding Principles • Executive Authority should exercise policy control over the SOE; • Executive Authority should set clear objectives for SOE’s; • any Social Service Obligations that a SOE is to undertake should generally be specified through a Shareholder Compact;

13. Mandate of the Board • The Shareholder should prescribe the role and responsibilities of the Board within the context of the company’s mandate.

14. Shareholder and Board Relationship • There is a very unique relationship that exists between the Shareholder and the boards of the SOEs. This relationship is now for the most part regulated by the Shareholder Compact, the PFMA and now the Protocol. • Full disclosure is a critical aspect of this relationship. • The Protocol further establishes the principles upon which the Boards shall be held accountable to the Shareholder.

15. Reporting • The reporting requirements of SOEs are defined in the Public Finance Management Act, the Companies Act and the Shareholder Compact. • The Protocol amplifies these requirements. It provides certain guidelines as to the information that needs to be contained in the Director’s Report, the Corporate Plan and other reports. • It also provides for the drafting of a Corporate Objectives Statement (an Executive Summary).

16. Monitoring and Compliance • The boards are required to submit quarterly reports on progress against or deviations from the corporate plan. • The Protocol further provides that the corporate plans submitted by SOEs should contain benchmark standards or baseline data, which will be used to benchmark the SOEs in future. • The reporting requirements already set out in the PFMA and Companies Act, will be added to this reporting requirement to ensure effective monitoring by the Shareholder.

17. External Audit • The Protocol provides for greater independence on the part of the external auditor. • It provides that the auditor may not provide consulting or any other non-audit services to that SOE, which might impair or appear to impair the auditor’s independence. • It requires that an auditor or audit firm may not audit any SOE for more than five consecutive years. This is part of a global attempt to ensure greater auditor accountability.  

18. Socio-economic Issues • Black Economic Empowerment • SOE boards should take initiative that would advance members of historically disadvantaged groups economically on a large scale. • The director’s annual report should disclose the SOE’s procurement practices in so far as they relate to Black Economic Empowerment and whether the SOE has achieved the empowerment targets as agreed with the Executive Authority.

19. Socio-economic Issues • Impact of Restructuring • Recognition is given to the impact of restructuring on corporate governance issues in an SOE. • As long as Government retains a majority stake in an SOE, then the board is required to ensure that its Memorandum and Articles, and governance structures do not conflict with the Protocol. • Some of these principles may however be varied if necessary, after consultation with the Board, to facilitate a restructuring transaction.

20. Conclusion: Process • The Protocol is the product of a collaborative effort between the DPE, management of National Treasury, DPSA, management and directors of SOEs and external advisors. • The Protocol was published in the Government Gazette on the 30th of April 2002 for public comment. • The comments have been varied but predominantly positive, and in so far as they were relevant, were incorporated in the final document. • The Protocol has been adopted and approved by Cabinet. • A communication strategy has been developed which entails communicating the principles of the Protocol through various means eg the print media, presentations to key stakeholders, SOEs and other government departments and agencies. • A formal launch of the document is planned for end 2002.

21. …2 • Governance Status of SOEs

22. Content • Areas of strength • Areas of weakness • Remedial options • Actions taken

23. Areas of Strength • Recognition of the significance of good corporate governance practices; • Initiatives undertaken to promote good governance has resulted in reform; • General governance structures adopted and complied with eg, unitary board structure, majority of non-executive directors, split chairman and chief executive positions; • General understanding of responsibilities and fiduciary duties.

24. Areas of Weakness • Low-level distrust between executive management and the board; • Abdication of some strategic decision-making to executive management or too much involvement in operational decisions; • General lack of understanding of risk exposure of the SOE; • Ineffective performance review of board members’ performance / contributions to decision-making; • Governance structures not always formalized and informal delegations of authority.

25. Remedial Options • Inter alia… • Board Charters setting out responsibilities; • Written delegations of authority; • Contracts of Appointment; • Declarations of Interests; • Regular Performance reviews of board performance; • Performance-based remuneration; • Monitoring compliance with PFMA, Shareholder Compact and Protocol; • Skills assessment by Board before appointments.

26. Actions Taken • Signed Terms of Reference upon appointment; • Declarations of Interests; • Agreement of a materiality framework for some SOE; • Performance Targets in Shareholder Compact; • Quarterly Reports by Board in accordance with Shareholder Compact, PFMA and Protocol; • The Protocol on Corporate Governance; • Appointment of majority of non-executive directors; • Performance Review by the Board required by Protocol; • Directors’ Development.