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The PFMA must be SOEs' guiding light

Mar 11 2018 06:00
Tryphosa Ramano

Every South African wants to see state-owned enterprises (SOEs) fulfil their mandates of being strategic national assets for infrastructure development and transformation, operating efficiently and embracing financial accountability to help tackle the three scourges of unemployment, underdevelopment and poverty.

In his Thuma Mina (Send Me) clarion call, President Cyril Ramaphosa has called for a “social compact” to lift the ailing SOEs out of the financial and economic morass.

As we look for common solutions to arrest the downward spiral of our SOEs, the question remains why it has taken government so long to act in areas where it has direct control.

The answer lies in government’s refusal to ensure that capable people with good credentials are deployed to the right positions, and are accountable through the Public Finance Management Act (PFMA) and related Treasury regulations.

New Public Enterprises Minister Pravin Gordhan has his job cut out for him and must make the PFMA the cement that secures the bricks of the foundation of corporate governance
for SOEs.

The PFMA is defined as the “regulation of financial management to ensure that all revenues, expenditures, assets and liabilities are managed efficiently and effectively, and to provide for the responsibilities of persons entrusted with financial management and matters connected therewith”.

While the professionalism within many boardrooms has improved considerably over recent years, the role of boards of directors continues to be scrutinised regularly and, for some, the implementation of strong corporate governance arrangements is a never-ending pursuit.

So why have most SOEs been accused of lapses in corporate governance despite the PFMA being in place? Why should nonexecutive directors be involved in procurement processes? Why is the Auditor-General not auditing all SOEs?

Because the boards and management of SOEs pay lip service to the PFMA as a guideline for good management, ethics accountability and corporate governance, which are integral to running an organisation and delivering governance outcomes.

ACCOUNTABILITY

Why is the concept of accountability in public financial management easy to discuss and theorise, but difficult to concretise?

Why are some companies hiding losses to maintain a facade of high profits?

The truth is there has been a slow breakdown in the country’s adherence to the PFMA.

Management and boards pay lip service to this act, which demands that responsibility for public and private affairs should not be consigned to public officials alone.

Ordinary citizens and customers should also do their civic duty, and get involved in positive and productive ways to contribute to the common welfare of companies and organisations.

The first step towards accountability is to fully understand and determine the nature and extent of the risks within the organisation or company, and to establish clear channels for decision making and communication.

Also, transparency is key to accountability.

Open, clear and honest reporting helps a public or private entity build relations with stakeholders including customers, employees and investors, and the annual financial statements allow the board to communicate the results for the year and also document their assessment of performance.

Accountability and transparency need to be embedded in the organisation’s culture and be subject to review as an organisation grows, as the risk profile of the company changes.

The PFMA promotes good governance and improved transparency, accountability and public faith and confidence in the organisation, thus enhancing wealth creation and share-holder value.

Through the PFMA, good governance protects the organisation from managers and directors who pursue their own self-interests, steal corporate assets and engage in corruption.

Every SOE must set a philosophy of respecting the PFMA, keeping in view the nature of its business, the objectives and its relationship with its stakeholders.

Also, all the members of the board and the senior management should confirm compliance with the PFMA.

HERE ARE SOME GUIDELINES:

. Separating the post of chair and CEO encourages division of responsibility at the head of the SOE for the balance of power and authority.

. Every person on the board should be clear about his or her role and responsibility, and have a clear line of direction on what role the board, management and executives play.

. Adhere to the basic pillars of governance through the specialised committees – audit committee, remuneration committee and nomination committee.

. The audit committee establishes assurance about the quality and reliability of financial statements and information.

. The remuneration committee establishes rigorous and transparent procedures, developing remuneration policy for the directors.

. The nomination committee’s job is to attract a mixture of skills, experience and objectivity on the board. Nominations are required from various stakeholders for maintaining everyone’s interests.

INTERNAL AUDIT

One of the questions that the regulators ask when public organisations such as SAA, the Passenger Rail Agency of SA and PetroSA have serious problems has always been: “What did the internal audit find?”

As mentioned above, an internal audit, for many good reasons, is a creature of the audit committee of the board of directors, not of management.

This is even more so today, because regulation has been modified over the past decade to increasingly stress the independence of internal audit from management.

Accordingly, companies, private or public, prefer that an internal audit be run by the board’s audit committee. However, often the heart of the problem has been oversight.

The best CEO and chief financial officer needs an effective internal audit department.

Arguably, one answer to this problem is to have a technically astute chair for the audit committee. Furthermore, the CEO should avoid actions that create the appearance of compromise to the independence of an internal audit.

All in all, members of the board should provide advice and support executive management at all times.

They should be interested independent observers of management’s initiatives, and be the most constructive critics and wisest counsellors.

Every public company’s management should provide accurate information and facilitate investment in the organisation’s equity and growth.

Serving on boards should be as competitive as a job application. Suitably qualified cadres should apply by themselves, like everyone else, and the best candidates for the jobs should be appointed.

Let all SOEs embrace the PFMA and then sound corporate governance will cascade positive ethics and transparency across all levels of private and public organisations.

Ramano is chief financial officer of cement giant PPC and a former board member of a number of companies, including SOEs

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