HomeBusiness DigestLoopholes in the law permit Zesa profligacy

Loopholes in the law permit Zesa profligacy

LAST week’s second front page headline grabber in the Zimbabwe Independent re-ignited the debate on the quality of our remuneration culture and remuneration governance in the public enterprises sector.

The Brett Chulu Column

That a tantalising US$1,3 million reportedly would be sunk by Zesa into buying ostensible company vehicles for a coterie of top directors against the backdrop of reports that Zesa has been complaining that its operations are generating income below cost is a paradox of a scandalous kind.

This practice is an indicator of a culture that appears to be firmly inscribed and coded into the DNA of our public enterprises. The reason for this despicable remuneration culture is sired by the way the laws governing public enterprises are written in terms of remuneration governance and, more importantly, what the laws omit.

Take, for instance, the Electricity Act of Zimbabwe that governs Zesa and the Revenue Authority Act that sets the strategic and administrative mandate of the respective public enterprises. The two Acts share similarities in terms of the powers given to the boards (called a commission in Zesa’s case and authority in the case of Zimra), almost word for word.

The powers granted the boards in terms of remuneration governance are as follows: fixing the terms and conditions of employment of executives and lower level employees as the boards see fit, to grant leave of absence, gifts and bonuses as the board sees fit, provide monetary benefits to employees upon retirement, resignation, discharge, termination of service, sickness or injury, establish pension and provident funds, purchase or lease dwelling — houses to employees, sell or lease dwelling — houses and land for residential purposes for employees, guarantee or provide loans to employees to purchase dwelling — houses and land for residential purposes, provide loans to any employee to purchase a vehicle or property, to do anything for the purpose of improving the skill, knowledge or usefulness of its employees and, in that connection, to provide or assist other persons in providing facilities for training, education and research, including the awarding of scholarships for such training.

It can be inferred from the foregoing that the Act tacitly confers power on the boards of public enterprises to make decisions on remuneration. This is a double-edged sword.
The biggest structural weakness of the acts is that it gives the board a lot of discretion in making remuneration decisions. Stating that the boards of public enterprises do as they see fit in terms of remuneration seems to have been leveraged upon to undertake questionable remuneration decisions. In the context of the US$1,3 million car purchases, the board can simply justify it by arguing that buying such cars is the only way Zesa can retain its executives and the Act gives them the discretionary powers.

One begins to understand why the culture of buying vehicles every five years for executives and disposing those cars to them at residual values came about. Someone just thought it was a good idea and the board just approved it. Why shouldn’t they, since the Act gives them a lot of discretion? If we went strictly by the book, the acts governing our public enterprises favour the giving of loans for the purchase of cars. The board can, however, ignore this for the company cars option.

The US$75 000 Fortuners Zesa is buying will probably have a very low residual value, with the director getting the car at well below its used car market value. No one can say anything about that since the Act gives the board carte blanche powers on remuneration decisions. The fact that a public enterprise is performing badly is independent of the seemingly insensitive decision to meet the contractual obligations of top executives.

The fault lies squarely in the loopholes in the governing act. The directors who are benefitting from the legislative and remuneration governance vacuum will most probably see themselves involved in bottom-feeding. The axe then must fall on the roots and not the branches. Overhaul the Act.

The second biggest challenge that opens wide the gates for scandalous and unconscionable remuneration practices at our public enterprises is that acts do not force the board to come up with a remuneration policy. The seven or so guidelines in the acts are woefully inadequate.

A remuneration policy is a professional and formal statement of the principles that guide the remuneration decisions of an organisation. For instance, a remuneration policy will state the clear mix of remuneration elements and their relative proportions such as fixed elements and variable elements. It also states if the organisation will internally apply the equity principle (vary pay according to weight of a position) and externally benchmark with comparators.

If applying external benchmarking, then the remuneration policy will state how it will determine appropriate comparators and what its benchmark level will be such as the median, the upper quartile, the upper quintile, for instance and the reasons for settling on that external benchmark.

The remuneration policy also makes it clear if it will adopt pay-for-performance policy and which levels of employees will be affected by that policy. Thus Zesa and Zimra can decide to pay their executives at whatever level and no one can say anything because the Act is too weak to rein any excess pay since there is nothing prohibiting that.

Due to the complexities of society and individuals, remuneration policies are getting more and more sophisticated with risk management policies infused into remuneration policy. Policies such as bonus clawbacks and deferred compensation are responding to issues of poor performance being rewarded.

It is virtually impossible to exhaust all the elements of a remuneration policy and its various nuances. The point is that our public enterprises do not have the incentive to put in place professional and modernised remuneration policies that speak to the expectations of different stakeholders.

You cannot have a situation where the major shareholder does not have a say in demanding and approving a remuneration policy. The acts governing public enterprises do something unreasonable, allowing the boards to be accountable to themselves in terms of remuneration decisions. You cannot give a lot of discretion to a board to make remuneration decisions and do not check if their decisions are not to the detriment of the interest of the shareholder. Ironically, that is what the acts tacitly condone.

There is room for the government to challenge its agents, the boards of public enterprises, on the company car purchases as it deviates from the explicit provisions of the act. The parliamentarians may need to step in and qualify the discretionary powers the boards of public enterprises currently wield on remuneration policies. This provision that the board should act as it “sees fit” provides too much flexibility that is promoting the rot in public enterprises remuneration.

This defence line that directors have contracts that are locked in is nonsensical so the board cannot arbitrarily change the terms of their employment contracts lest it invites legal challenges. Contracts must reflect the principles of well-crafted, professional shareholder-approved remuneration policy, not the hodgepodge of discretionary decisions. Parliamentarians can sanitise this. That is their job.

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer-reviewed academic journal.

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