Parastatals: Govt listens, but weaknesses remain

RECOMMENDATIONS on modernising the governance of public entities titled Parastatal performance poser for Moyo carried by the Zimbabwe Independent in July 2010, shortly after Gorden Moyo was appointed minister in charge of public entities (state-controlled companies and parastatals), have been adopted by government.

The Brett Chulu Column

That article lobbied government to adopt a corporate governance code for public entities and make it into law.

At the time, I wrote: “In my opinion, Moyo should push for a Bill enabling the formation of a central SoE authority and the adoption of a SoE governance code crafted along the lines of the OECD guidelines, niftily deferring final arbitration to Parliament. Taking the route of amending the specific acts governing each parastatal will more than likely give rise to legislative and procedural log jams.”

In that article, a proposal was made to establish a coordinating authority. It has been adopted by co-opting and strengthening the existing Corporate Government Unit (CGU).

Government listened; a public entities governance bill intending to codify corporate governance of public entities into a harmonised law is ready for public debate. It has fissures. Merriment and tinsel should only come after the deep flaws in the bill are remedied.

The good first before taking deep dives into the subject of the bill’s fundamental structural faults.

The good

Let’s sample a few. Remuneration caps for both board members and senior employees as well as restricting terminal benefits for senior employees are a master stroke in the interim to bring sanity to the remuneration of the executives and non-executives of public entities. Introducing surcharges to recover the excess of payments above remuneration caps remuneration caps and the classification of these surcharges as debt is a progressive move.
The introduction of performance ratings of each public entity that will be made available for public scrutiny is a powerful innovation. Requiring each public entity to have a strategic plan that will be subject to approval by shareholders is a breath of fresh air; governance is meaningless if the strategic intent of an entity is not known.

The statutory requirement for board members to have a performance contract with the line minister and for all senior executives to have renewable performance contracts is a god foundation for accountability. The requirement for each public entity to be subjected to an independent annual audit will force every public entity to do annual audits as it will now be a statutory requirement. The 50-50 board gender parity and regional balance are progressive moves.

The chinks

I have picked four fault lines for illustrative purposes.

First, the bill’s foundational weakness is its injudicious and naive appropriation of the national code of governance when it comes to state companies.

The national code uses the apply-or-explain enforcement regime which naively relies on the market to punish those who breach corporate governance principles.

The way the national code is structured, flowing from its philosophical assumption of soft enforcement to indirectly goad entities to comply with the national code, is that it is constructed as principles and recommendations.

Here is the problem: expecting state-controlled companies in an environment where profligacy, malfeasance and corruption are institutionalised and bone-deep to suddenly have the maturity to follow corporate governance norms in letter and spirit just because there is now an explicit code is frankly naïve.

What bolsters my misgivings is that some of the architects of the national code have apparently given us a demo of how to interpret the apply-or-explain rule.

The national code recommends that a chairperson should not have their professional firm providing services to the entity they chair. It further says if that is to happen the matter must be brought to a special general meeting of shareholders convened for that special purpose where a 60% vote threshold must be reached.

The code also recommends that the members of the remuneration and audit committees must be independent. Some of the principal architects of the national currently run afoul of these recommendations. My point: they can always cite reasons why they are not following the national code’s recommendations.

They are likely to throw the rejoinder that in the estimation of the national code the comply-or-else regime is a “mindless” (the national code’s actual wording) application of corporate governance.

That is precisely the rub of my scepticism: The bill, unwittingly, gives state-controlled companies plenty of latitude and introduces legal grey areas which state-controlled entities can exploit to discard the recommendations of the national code.

In the end, the bill is effectively sanctioning state-controlled companies to pick and choose while telling parastatals to comply or else. If the bill does not plug this loophole, expect a flurry of constitutional court cases challenging the ensuing law.

Second, the bill gives us old wine in new skins: it effectively makes the line minister a one-man remuneration and nominations committee. It is completely absurd for the bill to outline its seven principles and with one of the principles provisioning for the formation of nominations and remunerations committees and yet perpetuate and even entrench the status the status quo of a one-man nominations and a remunerations committee.

The bill is creating lame duck board committees, no different from the shadow directors the national code is frowning upon. These inconsistences are not minor: the quality of governance is correlated to the quality of personnel in terms of strategic nous and probity. The minister can ignore any recommendations from the nominations and remuneration committees. The bill should let parliament give the final say-so to nominations and remuneration proposals.

Third, the bill appropriates the strategic blindness of the national code in that omits a critical component of governance; it does not explicitly require the formulation of remuneration policy.

Setting remuneration caps, conditions of service and surcharges is hardly remuneration policy. Here is an example of the short-sightedness of the remuneration provisions the bill is promoting: you cannot put blanket remuneration caps and then state that remuneration should be such that it attracts competent people.

A well-thought out remuneration policy will make careful provision to balance remuneration caps with controlled flexibility. I had an opportunity of being a senior consultant engaged solve a retention problem that was bedevilling one key parastatal in one country which uses remuneration caps for senior executives. We located the mother lode of the issue after a rigorous scientific analysis: the critical skills were not being lost to other public entities — they were being lost to the better remunerating private sector.

Our solution was not a salary adjustment but a reviewable critical skills allowance to match the attractor market.

This is just one example to show that there are nuances in remuneration strategy that warrant that crafting a remuneration policy be treated as a principle, not a practice.

Fourth, the bill is absolutely silent on the consequences for breaching the provisions of the corporate governance law.

That is a clear invitation for public entities not to take corporate governance infractions seriously. What’s the point of a law if there are no consequences for transgressing it?

Timeless wisdom: thou shalt not paper cracks in a foundation.

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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