A Review Of The World Bank’s 2014 Suggestions On ‘Good Corporate Governance’ With Help Of Julieth Gudo’s Thought…
In our last article about business rescue practices in South Africa, we mentioned the 2014 ‘Corporate Governance of State-Owned Enterprises [SOEs]. A Toolkit’ publication by the World Bank (WB). This article will provide a brief overview of the latter and offer a review of the WB’s recommendations with the help of the findings of Julieth Gudo’s research, who is currently a Postdoc at the University of Cape Town and has written her PhD dissertation about the legal pathways, which CSOs in South Africa have utilized in order to hold SOEs and their representatives accountable.
Towards A New SOE Legislation: Dealing With Cases ‘Before’ State Capture
In 2014, the afore-mentioned toolkit was funded by the WB, the International Monetary Fund (IMF), the Korea Development Institute (KDI) School of Public Policy and Management, and the Global Partnership Facility Trust Fund, and established by the Finance and Markets Global Practise (FMGP) and the Government Global Practice (GGP) teams of the WB with the aim to provide policy-makers worldwide with a good practices framework to introduce SOE reforms. The toolkit distinguishes between country- and company level tools, whereby the first provide an analytical lens to identify potentially indispensable legal changes ahead etc. and the second provide ways of “assess[ing] and improv[ing] the corporate governance of individual SOEs”. The first essential point, which the WB toolkit highlights is that despite the process of privatization, SOEs continue to remain important cornerstones in crucial sectors of society such as “finance, infrastructure, manufacturing, energy, and natural resources”. Despite that these sectors provide essential services to society, as Gudo reemphasizes in her PhD dissertation ‘The use of legal provisions by civil society organisations to advance corporate governance in state-owned enterprises in South Africa’, SOEs are emphasized to have traditionally not had access to capital markets.
The WB’s toolkit establishes that this is problematic considering the need for an increased market discipline and competition. Whereas the publication reminds that SOEs were exposed to market competition in the 1980s, whereafter “SOEs were commercialized and […] corporatized into separate legal entities”, the politicization of SOEs and other critical developments respectively failures (i.e. accountability gaps in high ranks) are pointed out to have stood in the way of an economically profitable SOE model that actually steps in the way of market failures. Although privatization came along with larger returns, it dispersed returns among too many smaller players as corruption became a rampant issue among dominantly state-led SOEs. As the WB toolkit highlights, SOEs are some of the most powerful companies in the world, but they also create a monopoly. In 2010, “[t]he 13 largest oil companies, controlling 75 percent of global oil reserves and production, [were] state-owned”, which is particularly interesting in the South African case as Eskom’s (financial) performance and facade has been crumbling for decades.
As the WB toolkit argues, effective, fair and transparent board practices constitute an important part of the work towards an enhanced corporate governance in SOEs. But board practices do not end with the ‘democratic appointment’ of members, it also includes aspects in relation with political interests. While SOEs have certain corporate interests, they also have political interests, which may lead to conflicts in management and corporate governance. Not to mention the fact that gaps in accountability and the lacking “protection of minority shareholders” (i.e. as far as they exist) only make the battle around individual political interests (i.e. not as an entity that ‘serves’ citizens) worse. As Gudo writes in her PhD dissertation, laws around corporate governance were created as if governments always acted in the best interest of citizens. However, in the South African case, there is a lack of legal frameworks that hold accountable board members of and decision-makers within SOEs. In a nutshell, the WB’s points of critique relate to: 1.) “multiple [and clashing] goals of SOEs”; 2.) “protection from competition”; 3.) “policitized boards and management”; 4.) “little transparency and accountability”; 5.) “weak shareholder and stakeholder protection”.
Instead, the advantages of corporate governance reforms are described as follows: 1.) “[b]etter access to finance by firms”; 2.) “[i]mproved strategic decision-making and operational performance”; 3.) “[r]educed risk of corporate crises and scandals”; 4.) “[b]etter relationships with stakeholders”. And whereas the latter might be relevant objectives with regard to corporate-level goals, they indirectly point towards what Gudo emphasizes a little bit more directly – the need for SOEs to be guided to a pathway, whereon they actually stand up for citizens’ interests. While Gudo analyzes how South African CSOs play the role of the ‘mediator’ respectively the ‘collective’ that stands up to give citizens’ needs and demand for justice a voice by legal means, especially in the fight against political corruption in South Africa, the WB’s toolkit raises awareness that “the legal framework [for SOEs] varies greatly across jurisdictions” worldwide and suggests that SOE legal frameworks need to be more strongly aligned with private sector legal frameworks. As both publications indicate, there may be a need for legal reforms to make sure that political interests and conflict do not stand in the way of service delivery and good corporate governance.
The WB toolkit more specifically suggests in this regard that “a separate legislation [may be] needed in order to change the status or ownership of SOEs”, while Gudo proposes the further adoption of a “dedicated SOE corporate governance code”, which could be enshrined within the Companies Act No. 71 2008 in South Africa, a country where corporates and SOEs are governed by the same law. As the WB lays out, in an attempt to push for the commercialization of SOEs, various countries adopted company legislation that also guides and legally binds SOEs. However, both countries’ attempts to the (partial) privatization of SOEs, and the ‘commercialization’ and ‘universalization’ of laws, have ended up creating larger gaps, wherein petty and grand corruption as well as political patronage have occurred. The fact that SOEs in South Africa can demand for certain exemptions in terms of the applicability of the Companies Act No. 71 2008 on them, which essentially means that they can deny some of their duties in respect of accountability, shows that a separate legislation for SOEs might be needed next to changes in the Companies Act No. 71 2008 being indispensable.
In this regard, the WB 2014 toolkit mentions the potential necessity of a “State Ownership Framework for SOEs”. As is specified in the latter context, ownership policies typically address a range of issues that include SOE operational criteria (i.e. with regard to ‘commercial sustainability’), responsibility criteria (i.e. of the SOE board and management), , and transparency and public disclosure criteria (i.e. with regard to ‘financial and social performance’). Whereas South Africa has established a voluntary code, The King IV Code, which, as Gudo points out, “is based on the idea that leadership starts with the person entrusted with governance and duties but, in addition, the governing body must act ethically”, it is only binding when combined with case law. Next to voluntary codes, the WB has specified that certain countries have adopted ‘comply-or-explain codes’ and ‘mandatory codes’ to guide SOE governance. While some have oriented themselves at the OECD’s 2015 Guidelines on Corporate Governance of State-Owned Enterprises (i.e. Estonia, Latvia, Egypt etc.), Gudo’s research might demonstrate that next to global good practices, legal frameworks need to be informed by in-depth analysis of how civil society actors (i.e. CSOs, citizens, small businesses etc.) utilize legal pathways to claim accountability.
The benefits of Gudo’s approach relate to its capacity to identify where civil society actors need to be more strongly protected. As Gudo argues, South Africa first of all needs more effective legal tools to deal with the protection of whistleblowers and journalists who work towards exposing political corruption within SOEs. Whereas this may not be the case in other countries, South Africa has a history of chasing away journalists through the National Key Points Act 1980, which may prevent them from collecting evidence of state capture. And even though enough evidence of state capture has actually been gathered in the last decades, nothing much is changing although the Zondo Commission has led an investigation against Zuma. As Gudo attempts to explain, “[s]tate capture can be solved when power is not centralized”, but in South Africa ‘centralization’ and ‘political patronage’ remain pressing issues that might go back to the Gupta family and corrupt and ineffective corporate governance practices for SOEs. A few further recommendations by the WB to combat accountability and performance issues of SOEs relate to effective monitoring efforts, the disclosure of performance-related data and enhancing SOE corporate governance by targeting internal operating mechanisms and capacities (i.e. by training different professionals, the management and the board to effectively fulfil their roles). Gudo reemphasizes the latter recommendation by stating that “political representation in SOEs should not outweigh merit”.
To sum up, some of Gudo’s points align with the WB’s recommendations from eight years ago despite the fact that time has passed. One may speculate, that latter may first and foremost be the case, because government accountability might be difficult to be achieved in two cases, when SOEs contribute a large positive or negative share to the economy (i.e. the debt burden of Eskom etc.) of a country and in the immediate aftermath of South Africa’s ‘democratization pathway’ from 1996. With Mandela’s having promulgated South Africa’s Constitution on 10th December 1996 and with the latter having been adopted on 4th February 1997, it might have been believed that future governments will hold their word when it comes to diversity, inclusion and non-discrimination, when, as a matter of fact, even the most dedicated government has to be held accountable. Gudo states that “NPOs exist due to market failure [and] are need-fillers where the market is not able to sufficiently provide goods or services required by the majority”. And while ‘market failure’ appears to be an innocent word, there is a lot of talk about ‘state failure’ nowadays in South Africa. Rather than seeing stricter regulations with regard to SOE governance as an obstacle, they should be regarded as a chance to enforce democratic accountability alongside market protection.
In the end, even the Development Bank of Southern Africa (DBSA) has denied Eskom another bailout despite that South Africa’s government announced in August 2022 that it will cover part of the company’s debt. And whereas Gudo does not address the economic aspects of ‘public official’, ‘state’ and ‘SOE management accountability’, there might arguably be a need to hold both individuals and the government accountable in different ways but with regard to the same incidents. Whereas Gudo’s suggestions point at the need for stricter punishments for government officials, it is unclear whether the latter would be enshrined in the Companies Act No. 71 2008 together with urgent changes (i.e. no exemptions for SOEs) and a separate passage with regard to the special character of SOEs respective responsibilities and duties or within criminal law, either in addition to the latter action or in accompaniment of a novel SOE act, which, as Gudo argues, should also promote principles on the establishment of SOEs so that accountability gaps (i.e. including individual political motivations) do not motivate the establishment of institutions that were commonly thought to serve the public good. Such a code could, as the researcher suggests, be based on the The King IV Code. As Gudo’s research has demonstrated in various ways, it is CSOs who have fought against political corruption and for citizens’ right to an equal and effective service delivery.
As the researcher has pointed out, CSOs have identified different legal tools and pathways to fulfil their role as a ‘watchdog’ over the country’s SOEs amid political corruption, even though some of them sadly still fulfil their role as an ‘alternative service deliverer’ to a greater extent. In this regard, Gudo has suggested equipping CSOs with legal knowledge and training through organizations such as the South African Human Right Commission (SAHR Commission) so that they can keep holding the government and SOEs accountable where the law does not. Emphasizing that the implementation of corporate governance related laws may be even more complicated than their adoption through the law, Gudo also underlines the need for forums through which CSOs can more immediately communicate about state capture, corruption, poor governance etc. Some of the organizations, whose efforts to hold SOEs legally accountable have been analyzed by Gudo, include Black SASH, Corruption Watch and Earthlife Africa. Representatives from these and other organizations gave to think that the most effective legal resources to date are: the Bill of Rights; the PAIA Act No.2 2000; the Promotion Of Administrative Justice Act No. 3 2000; the Companies Act No.71 2008; the Preventing and Combating Corruption Act No.12 2004; the Protected Disclosures Act No.26 2000; case law; and the judicial review.
As Gudo specifies, “[t]he judicial review process allows CSOs to challenge certain decisions taken by the government that are not in the public interest”. Similar to SOEs, the responsibilities of CSOs would also have to be rethought as a consequence of their integration in the fight against SOE corruption and for an effective corporate governance and public service delivery. In this regard, Gudo advises CSOs to “[publish] their reports on the NPO Directorate website”. And whereas this step serves to ensure CSO transparency, it could also lead to protecting CSOs who commit themselves to their ‘watchdog role’ under certain circumstances. Encouraging public disclosure of information from SOEs and from CSOs could build a good basis for the establishment of an external communication mechanism on public governance matters carried out through SOEs. ‘Depoliticizing’ the composure of SOE boards and management and ‘repoliticizing’ public participation through CSOs as mediators could also help with collecting information that may serve to inform attempts to economic compensation in grand corruption cases. Such cases, that is SOE corruption, could be dealt with either in the Zondo Commission or within another independently established tribunal to deal with a variety of ‘SOE corporate governance’-related issues rather than state capture alone. Whereas the Companies Tribunal can be consulted for a range of issues (i.e. ‘board consists of less than three directors’ etc.), a tribunal for SOE’s should deal with the exact challenges mentioned by Gudo, the WB and other researchers. Rather than focusing on punishments for public officials and other representatives alone, such a tribunal should deal with issues of ‘good governance’ to outsource some of the decision-making that happens within SOEs and allow CSOs to have a consultative status.
Centurion Plus
Are you a start-up or a SME with the goal to scale up between or in Africa and/or Germany? Then our team will happily assist you on the legal side! We are specialized both in supporting multicultural businesses in Germany, in supporting African businesses in Germany and in supporting businesses across various African jurisdictions. While our support starts with providing help on immigration and relocation matters, it does not stop there – taxes, tech, intellectual property…You heard us! Contact us today to find out more!
