Business Law

Learning the lesson of yesteryear

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The public sector has been governed by the Public Finance Management Act (PFMA) for more than two decades, which creates a framework for corporate governance that was revolutionary at the time. It was certainly far in advance of the governance framework for the private sector, which has only recently caught up with the promulgation of the new Companies Act, 2008.

“There’s no doubt that the PFMA provides a strong foundation for public sector accountability and that many directors on the boards of public entities are applying it effectively,” says Professor Linda de Beer, a member of the King Committee and a facilitator for director training programmes at the Institute of Directors in Southern Africa (IoDSA). 

“However, there are certain areas to which the boards of public entities need to pay more attention.”

One important area for consideration in the public sector seems to be a mindset overly focused on compliance. Too often, says De Beer, public entity boards believe they have achieved good corporate governance if there are no areas of non- compliance within their entities. 

“Compliance is obviously a very important element of governance, but not the only one. Firstly, good governance is about enhancing performance and achieving strategic goals, with a good corporate governance structure providing a framework for making sound and ethical decisions,” she says.

In the public sector, strategic goals ultimately translate into service delivery, and in the private sector to increased profits. Boards should not be so scared of non- compliance that they are unable to take calculated business risks and make bold decisions if warranted. De Beer reminds us that King III explicitly links these concepts in the important principle “the board should appreciate that strategy, risk, performance and sustainability are inseparable”.

Another area of difficulty often experienced in the public sector is board rotation that is not well planned. De Beer says that many public sector entities rotate too many board members at once, resulting in the loss of invaluable institutional knowledge. The end result is that the organisation is condemned to constant reformulations of its strategy. 

This is very frustrating for executives and reduces the effectiveness of service delivery. Ideally boards should be rotated in line with a long-term plan that has taken account of continuity and succession planning for directors, audit committee members and executives.

“Not more than a third of the board should be rotated at once, or the entity jeopardises its ability to develop, and most importantly to implement, a sustainable business strategy,” says De Beer.

De Beer says that a last area to highlight is not unique to the public sector, but is also very common in the private sector. “Boards are often reluctant to call unethical, negligent or non-performing executives to task. This is certainly neither an easy nor a popular task, but a good board steps in early enough to address issues to the benefit of the entity. 

In the same way, every director should have a zero tolerance attitude towards colleagues on the board (executive or non-executive) acting without authority or in their personal financial interest. Leadership from the board chairperson is vital in creating a high-performance and ethical board climate,” she concludes.

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