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Public Entities Corporate Governance Bill: What can be improved?

Editorial Team
03/08/2017 11:21 AM

While the government should be applauded for taking steps to address corporate governance issues in public entities through the Public Entities and Corporate Governance Bill, it should be noted that the major perennial problem with state entities has not been lack of legislation to deal with violations of standards, but lack of political will to implement the various remedial measures available in the current statutes. I am not sure how this bill will address the lack of political will in taking remedial action in state entities.

Before going deeper into the analysis of this Bill, I would like to note that violations of governance all over the world are not done by people who are not aware of what needs to be done. These violations are perpetrated by people who are very educated and knowledgeable about how businesses are run. At the core of most of the corporate governance problems in state enterprises is the selection of people of low integrity who easily “morally disengage” and find themselves involved in illegal activities.  The second challenge is that there is no mechanism in government to select people based on merit.  This problem affects all state entities.  Unless the above two problems are addressed, the Bill when it becomes law is likely to have very little impact on how state enterprises are run. I am also concerned that overall in setting remuneration for Board members and executives, the Bill references experience and qualification instead of referencing both the entity’s performance and the individual performance of Board members or executives.

A closer look at the Bill shows that nothing has changed from the current practices for running state entities except that there will be a penalty for not complying with the Act. While the issue of penalties is meant to be a deterrent, the government will have a tough time implementing the penalties considering the lack of political will and interference from the parent ministries.

You may be asking yourself what has not changed. What has not changed is that in the Bill, Ministers are still empowered to appoint Board members for state entities supervised by their ministries.  This has been the practice before. The only change is that they must avail the names of the proposed members for inspection by the Corporate Governance Unit.  Secondly, the Ministers still fixes fees for board members and any other allowances. This has been there before. Thirdly, the Board fixes salaries for Executives but the Ministers approve salaries for Executives and that has been the case before as Boards always sought approval from the Minister.  It’s very likely that the status quo will continue. Everything I have highlighted above has been the source of the current problems which means the problems of pay governance for example will not go away.  The problem of not appointing people on merit will not go away.  While the constitution says appointment to state entities should be based on merit, this was known all along but was never implemented. I do not see anything changing here.

The Bill introduces new areas that are likely to present new problems. The first problem is that the Bill allows the Board to fix exit packages for Executives in advance. This is an archaic practice that will be too costly for the government. The Labour Act is very clear that on exit an employee is entitled to two weeks’ salary for every year served (minimum) and why would the government want anything more than this to be fixed in advance.  This will leave room for Boards and appointed Executives to negotiate for exorbitant exit packages.  This practice is not there in the private sector because it’s costly and why would the government with its limited resources want to have this practice?

The Bill makes it difficult for Board members to resign. In the Bill, Board member resignations will be “probed” to check if they are not running away from governance problems.  The Bill also allows for the involvement of cabinet in checking on whether a dismissal of the Board member is justifiable (in case there is a dispute). Why not follow what most private sector organisations do when dismissing Board members.  You can imagine the whole cabinet discussing the dismissal of Board members for how many state entities.

While the introduction of regional balance in appointments of Executives sounds good on paper, it brings an unnecessary burden on the entities administratively and will bring accusations and counter accusations. Yes, the Constitution talks about bringing in regional balance in the appointment of people to public entities but the overriding factor should always be merit.

It is interesting that this Bill does not give the Corporate Governance Unit enough power to ensure compliance as the Ministers still hold most of the power in relation to the management of state entities. The Unit will be run by a Per Sec level person. How much power will this person have to enable them to supervise work done by Ministers?

One of the challenges is that the Bill sets up a Corporate Governance Unit in the President’s Office staffed by civil servants to offer advisory services regarding compliance with this Bill. Civil servants are already “underpaid” and naturally it will be difficult for them to supervise these public entries.  It was going to be better to set up this Unit as an independent Unit which will have Board members from both the private sector and public sector.  Such a Unit would need independent experts who are experienced and knowledgeable about corporate governance and human resources issues.

The other big question is who qualifies to be in the database of Board members. Is there an objective method for selecting these people? If so, why has it not been outlined in the Bill?  The Bill says “Persons will have to be appropriately qualified and experienced before they can be appointed to a Board, and Board members will have to have an appropriate diversity of skills”. This clause is so vague that it can mean a hundred things to a hundred different people.   Why not be explicit on the profile of an ideal Board member of public entities?

The Bill allows a Board member to be on the Board of a public entity and also on the Board of it subsidiary. This violates normal corporate governance practices.

The role of the Ministry in the management of public entities has not changed. This has been the major source of most governance problems in public entities especially interference by Ministry staff in the running of public entities.

Clause 14 intends to fix board fees for public entities.  The same factors that were being used in practice before are still being considered. The best practice is for Board fees to be paid per quarter instead of per sitting to reduce the level of abuse. The level of Board fees should always be based on affordability and sustainability.

Clause 20 gives the Minister power to cap Executive salaries.  This same clause seems to be giving the power to fixing remuneration to the Board but in the same clause the Minister is empowered to “formulate model conditions of service for such officers” and the Board will have to follow this model. When have Ministers become experts in fixing remuneration? This is the same corrupt system currently in operation and we are just putting it into the statutes. The Bill talks about capping remuneration of the CEO and Executives - this does not work and it has been tried and failed locally. The state entities will lose qualified staff into the private sector especially the second and third level Executives.  The overriding factor in fixing remuneration at whatever level should always be affordability and sustainability.

Clause 22 – gives a framework for strategic plans. This again will not work as by the time these are presented to the National Assembly they will have been overtaken by events. The problem is not that they do not have strategic plans; the problem is implementation which is even going to be made even more difficult by this new clause.

Clause 23 – Performance Contract – these will fail as the structure of governance proposed in here makes it complicated. There is just too much interference by line ministries in the running of state entities that will make it difficult to hold any CEO or Board member accountable. Government has been experimenting with this for a while now and none has worked.

Part VI that talks about governance, adds nothing new. This has been the standard practice. The reason why this will be difficult to implement is because of the interference by Ministers and ministry staff. This Bill makes the interference worse.  The requirement to have Board Charters and Codes of ethics for inspection is empty as it will not force a change in behavior.

Only an empowered independent entity to manage or supervise all state enterprises will bring the much needed sanity to state entities. This same entity will use best practice in corporate governance and pay governance for state entities.  The entity will then lead in the selection and appointment of Board members and Senior Executives of all state entities based on merit whose criteria should be made public for all Zimbabweans to participate.

Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant - Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. https://www.linkedin.com/in/memorynguwi/  Phone 481946-48/481950/2900276/2900966 or email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com

Editorial Team

This article was written by one of the consultants at IPC

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