Parastatals sink deeper into corporate governance disarray
Mbongeni Mguni | Tuesday June 27, 2023 09:05
The Botswana Accountancy Oversight Authority (BAOA), the statutory watchdog for corporate governance in the country, has its hands full with state-owned entities, where annual reviews show declining standards.
In its latest report, covering the 2022 calendar year, BAOA officials sound exasperated by the country’s state of corporate governance.
“Entities’ performance in corporate governance continues to decline, with the total number of findings increasing from 392 in 2021 to 462 in 2022.
“The analysis shows that most findings, constituting 41%, were identified under the State-Owned Entities category.
“SOEs did not comply with most areas of corporate governance, especially in areas of board composition and integrated reporting.”
The BAOA is the oversight body of the accounting and auditing profession in Botswana, regulating the activities of auditors and regulating the financial reporting and corporate governance of Public Interest Entities and the corporate sector. Public Interest Entities (PIE) are major firms listed on the Botswana Stock Exchange, licensed by the Non-Bank Financial Institutions Regulatory Authority or the Bank of Botswana, state-owned entities and others deemed significant in terms of their presence in the country.
Corporate governance within the SOEs, better known as parastatals, has been a thorn in the flesh of the BAOA over the years, a trend that belies the fact that the standards should be higher amongst such organisations as they are funded by and accountable to taxpayers.
At the last count, the country had 64 parastatals spread across the different ministries, with the majority of these loss-making and having been in such a state over many years. This is despite the fact that each year, government, allocates the majority of the P15 billion or so it spends under ‘grants and subventions’, on parastatals. The balance goes to local authorities.
Parastatals are key to service delivery in the country and a number of them are generally expected to run as going concerns and provide a return to government as the shareholder.
The parastatals are divided into commercial and non-commercial, meaning those expected to run on a profitable or ‘going concern’ basis and those that by the nature of their activities exclusively rely on support from government for sustenance.
Thus, the majority of parastatals such as the Botswana Geoscience Institute and the Botswana Examination Council are not focused on profits but on public service. However, the balance such as Air Botswana, the Botswana Power Corporation and others, are expected to provide government with a return on its annual investment.
By law, these commercial parastatals are expected to operate as ‘going-concerns’, generating enough revenue to cover their operations and ordinarily should not require additional capital from government.
Whether commercial or non-commercial, however, all the parastatals are expected to operate as professionally run entities abiding by the highest corporate governance standards.
Instead, according to the latest BAOA survey, which covered just 13 of the 64 parastatals, corporate governance failures were the order of the day in 2022, as they were in 2021 and the year before.
Some examples include:l Eight parastatals did not have effective monitoring of ethics
l In five parastatals, CEOs’ roles were not formalised and there were no performance reviews of the CEOs
l Nine parastatals had a membership of the boards which were not according to recommended best practice; the boards did not have a minimum of two executive directors
l In eight parastatals, evaluations of the board, its committees and individual directors were not performed
l Six of the parastatals did not have approved legal compliance frameworks
While the BAOA survey does not provide reasons for the poor performance by parastatals and others, the authority has previously noted the dilemma that SOEs find themselves in.
“The main reason is that state-owned entities are torn apart between good corporate governance and the requirement to comply with their statutes,” BAOA CEO, Duncan Majinda previously told a parliamentary committee.
“That is a serious conflict.
“Some are taking advantage of that and saying they will comply with their statutes and not good corporate governance.” One ‘parastatal’ that turned its corporate governance challenges around is the Bank of Botswana. The BAOA in 2021 blasted the central bank for having the CEO or governor as also the chairperson of the bank’s board. At the time, Majinda said the situation was one that ‘breaks the back’ of corporate governance. However, the issue was an example of the conflict between good governance and complying with the statute, as the central bank’s dilemma was guided by Section 9 of the Bank of Botswana Act, which stated that the chairperson of the central bank’s board shall be the governor.
Since then, however, the Bank of Botswana Act has been amended to clarify its priorities and improve governance structures.
“There are detailed functions of the board in the act, clear powers of the governor and now also the act separates the role of the governor from that of board chairperson,” BoB governor, Moses Pelaelo told Mmegi last year after Parliament passed the amendments.
“The board now has to be chaired by an independent director and it was important to say how the board deals with monetary policy.”
The BAOA’s review for 2022 shows that most other parastatals remained steeped in corporate governance non-compliance.
One major trigger overlooked by the BAOA is the role played by politics in corporate governance amongst parastatals.
Prominent corporate executive, Sheila Khama, previously wrote that in SOEs, political interference can paralyse a well-structured, suitably composed, professionally competent, committed, and ethical board.
“The directors can be reduced to a mere rubber stamp board,” Khama said in 2021, in a chapter of a planned book release.
“Yet, it is only through empowered individuals able to exercise free will that boards of directors can discharge their duties effectively.
“However, in cases of SOEs, a common dynamic between the government nominee and shareholder is usually one of professional dependency, which does not bode well for independence.”
She continues: “Board effectiveness requires that the process of appointing and/or nominating directors to boards of SOEs and any company with state equity be non-partisan.
“The least effective method is one that centralises power around a political appointee, such as a minister of Cabinet.
“Such discretionary powers breed corruption and cronyism.”