Wednesday, September 23, 2020

Of PEEPA directors and conflict of interest

The articles I wrote in the recent editions of The Sunday Standard have succeeded in attracting a good deal of public interest because of the importance given to PEEPA as a key player in the reconstruction of the national economy.
The result of PEEPA’s important work is that a number of different people have come up with different positions that basically reflect their special interests in PEEPA’s sphere of activity.

What we are seeing now and what I believe will be a permanent feature of this privatisation exercise, is a clash between two tendencies, each with its own different ideas about how best to handle the implementation exercise: the present ad hoc approach, on the one hand, and the legislative approach, on the other hand.

The ad hoc approach raises issues of executive accountability.

In contrast, the legislative approach raises issues of parliamentary accountability. In other words, the first approach places the ownership of the privatisation project in the hands of State bureaucrats whereas the second approach ensures that the public at large owns the privatisation project through parliamentarians elected directly by the population to represent them.

The question as to which will in the end prevail involves a struggle for power as key actors position themselves to benefit from the windfall likely to result from the disposal of public assets.

Unfortunately, it is hard to see that this apparent struggle for power between the particular interest and the common interest will be any different in other parastatals so the best way to deal with the issues raised is perhaps to look at parastatals and companies generally rather than just one public entity.

In PEEPA, therefore, we are confronted with the problem of the relations between the particular interest and the common interest.

It would seem that in light of the various political and social pressures at play, the ad hoc approach (which may possibly mean that Batswana are denied a direct channel through which to question, at once, certain official actions), might remain the rule for some time. It may be proper to distinguish the two approaches further by identifying the ad hoc approach, apparently favoured by PEEPA’s directors, as representing the particular interest, and the legislative approach, favoured by others, as representing the common interest.

No one can seriously question the Minister in exercising his powers of appointment, as he has done, legitimately, although concerns may be raised about some indiscretions such as reappointing the combatants. Many of us strongly believe in the current policy, which is to advertise board vacancies in public bodies. This assures objectivity and transparency. Indeed, this was the case when the PEEPA board was first put together. Or is there a preference for particular individuals, as the former Assistant Minister of Finance (and now CEDA board chair), Mr David Magang, once publicly declared? But this is a long detour from the topic.

The setting for this article is PEEPA. But the topic is about state owned companies and, for comparative reasons, private companies. Two words have been bandied about recently: fiduciary duty and corporate governance.

Their functionality involves the principal organs of these bodies and how powers and functions are distributed between them. The approach taken by the government to form parastatals is either to do so directly by an Act of Parliament, e.g. Botswana Housing Corporation, Public Procurement and Public Asset Disposal Board, etc; or to form a company under the Companies Act, e.g. PEEPA, CEDA, etc.

Some undertakings in which the government is a major stakeholder are private companies, e.g. DEBSWANA. In all these examples, we find that the model used for the organs and the primary division of powers and functions is basically the private company. Therefore, it does not come as a surprise that we find so many overlaps of constitution, powers, functions and responsibilities when it comes to the operations of such bodies.

I have said previously the two main organs in a company such as PEEPA, or CEDA, are the board and the general meeting. The board normally manages the business and the general meeting approves or ratifies decisions of the board and also formulates policy. The Minister appoints members of both organs and, without going into the technicalities, these organs also report to him. This means that both organs are, in the last instance, answerable to the government. And it should be so because although an investor, like the government, hires other people to manage his business, those in whom he has faith either due to their qualifications or experience or connections or an accident of birth, it is the investor who risks the greatest loss if the undertaking should collapse at the hands of the directors or managers. The law recognises this by making it possible for the investor to intervene in certain cases and use the powers given to directors in order to protect or salvage his property.

He can intervene through the shareholders in general meeting or directly if permitted by the company’s articles. Sometimes there is conflict between the directors and shareholders which results in deadlock, thus paralysing the company. In most cases involving public bodies the Minister can intervene legitimately to resolve the deadlock. To illustrate, the Minister has recently intervened in CEDA’s affairs. Before 2005, CEDA’s chief executive officer was appointed by the board in consultation with the government (or the Minister). Today the chief executive officer is appointed by the Minister on the advice of the board. This is not just a play of words. The change represents a drastic reduction of the board’s original powers in an organisation set up to promote citizen participation in the domestic economy.

I have said before that the situation where directors exercise their powers has a potential to create tension or conflict between them and the shareholders. It is not uncommon to find the board struggling to wrest control of the company from the shareholders, who usually represent the owners of the company. In this battle of wills, the shareholders will want to usurp the board’s powers. The directors, if left unchecked, will abuse their powers to the detriment of both the company and its shareholders. Examples are legion. The collapse of Enron in the US is one; another is the Bank of Credit and Commerce International, or BCCI, which was illegitimately used as a conduit to launder the proceeds of drug and arms trafficking.

Closer to home, WADE ADAMS was implicated when certain of its directors formed a subsidiary company to buy land illegally at Mogoditshane. The two have since become fugitives from justice. Numerous other examples will have readily come to the reader’s mind.

The directors will use corporate assets, information or opportunity for their own selfish benefit, notwithstanding that they have obligations that are fiduciary in nature.

A person who has such duties to discharge cannot be allowed to enter into an engagement in which he has or can have a personal interest conflicting or which may possibly conflict with the interests of those whom he is bound to protect. Practising lawyers and auditors are especially suspect to such conflict of interest. It is ill-advised to have such professionals also as directors, more especially of public bodies in Botswana’s small economy as often they have to act for clients who transact business with or in competition against the parastatals. This is obvious because the parastatal is entitled to the unbiased and independent judgment of its directors, unclouded by any personal interest. The company may of course waive this duty and often we find that the articles provide for its modification so that directors may do business with the company, but having first declared their interest. But the modification of this duty does cause a lot of concern and that is why our parliamentarians have introduced a number of statutory provisions to control the way directors transact business with

parastatals and other publicly owned companies.
This brings me to the last issue: corporate governance. Here some clarification of context would help to avoid misunderstanding. From the perspective of economics, corporate governance is about how to motivate efficient management of companies by the use of incentive mechanisms, e.g. service contracts, legislation, etc. This is not of concern to us. What we are looking at here is a system of basic controls by which companies are governed. Whether we are dealing with private companies or public companies or parastatals, we find that corporate governance in the context of law is about promoting corporate fairness, transparency and accountability. The controls involved are:

shareholders appoint directors to represent them; directors vote and adopt the majority decision; decisions are transparent so that shareholders and others can hold directors responsible; the company or parastatal adopts accounting standards to enable shareholders, investors, etc, to make informed decisions; and the company’s practices adhere to the law. All these factors define a system to be followed in the best interests of the company, its shareholders, investors, and as has been said by some, “and indeed for the reputation and standing of our nation and its economy.”

The issue of corporate governance will become even more important in the transition of Botswana’s welfare or quasi-socialist State to a market-oriented economy.

Some will perhaps argue from all this that public confidence in the board of PEEPA has been irreversibly undermined. They might feel that nothing short of root and branch reform will suffice to restore such confidence.

But I would not go so far.

Perhaps a newly reconstituted board would help place PEEPA back on track. Meanwhile, the power struggle rages on unabated!

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The Telegraph September 23

Digital edition of The Telegraph, September 23, 2020.