The minefield of appointing a CEO for a state-owned entity

Efforts to appoint a new Eskom CEO have shown how it can be a minefield of a process. This after Minister of Public Enterprises, Pravin Gordhan, rejected the person the Eskom board chose to replace André de Ruyter as CEO once again.

Gordhan rejected the candidate because the board was supposed to submit three names as stipulated by the minister in terms of Eskom’s Memorandum of Incorporation.

However, Professor Parmi Natesan, CEO of the Institute of Directors in South Africa (IoDSA), says the minister’s rejection raises complex governance issues regarding the appointment of senior management at state-owned enterprises (SOEs).

“Governance best practice is for the board to appoint the CEO so he or she is accountable to the board. The challenge is that SOEs have enabling legislation or founding documents which often stipulate government (effectively the shareholder) has the power to appoint senior management, as well as the board,” she says.

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Board must be fully involved

“King IV recognises this and suggests in the SOE supplement the board be fully involved in the appointment of the CEO and that both parties agree the CEO is accountable to the board, not the minister, as representative of the shareholder.”

She says if this approach is not followed, CEOs who do not have the confidence of the board may be appointed and these CEOs may see their reporting line leading directly to the minister rather than the board.

“The resulting blurred reporting lines make it difficult for boards and management to work constructively together.”

Natesan warns that the current state of affairs means the faith of both the board and the minister seems questionable.

“It could be construed that the board is not following the minister’s instructions, or the board is rebellious in asserting its preference for appointing the CEO it wants (in line with governance best practice).”

She says in the same way, the minister could be accused of having a hidden agenda, namely that the nomination did not meet with the approval of the political powers.

“The IoDSA has been steadfast in bringing this particular governance issue to the fore and we once again urge government and SOEs to follow King IV’s lead. However, in a perfect world, the appointment of the CEO should be the board’s prerogative. The board would then be able to hold the CEO properly to account and could in turn be held to account by the shareholder.”