Institute of Directors South Africa (IoDSA) CEO Parmi Natesan said the problems Transnet is facing within its leadership hold lessons for corporates and other state-owned enterprises.
Natesan referred to concerns that Futuregrowth Asset Management recently raised about the inordinate time it is taking to fill six vacant positions on the Transnet board.
She said these concerns are valid and point to governance issues that all boards should seriously consider.
Futuregrowth investment analyst Lindani Vezi said Transnet is facing significant challenges in both governance and operations.
After the state capture era in 2018, a new board was appointed to address corruption allegations and improve stability. However, the board has experienced high turnover, with key positions remaining unfilled.
Furthermore, the terms of the remaining non-executive directors will expire in May 2024, posing a risk of losing continuity and institutional knowledge.
The reduced board size has also resulted in a skills shortage within important sub-committees, such as the Audit, Finance and Investment, and Risk Committees.
Transnet’s performance has deteriorated over the past years, with declining revenues, profitability, and cash flow, leading to a need for a bailout.
Transnet Freight and Rail face challenges such as locomotive shortages, cable theft, and inadequate infrastructure investment.
Vezi emphasised the urgency of resolving these issues to restore Transnet’s sustainability and contribute to economic recovery and growth.
“Futuregrowth’s analysis shows that the failure to fill six vacancies in a 12-person board has made it less able to tackle the company’s serious challenges – a matter of considerable concern given its pivotal role in our economy,” Natesan said.
“In the best of times, a board needs the right mix of skills to steer the organisation well, but in a tricky economic climate and facing significant challenges, the lack of board skills is existential.”
Natesan said the lack of skills on Transnet’s sparsely populated board might hinder the organisation’s ability to address its significant challenges.
Transnet’s sparsely populated board table means that important board committees like the audit, social, ethics, and risk committees could be missing critical skills.
“These committees fulfil vital roles in the organisation’s governance, particularly concerning its ability to rise to the challenges it faces,” she said.
“Organisations and board chairs must pay particular attention to the need for the board to have, in the words of King IV, ‘the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively’ (Principle 7),” Natesan says.
The impending expiration of the terms of the remaining non-executive directors in May 2024 further highlights the need for balancing continuity and renewal.
While the principle of rotating board members in a staggered fashion to ensure that skills are renewed and diversity is improved is a good strategy, it is clearly counterproductive for so many board members to leave at once, she said.
“We see this kind of mass reshuffling of boards, particularly in the public sector. The motivation behind rotation is good, but it needs to be handled intelligently to ensure that invaluable institutional memory is not lost,” she said.
“Organisations need to focus on striking a balance between continuity and renewal.”
According to Natesan, another important consideration is succession planning. If board members are to be rotated regularly, as best practice suggests, the organisation must ensure that individuals with the right skills – including professional directorial skills – are ready in the wings.
Therefore, succession planning needs to proceed in parallel with an ongoing skills audit to ensure that the board understands what skills it needs and that the individuals nominated for it have them.
“Nobody in South Africa, at least now, doubts the important role that governance and oversight play in ensuring organisational health and effectiveness,” said Natesan.
“The corollary – that the board needs to have the right mix of skills to fulfil this vital function – is equally true.”