The woes of state-owned organisations are self-inflicted


State-Owned Enterprises (SOEs) are known to be entities whether incorporated or not under the Companies Act and whose shares are wholly held or controlled by the state. They are typically commercially-oriented entities, although some of them are required to perform specific public policy objectives. Special Purpose Vehicles (SPVs) sponsored by government, including ESLA Plc and Ghana Amalgamated Trust (GAT), are also classified as SOEs.

The 2020 report on State Ownership shows that government exposure to State Owned Enterprises (SOEs) stood at GH¢21.53bn receiving explicit and implicit support. Ultimately, as at the end of 2020, SOEs reported an aggregate net loss of about GH¢2.6bn, continuing the trend of unprofitability which was GH¢586.49m at the end of 2019. It is also on record that ten SOEs in the energy sector have made about GH¢9bn cumulative losses between the years 2018 to 2020. According to the 2020 Annual Public Debit Report (APDR) issued by the Ministry of Finance, repayment arrears to loans to SOEs was GH¢206.7m

The Finance Minister, Ken Ofori-Atta, has called for more urgent and collective work to address these losses. The Director-General of The State Interest and Governance Authority (SIGA) that has oversight responsibility over the SOEs is determined that SIGA will analyse extensively root causes for the underperformance of some of these entities; examine best international practices; benchmark performance against their local, regional and international peers; and make appropriate recommendations in line with the Authority’s mandate. The Authority, he said, will seek strategic interventions to address the worsening net losses, reduce the fiscal risk exposure to government, and improve on the profitability position of the entities to increase dividend payment to government.

The president of the Republic of Ghana, Nana Addo Dankwa Akufo-Addo, during the 2020 Policy and Governance Forum also said:

“We will reform the governance of state-owned enterprises and maintain strong oversight over their performance. Targets will be set for the board and management of each enterprise, and they will be monitored diligently. Good performance on the targets will attract rewards and poor performance will attract sanctions, which will be applied and announced publicly. Each state enterprise that government designates as commercially-oriented will be required to meet a specified minimum positive rate of return on assets annually.”

The resolve to find root causes of the SOEs woes is refreshing, but these woes are self-inflicted – by government, the legal governance framework that set them up, appointments of the Boards and Executives that run them, and the politicisation of their operations.

Why is it that the entities in which the state has minority interest – such as the African Reinsurance Corporation, AngloGold Ashanti Limited, Benso Oil Palm Plantation Limited, Newmont Ghana Gold and Newmont Mining Company – are able to consistently pay dividends to the state? The corporate governance structures are made to work, they employ and reward competence. The state has minority interest in GHACEM, and they paid dividends of GH¢7,301,000 and GH¢27,660,000 in 2019 and 2020 respectively to the state.

The woes of SOEs lie mainly with poor corporate governance practices. The ‘jobs for the boys’ appointments of Board members and staff; inadequate remuneration to attract quality Board members who appreciate the role of directors and can direct affairs of the business; and poor execution of performance management systems are the problem’s root causes. We also seem to be equating great technical ability to great leadership ability in the appointment of Chief Executive Officers (CEO) of these SOEs – forgetting that leadership, which is crucial, is a learnt ability. We need people who in their own right understand the interplay of areas of expertise such as finance, law, human resources and industry in making strategic decisions for the company.

The woes of SOEs are self-inflicted and mostly relate to Corporate Governance challenges. Let us look at some areas that need to be addressed.

  • Role of directors and their appointments

In an article captioned ‘Are your directors really the brain?’ by my company law lecturer, Ferdinand Adadzi – a Partner of AB & David, in the B&FT on February 9, 2022, he made certain statements which I wish to associate with as follows:

“Directors are supposed to be the brain and mind of a company. The directors are to direct the affairs or business of the company. Performing the function of directing the business of the company requires as a minimum that the persons have the required capacity to direct the particular business the company is engaged in.”

“A board of directors is a pivotal, if not the most important, organ in corporate governance.”

“Directors must in their own right be able to understand the interplay of these areas of expertise (finance, law and industry) in taking strategic decisions for the company.”

According to the Minister for Public Enterprises, a Code of Corporate Governance is being prepared by a technical team to provide additional direction and guidance to boards and management of specified entities to protect government’s interest in the Public Service Organisations and Specified Entities they manage.

How useful is a well-crafted Corporate Governance Code if the people who are supposed to be guided by it do not fit the role; do not understand or have the experience, knowledge and leadership skills needed to run the organisation? A fit for purpose board and management based on best practice without a Corporate Governance Code can direct a successful and profitable SOE. On the other hand, having a well-crafted Code with ‘jobs for the boys’ board and management will still not solve the problem we want to cure. It is fantastic to have a Corporate Governance Code, but how are the people taxed to protect government’s interest appointed? How are the board members and CEOs of SOEs appointed? What about the rest of staff? What is the mix of expertise among the Directors with respect to law, finance, human resource, information technology and specific industry the SOE is operating in?

We seem to be choosing a CEO who is fit for the job, but when it comes to the Board we do ‘job for the boys’, party loyalists, friends and family-reward appointments. A CEO that does not have a well-balanced and experienced Board will not be challenged and will fail. We keep witnessing CEOs being changed all the time when the problem’s root cause may be the Board. On the other hand, what will a competent Board Chairperson do with inexperienced members and CEO?

In practice, the first rule in appointing directors to SOEs is the person must belong to the ruling political party. Though this should not necessarily be the case, it is deemed normal and acceptable since no law is being broken. Even if he/she satisfies Rule 1, the person must then be one who will agree with the appointing Authority. Someone who they can control, a friend or relative. At least, we use an Industry-competent person – but no, we just distribute the party people and other ‘faithful’ across the institutions.

This results in a situation that Ferdinand refers to in his article as “having wrong persons unqualified to be appointed to the Boards of companies directing the business of the company”. The consequences, according to him, is the companies have underperformance and in some cases collapse. A case of the SOE’s woes being self-inflicted.

Equating great technical ability to great leadership ability

We seem to ignore administrative and leadership expertise in appointing people as Chief Executive Officers of the State Owned Enterprises or Other State Entities, as if those skills come naturally when you have technical expertise in that particular field of operation. We need a Chief Executive Officer for the Korle-Bu Teaching Hospital, and it is a medical doctor with no knowledge or experience in hospital administration. An Information Technology person need not necessarily head the National Communication Authority. Having technical ability may be necessary, but is not sufficient condition to lead an organisation.

Technical people do not necessarily make good administrators, leaders and managers in their field. They lack knowledge of how to put in the needed structures and systems to align with the strategy, motivate staff to create shared values and create the strategic fit between the organisation with the environment in which it operates, in order to achieve the envisaged vision, mission and strategic goals.

People with great technical ability without leadership skills and administrative sophistication become fixated in technical aspects of the work and what they think the solution is. They want to implement their technical view of issues and not allow divergent technical opinions from other experts working in the organisation. They resort to using logic and feelings in the non-technical aspects of the work with respect to procurement, human resource management, and finance – with the impression that once it is technically feasible it is acceptable. The result is an overly-autocratic power culture with a very effective grapevine that negatively affects the organisation.

Having said that, having both technical and leadership skills is an ideal condition; but the most critical skill is leadership. Great leaders can manage any organisation and appreciate quickly the job’s technicalities, but a great technical person may not necessarily be able to manage an organisation in that specific industry in which he/she possesses technical abilities but is without leadership ability.

The Cybersecurity Act, 2020 (Act 1038), for example, requires that the Director-General (DG) has expertise in Cybersecurity. The DG’s function is to implement decisions of the Board and be responsible for day to day administration and management of the Authority. It is a leadership role and there should not be any compelling need for the DG to have expertise in the technical aspects of cybersecurity specifically.

It is nice to have, but not necessary since the qualification needed in understanding and appreciating the issues of cyberspace and its related security issues are diverse and need not directly be linked to the word ‘cybersecurity’. A lot of areas in Information and Communication Technologies come together to address the issues of cybersecurity from administrative, technical and legal perspectives. Leadership expertise at that level is crucial, and an appreciation of cybersecurity is necessary but not a qualification or ‘expertise’. The woes of the SOEs are self-inflicted.

Board and CEO remuneration

The remuneration given to Board members is determined by the Ministry of Finance by categories which seriously cannot attract the sort of brains needed to make these SOEs profitable. The opportunity-cost of the time used to be on these Boards, for any person worth their salt, far outweighs the responsibility and risks of being Board Members under stringent requirements of any corporate governance code – and especially the Companies Act, 2019 (Act 992).

It is not a role for the faint-hearted who do not have the requisite experience and skillset necessary to direct affairs of the entity. If you know you are to be held personally liable for negligent actions and inactions, not forgetting any associated reputational and legal risk should the SOE be declared insolvent, you would not accept Board Membership for meagre remuneration.

As part of expenditure-cutting measures to ensure achievement of the fiscal deficit target of 7.4 percent of GDP for 2022, government approved a 30% reduction in salaries of all Cabinet Ministers and Heads of SOEs, effective April 2022 till the year ends.  Yes, government has the right to reduce salaries of Cabinet Ministers – but on what basis was those of Heads of the SOEs done?

Should this decision not be taken by the Boards of these institutions? Should this decision not be based on a performance contract or an appraisal system? Is government saying the Heads of the SOEs are philanthropist or should be working pro bono? Who, worth his/her salt, will accept this cut in salary when they are selling their expertise to the SOE and delivering a competent service that could be made available to any private sector institution? Is the government alluding that the Heads of these institutions are not worth their salt? Is it that Heads of the SOEs were jobless and unemployable people? Cutting the salaries of Heads of SOEs with a political fiat instead of an informed Board decision is in itself part of the SOEs’ woes.

Some people may have left good-paying jobs in the private sector to give their services to support government business, which includes being Heads of SOEs and other entities. Although they are prepared to sacrifice their relatively good-paying jobs, they are not charity and have a minimum threshold for which they are prepared to make their expertise available to benefit the whole country.

Yes, they are being paid with taxpayers’ money, but we forget that they also pay tax. The difference is they are prepared to put their energies into making their country a better place, rather than working for themselves or a private entrepreneur. Heading State Institutions undoubtedly comes with its own networking advantages and new learnings that adds to ones experience into the future; but it is not charity for which reductions in salary should be politically determined, even if they are making losses. It is the duty of the Board. If the SOE is making losses at a reducing rate which is in line with the strategic plan approved by the Board, that head is performing and there is no need for cutting salaries across board to affect all SOEs.

The human capacity needed to run a profitable SOE, like any other business, does not come cheap. Competent skill-sets are available to the labour market, public or private, so why should one sacrifice unnecessarily because they decides to sell his/her services to the public sector? The person also has children and bills to pay. The state should deal fairly with people, who should also give of their best. No favours are being done by any party.

There is nothing wrong with the Board and CEO of an SOE being remunerated well, as long as they are meeting and exceeding their performance targets. That should be their motivation to improve the entity’s fortunes. Public sector Boards should be able to attract good people who understand the risks involved, and be able to compete with the private sector for Board Directorships with respect to competence.

The challenge is Board appointments have also been added to the ‘jobs for the boys’ agenda after political parties get the mandate to govern; hence, the ‘boys’ accept anything and can be treated anyhow. After all, it is better than nothing. The woes of SOEs are self-inflicted.

The legal framework for appointments in practice

The crafting of the law, sector-specific law, which set up some of these entities – and most times execution of the law in practice – are themselves the beginning of the problem. The laws specify who must be on the Board and at times the skill set needed, which is the right thing to do. The challenge, however, is in the bid to have governmental control – or should I say ‘political control – the concentration of the law is more focused on control than directing a profitable, effective business or entity.

  • Article 195 of the 1992 Constitution

Article 195 (1) of the 1992 Constitution vests the appointment of persons to hold or to act in an office of public services in the president – who must act in accordance with advice from the governing council of the service concerned, and which must be given in consultation with the Public Services Commission. In practice, how is this followed when a new government is voted into office? Most often, with the governing council of the entity dissolved because of the provisions of Section 14(1) of the Presidential (Transition) Act, 2012 (Act 845); the CEO or Head of Institution is appointed, or as a better term ‘nominated for appointment’, since by my understanding of Article 195 (1) the governing council and Public Services Commission must be involved. The ‘appointed’ CEO takes office without a functioning Governing Council or Board, and that is where the issues begin.

If that person has no experience in governance but is just a party person, he/she starts using ‘efie nyansa’ with a political mindset and vindictiveness to run the organisation till the Board is put in place some months after. By that time the CEO – in the absence of the Board taking direct instructions from the sector Minister, another political figure – has caused enough havoc by polarising the institution through gossip and grapevine politics; and breached most of the corporate governance best practices, not forgetting financial administration and procurement practices.

Once the Board is appointed, they face the uphill task of dealing with a politically motivated CEO who also directly derives his/her power from the president. The conflict, power-play starts between the Board Chairperson and the CEO, with the situation getting worse if the CEO is close to the president and has direct communication to the Presidency.

The new Board that is later appointed will take office when there is a working relationship between the Sector Minister and the CEO, and certain decisions that flout corporate governance and financial administration rules have already been taken. This then creates a triangular conflict that worsens the entity’s fortunes. The CEO does not acknowledge his/her reporting line to the Board, but defers to the Sector Minister or the Presidency.

The solution for me lies in replicating Article 195 (3) of the 1992 Constitution for State Entities. Under Article 195 (3), the power to appoint persons to hold or act in an office in a body of higher education, research or professional training is vested in the council or governing body of the institution or body. This same arrangement or provision should be allowed for State Entities – especially SOEs. The president can continue to appoint the governing body, the Board, but the rest of officers including the CEO should be left with the Board.

Of course, the president in practice can, and in most cases does, influence the choice of persons; but the buck will legally stop with the Board, which can be held responsible. If the entity is suffering because of a bad Board, then the president can be held responsible. On the other hand, if officers of the entity are the problem then the Board can be held responsible. As it stands, when the entity is not performing we witness situations where the CEO or Head of the Institution is removed from office by the president – with the Board and Chairperson still in office.

Weird if you ask me, but understandable – since it is the president who appointed the CEO, so how can the Board be blamed?  The Board’s response is, “You, the president, appointed such an incompetent CEO, so how can you blame us?” On the other hand, the Board may be mostly party people or have been given positions of reward, so the CEO is sacrificed. Sacking the Board would affect too many party people. A typical self-inflicted problem created by the fundamental law of the land.

  • Crafting of Sector Specific Legislation

Certain entities are created by specific legislation that gives directions as to composition of the Board, with a mix of executive appointments by the president and institutional representations. Unfortunately, in crafting this legislation the Board is constituted in such a way that a change in government makes the Board ineffective and affects continuity in business. Though the Cybersecurity Authority is not a profit-making entity, I would like to use it as a classic example of a not-too-helpful governance structure created by the law that is most likely to make the Authority ineffective and prone to dysfunctional conflict.

The Cybersecurity Act, 2020 (Act 1038) establishes a Cybersecurity Authority to among others regulate cybersecurity activities and promote the security of computers and computer systems in the country – as well as advise government and public institutions on all matters related to cybersecurity in the country. The Authority has a thirteen-member Board made up of four ministers: that is the Communication, Interior, National Security and Defence Ministers. Also the president is mandated to nominate three other persons. In effect, seven of the Board members are from the Executive – and this excludes the Director-General. The quorum for Board meetings is seven, and decisions are of course by majority of members present.

With a quorum of seven members, the political appointees who are seven in number without the Director-General, can meet to take a decision that may be more politically motivated. Even when a full board is constituted, the seven political appointees, being in majority, will carry the day. This legal structure makes the board highly political and problematic. If it takes three months for a new Board to be constituted, should there be a change in government what happens to the country’s cybersecurity environment?

With the Board top-heavy with all these ministers, and the Supervising Minister as the Chairperson, I foresee a power struggle and conflict. The law gives the Supervising Minister power to issue policy directives that shall be complied with by the Board. It gets more practically complicated should the other member-ministers be of higher status, say Cabinet Minister, than the Chairperson.

The Supervising Minister can be said to be the mouthpiece of Government; and as Chairperson of the Authority’s Board, the ‘buck stops’ with the same person. Meanwhile, one of the Authority’s functions is to advise government on matters relating to cybersecurity.  Where is the independence of thought? How can the Authority assist the minister with technical knowledge in cybersecurity? In such a case, the law itself has created the governance problem. I do not think the Supervising Minister should chair the same Board that shall comply with policy directives from that same person. Self-inflicted recipe for disaster.

The Board composition should have seen a majority of institutional representatives by the industry players, with government having oversight through the Supervising Ministry. After all, the Act obliges the Board to comply with directives from the Supervising Minister.

Way forward/Conclusion

I would say the challenges being faced by most State Entities, and for that matter SOEs, are corporate governance-related and can easily be solved by the shareholder, the state, as long as there is political will. The only reason businesses that the state has minority interest in, such as GHACEM, are profitable and paying dividends to the state is the fact that government has little political influence in their corporate governance structure and systems. We should consider the following in addressing the woes of SOEs:

  • A Stakeholders’ Strategic Plan to Turnaround the SOEs

We need to put in place a plan developed by all stakeholders, not desk top, over a timeframe to turnaround these loss-making SOEs – with key result areas, key performance indicators, milestones and objectively verifiable indicators made available to public scrutiny.

  • Appointment and Composition of Board of Directors of State Entities

The legislations that deal with appointments and composition of the Board of Directors should have more non-executive directors separate from the shareholders and ruling government at any point in time. These non-executive directors should be institutional representatives and professionals who have a licence and reputation to protect: such as the Chartered Institute of Bankers, Chartered Institute of Accountants, Ghana Bar Association, Institute of Directors, etc.

Of course, these representations can still be manipulated by the Executive arm of government in appointing party loyalists; but the individuals have a licence and the reputation of a professional body to protect. Human behaviour is such that when ‘push comes to shove’, most persons likely to lose a hard-earned professional licence will either do the right thing or resign their post – even if that person has some affiliation toward the ruling party. After all, man has to survive should the party leave government. Why risk your practicing licence?

The institutional representation should be more than the ‘political’ appointees by government, in order to be able to form a quorum for business continuity should there be a change in government.

  • Pay Well to Attract the Right People

Having put in place a strategy to turn around the loss-making SOEs over a time period, we should institute a performance management and reward system to attract the needed human capacity. The Directors and CEOs required to turn around the loss-making SOEs are selling knowledge, skills and experience that’s available to either the private or public sector – and does not come cheap. That is, if we want the right people who in their own right understand the interplay between the areas of finance, law, industry and leadership to be able to take and implement strategic decisions for the company. As the saying goes, “if you pay peanuts, you get monkeys”.  Now, is it because we want to pay peanuts anyway, so we get the monkeys who end up doing monkey business? Or we want monkeys anyway, so we only have to pay peanuts.

I agree, it is a ‘chicken and egg’ situation. Do we get the right people, pay them well to turnaround these SOEs; or because the SOEs are loss-making, we say we do not have money to employ the right people so we continue with the ‘jobs for the boys’ to keep running them down and eventually end up with a self-fulfilling prophecy. SOE Boards should be well remunerated, based on the complexity and type of business or industry, the critical role that entity plays in the economy and expectations – but held responsible like any other private sector Board.

All said and done, the present problematic corporate governance quagmire of state entities plays well into the hands of political parties, and they simply thrive on it when they get into government. After all, they are not doing anything illegal but working within the law that allows the president to appoint the Board and all staff, with at times competence being a secondary issue. The woes of SOEs are indeed self-inflicted, and it will take a change in legislation – maybe in the fundamental law of the land – and collective will to resolve.

Like Ferdinand said: ““A board of directors is a pivotal, if not the most important, organ in corporate governance”. Are they to be the Appointing Authority when it comes to state entities?

The author holds a DBA in Leadership & Organisational Change and an LLB. He is a Chartered Banker, a Certified Management Consultant & Organisation Development Practitioner. (Contact: [email protected])

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