The SOC Holding Company a Square Peg in a Round Hole

Public Sector and Regulatory

The National State Enterprises Bill, 2023 (“the SOC Bill”) has deservedly received the now much publicised criticism from corporate governance practitioners and other quarters.

The SOC Bill published in September 2023 seeks to establish what is to be known as the State Asset Management SOC Limited (“the SOC Holding Company”) which is envisaged to be a holding company wholly owned by the state.  The SOC Holding Company will be responsible for amongst others, the implementation of a phased succession of state enterprises, the restructuring and management of state-owned companies for developmental purposes.  In addition, it will ensure effective monitoring mechanisms of state-owned companies and the corporatisation of state enterprises that are currently not incorporated as companies in terms of the Companies Act No 71 of 2008 (“the Companies Act”). 

The most notable and convincing source of criticism for the SOC Bill is the proverbial case of putting a square peg in a round hole.  The primary intention of the SOC Holding Company seems to be that of it being the government’s arm of restructuring the public enterprise portfolio and following the well documented governance failures, the secondary objective appears to be reigning in on mis-governance of state-owned entities.  The fundamental flaw with the SOC Bill is that the drafters made a judgment error that for government to exercise its control over state owned companies, such control can only be achieved through an entity which is also registered as a company.  The establishment of this entity as a company is an oddity given that this super-entity is not intended to conduct commercial enterprise but rather to serve as an oversight body for the government’s business enterprises.  It deserves no debate that the government business enterprises in order to be competitive and gain credibility in the capital markets and the industry at large should be incorporated in the tried and test structure of a company.  The same does not hold for the oversight body being the envisaged SOC Holding Company. 

The misfit of a company’s structure on the oversight body, is evidenced by elementary corporate governance and company law flaws on the envisaged SOC Holding Company.  Primary to the corporate governance and company law flaws is that the SOC Bill provides that in as much as the SOC Holding Company will operate as a company, it will in essence be puppet-strung by the executive which is a cardinal sin of good corporate governance and our company law.  By way of example, the SOC Bill envisages concepts foreign to good corporate governance and company law to apply to the SOC Holding Company.

These concepts include the fact that the government executive can issue what is termed “shareholders instructions” to the SOC Holding Company, the introduction of administrators who will at a stroke of a pen take over the role of directors, and elaborate provisions on the ability of the executive to intervene in operations of the SOC Holding Company by amongst others commissioning investigations in typical government style in the event that the SOC Holding Company does not meet the expectations of the executive.  All interventionist provisions necessary as they may appear, are in direct conflict with the basic tenets of good corporate governance and company law.  It will be a wonder if any experienced director would be prepared to take directorship in the SOC Holding Company assuming all the company law director responsibilities in circumstances where the entity they are tasked to direct can be dictated to and directed from another layer of governance being the executive.

In view of what seems to be the primary objectives of the SOC Bill, the most appropriate vehicle to give effect to what government seeks to achieve should be an entity outside the confines of company law in the form of a sui generis agency whose sole source of authority and governance provisions will be its founding legislation without the need to contend with company law provisions which in the circumstances are respectfully unnecessary.

A good example of a bespoke agency that will be fit for purpose is the Botswana’s Public Enterprises Evaluation and Privatisation Agency (“the PEEPA”).  Like the envisaged the SOC Holding Company the PEEPA is the Botswana equivalent responsible for amongst others advising the government of Botswana on privatization, commercialization and divestiture of public enterprises and ministries.  The PEEPA further includes the implementation of cabinet decisions on privatization of public entities, reviewing of objectives of existing public enterprises objectives and determining the need for privatization or corporatization.  The PEEPA is also responsible for the performance monitoring of public entities, advising the government on the appointment of directors to serve on the public entities boards and monitoring their performance.  Lastly, the PEEPA also has the responsibility to develop corporate governance instruments including performance contracts, board nomination processes and other governance charters.

The government will do well to emulate our neighbours’ example and incorporate the envisaged holding company as a bespoke agency fit for purpose and flexible enough to meet the current requirements without boxing the entity in the cage of a company.

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