Board nomination in partly- privatized SOEs: Some lessons from the European Telecoms Industry

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Board nomination in partly- privatized SOEs Some
lessons from the European Telecoms Industry
Stilpon Nestor, Principal

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Ownership and Control of European Telecoms
(2002)
Company GovtOwner-ship Other Share-holders Total Free Float Golden Share
OTE 33.8 13.7 47.5 52.5 No
Deutsche Telekom 43.1 0.0 43.1 56.9 No
France Télécom 60.6 5.9 66.5 33.5 No
Portugal Telecom 20.9 5.2 26.1 73.9 Yes
Swisscom 65.5 0.0 65.5 34.5 No
Telefonica 9.1 0.0 9.1 90.9 Yes
Telecom Italia 3.0 55.0 61.0 39.0 Yes
Telia 70.6 12.8 83.4 16.6 No
KPN 34.7 0.0 34.7 65.3 Yes
TDC 41.6 7.8 49.4 50.6 No
BT Group 0.0 3.0 3.0 97.0 No
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What is a high-quality board

• An independent, competent and engaged board,
  capable of exercising its strategic and
  monitoring functions
• requires a managed nomination process that
• achieves the right balance between competence and
  independence of directors
• which, in turn, drives their engagement and
  effectiveness
• and thus ensures the right balance between the
  monitoring and strategic functions of the board

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The two key operational constraints of SOEs

• Politicization
• Company goals are defined politically
• and, where public institutions are weak,
  clientelism prevails
• While perceptions of politicization constitute
  obstacles to growth
• Lack of commercial incentives
• Government is a weak governance principal
• Managerial incentives are weak and perverse
• ..and employees are often civil servants, in law
  or in fact

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Average composition of the board of directors of
European Telecoms
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Constituency boards and shareholder nominated
boardsKey problems (1)

• In constituency boards, there is important
  outside voice but
• Loyalties are divided.
• Competence might not be the primary concern of
  the nominating party
• ..while management might not trust the board,
  resulting in weak board information
• A divided and low-competence board is a weak
  driver of strategy and corporate values.
• a function crucial in all boards,
• Institutional investors with more than USD 5.3
  trillion AUM require a specific strategy function
• but especially important for SOEs in competitive
  industries
• Board as primary change agent to counter
  politicization
• Board identifies and manages the overall risk
  environment and policies in an organization not
  used to dealing with risk

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Constituency boards and shareholder nominated
boardsKey problems (2)

• In companies that follow regular but not
  managed AGM nomination procedures
• Boards are often politicized in a non-transparent
  way
• or are captured by management.
• Formal independence requirements are weak
  protections in the presence of a dominant
  investor
• Cumulative votinga limited dose of a
  constituency board-- might be the answer, where
  minorities can play a constructive role
• While minority representation will play a role
  where minorities have CG competences, a board-
  managed, shareholder- oriented nomination
  process, independent from both management and
  government, might be the answer everywhere else

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Nominating committees in European Telecom boards
Company Executives Non-Executives Independents Participation of CEO Meetings Held
OTE n/a n/a n/a n/a n/a
Deutsche Telekom n/a n/a n/a n/a n/a
France Télécom n/a n/a n/a n/a n/a
Portugal Telecom n/a n/a n/a n/a n/a
Swisscom n/a n/a n/a n/a n/a
Telefonica 0 100 75 No 10
Telecom Italia n/a n/a n/a n/a n/a
Telia 0 20 0 n/i n/i
KPN 0 100 0 Yes 4
TDC n/a n/a n/a n/a n/a
BT Group 25 75 75 No n/i
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The SOE nomination process

• Director nomination by governments should de
  designed to facilitate both independent judgment
  and competence in the board
• The Swedish and Finnish experience
• The French agency and the PRC SASAC
• The Corporate Governance and Nomination Committee
  should (inter alia)
• Define and maintain a relevant competency profile
  for the board and keep control of job description
  for board vacancies
• Solicit candidates from key majority and
  minority shareholders
• Screen and opines on the nomination of
  majority/minority/constituency candidates
• Develop processes for nominating boards own
  candidates
• Develop consultation processes with key
  shareholders on boards own nominations
• Ensure that board competencies are enhanced
  through well-designed board induction process
  and relevant director training
• Lead yearly board evaluation process
• Lead individual director evaluation processes, at
  least whenever director terms come to an end.
• Lead the development of a corporate governance
  statement and annual reviews

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Key lessons from the European Telecoms experience
and challenges for China

• Some minority shareholder power is important but
  In the long run, constituency boards should be
  discouraged
• How can the CSRC avoid the pitfalls of
  constituency boards while remaining the ultimate
  authority in board nominations?
• replaced by a shareholder- oriented nomination
  process
• Is the restrictive view of independence (less
  than 1 of votes) compatible with shareholder
  orientation?
• Should the PRC envisage cumulative voting,
  especially in the largest important state-
  controlled enterprises?
• managed by the board through an active corporate
  governance/nomination committee
• Does the board of Chinese companies have enough
  authority to manage the nomination process?
• State ownership agencies need to develop explicit
  rules that are the first filter of good board
  composition
• How can the director nomination guidelines of PRC
  SASAC aimed at facilitating independence and
  competence of government appointees in listed
  companies?

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Thank you

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