Board Independence within State Owned Enterprises

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Board Independence within State Owned Enterprises

• THE PREMIER CONFERENCE ON CORPORATE GOVERNANCE
  200910 - 11 September 2009, Sandton Convention
  Centre

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Table of Contents

• 1. What is the challenge?
• Separation of ownership and management control to
  increase efficiencies lower agency costs
• 2. How do SOEs handle the challenge vs the
  Private Sector?
• SOEs
• Complex ownership models
• Unclear performance expectations
• Private Sector
• Market orientated Disciplines
• Insolvency Takeovers
• Empowered boards of directors
• 3. What should SOEs do to rectify their
  shortcomings?
• Empower their boards (Board Independence)
• 3(a) What are the Impediments to board
  Independence?
• Nomination of Directors
• Appointment / Dismissal of CEO
• Government Representatives on SOE boards
• Usurpation of Board powers by shareholder
• Poor SOE objectives/mandates
• Lack of Performance Assessments

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What is the Challenge?
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The Governance Challenge

• The separation of ownership and management
  control to increase efficiencies lower agency
  costs is as old as the corporate structure itself
• Private Sector shareholders elect directors who
  in turn appoint managers
• Public Sector - Government as an Owner
• Shareholder concerned with return on investment
• Policymaker concerned with service delivery
• Regulator concerned with industry practice and
  interests of consumers
• Complex Model of State Ownership
• Multiplicity of Shareholder Representatives with
  Competing Objectives
• The Executive (Cabinet), Executive Authority,
  Line Department, Policy Department, NT, Regulator
• The Setting measuring of performance indicators
  of SOEs
• No clear articulation of performance expectations
  from relevant Government department (do
  shareholder compacts add value?)

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How do SOEs handle the challenge vs the Private
Sector?
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Mechanism for Monitoring Management Conduct

• Private Sector
• The market for corporate control
• Insolvency Takeover
• Public Sector
• SOEs insulated from market forces due to implicit
  Government guarantee leading to complacency
  within SOE boards
• The Board of Directors
• The board is a mechanism to monitor and oversee
  management conduct to ensure alignment with
  shareholders interest
• To achieve this the board should be empowered,
  properly mandated and have the appropriate
  structures.

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What should SOEs do to rectify their shortcomings?
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Empowering SOE BoardsBoard Structure
Independence

• The central prerequisite in empowering SOE boards
  is to structure them in a way that they can
  effectively exercise objective independent
  judgement (OECD Guidelines)
• Independence is the ability to make impartial
  decisions without fear or favour. (King III)
• Independence of judgment is an important
  contribution of a director to the board requiring
  that the aspect be taken into consideration in
  the structuring of the board
• Independent director - is a non-executive
  director who has not been employed by the SOE,
  does not represent and/or is not affiliated with
  the shareholder or any other major stakeholder,
  has no business dealings or contracts with the
  SOE

Independent Board comprises of a majority of
independent directors who have the ability to
exercise independent judgement.
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What are the Impediments to Independence of SOE
Boards?
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1. Nomination processes to SOE Boards

• Strong political input and appointment of
  politically affiliated persons at the expense of
  professionalism
• There is lack of transparency
• Lack of defined processes and criteria of
  selection
• Lack of proper due diligence to determine whether
  the director is fit proper
• Board positions are offered as rewards for
  political patronage

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2. Appointment and dismissal of the Chief
Executive

• In most SOEs appointment Dismissal of CEO and
  other key executives are the prerogative of the
  Minister Cabinet (power reserved to shareholder
  through founding legislation of SOEs)
• The power to hire and fire the CEO is a key board
  competence a prerequisite to board
  effectiveness.
• It is therefore contradictory to charge the board
  with responsibility for SOE performance with no
  power to hire and fire executive management

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Government Representatives on SOE Boards

• The appointment of Super Directors on the board
  influence pursuit of political policy at the
  expense of interests of the SOE
• They exert direct and undue political
  interference on the board
• Senior government officials on the board upset
  board dynamics
• They Lack the incentive to attend and participate
  in board meetings as they are not remunerated

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Usurpation of Board Powers by Shareholder

• The shareholder sets and drives the strategy of
  the SOE
• The Shareholder exercises oversight and monitors
  management
• The shareholder appoints dismisses the CEO
• The Shareholder approves Financial major
  Capital expenditure projects of the SOE
• With management dealing with the day to day
  activities of the SOE

• The role of the board is severely constrained
• There is little accountability on the part of
  management to the board board discussions are a
  formality
• Limited power by board to police and prevent
  abuses by management

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Poor clarification of objectives of the SOE by
the shareholder

• Affords managers discretion to run the SOE in
  their own interests and
• Allows abuse of discretion by Government to
  meddle in the affairs of the SOE for political
  gain

The question that resurfaces is are
shareholder compacts being utilised to their full
potential?
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No Performance assessment of the Board by
Shareholders

• Shareholder activism (who is monitoring the
  monitor?)
• Ineffective board self-assessment
• Ineffective or no individual director assessment
  not linked to performance incentives or
  director rotation.
• No evaluation of the board by the shareholder or
  evaluation conducted solely from a policy
  perspective
• Assessment of super directors?

• E.g. Turkey body in charge of auditing SOEs
  also evaluates the boards of the SOEs

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How Do We Address These Impediments?
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Addressing SOE Governance Challenges

• Nomination Process implement structured
  nomination process that includes appraisals of
  board members which will ensure that the ultimate
  selection criteria is competency based.
• Appointment of CEO power to appoint and dismiss
  the CEO and senior management is a key function
  of the board not the shareholder.

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Addressing SOE Governance Challenges

• Appointing Shareholder Representatives
• Limit appointment of shareholder representatives
• Independent boards require a sufficient number of
  independent directors free of conflict of
  interest who should predominantly be drawn from
  the private sector to make SOEs more business
  orientated.
• Directors selected should have relevant
  competency and experience to the SOEs specific
  policy objectives
• Explicit prohibition of senior members of
  Government or political parties from sitting on
  SOE boards.
• Appointing specialised board committees with a
  majority of independent non-executive directors
  with specialised skills can off-set influence of
  the super director on the main board
• Develop guidelines to help civil servants and
  executive directors on boards to maintain
  independent judgement.

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Addressing SOE Governance Challenges

• Delineation of roles and responsibilities
• Shareholder should define the mandate of the
  SOE, the board should define, review guide
  corporate strategy to achieve the mandate and
  the CEO should implement the strategy.
• A clear delineation of roles responsibilities
• Poor clarification of objectives of the SOE by
  the shareholder
• Objectives should be clearly defined in
  performance agreements/shareholder compacts
• If SOE board members have special duties beyond
  their private sector counterparts, they should be
  transparent and clearly defined

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Addressing SOE Governance Challenges

• Performance assessment of the Board by
  Shareholders
• Enforcement and proper monitoring of shareholder
  compacts corporate plans.
• Proper scrutiny of annual reports

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Conclusion

• Is there a place for shareholder representatives
  on SOE boards?
• Should the power to appoint and dismiss the CEO
  continue to be a shareholder prerogative?
• Should we consider the OECD model and appoint
  central ownership agencies?

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THANK YOU