Transcript In Search of Independence within State Owned Enterprises

Board Independence within State
Owned Enterprises
THE PREMIER CONFERENCE ON CORPORATE
GOVERNANCE: 2009
10 - 11 September 2009, Sandton Convention Centre
Table of Contents
1.
What is the challenge?
◦
2.
Separation of ownership and management control to increase efficiencies & lower agency costs
How do SOEs handle the challenge vs the Private Sector?
SOEs
◦
Complex ownership models
◦
Unclear performance expectations
Private Sector
◦
Market orientated Disciplines


3.
Insolvency & Takeovers
Empowered boards of directors
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
4.
5.
◦
Appointment / Dismissal of CEO
◦
Government Representatives on SOE boards
◦
Usurpation of Board powers by shareholder
◦
Poor SOE objectives/mandates
◦
Lack of Performance Assessments
How do we address these Impediments
◦
Nomination - Structured & Transparent nomination process
◦
Appointment of CEO – Board to lead not shareholder
◦
Government Representatives – Why should they be on the board?
◦
Usurpation of board powers – shareholder (mandate); board (strategy); CEO/SOE (implementation)
◦
Clear Objectives – Shareholder Compacts
◦
Performance Assessments – Board by Shareholder, CEO by board, Executive Management by CEO
Conclusion
2
What is the
Challenge?
3
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
Lack of clarity of
which role it is
playing at any time
•
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?)
4
How do SOEs handle the
challenge vs the Private
Sector?
5
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.
6
What should SOEs do
to rectify their
shortcomings?
7
Empowering SOE Boards:
Board 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.
8
What are the
Impediments to
Independence of SOE
Boards?
9
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

10
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
11
Government Representatives
on SOE Boards

Primary Duty to
company &
Secondary duty to
shareholders

Duty of
Confidentiality

Personal liability
for reckless
decisions

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
12
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
•
13
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?
14
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
15
How Do We Address
These Impediments?
16
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.
17
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 SOE’s 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 offset influence of the ‘super director’ on the main board
• Develop guidelines to help civil servants and executive directors on
boards to maintain independent judgement.
18
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
19
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
20
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?
21
THANK YOU
22