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Home arrow Economics arrow Boards of directors of state-owned enterprises : an overview of national practices.

Adding value

A properly constituted and managed board can “add value” by helping management make better decisions. The characteristics of a value-adding board are: 1) responsiveness to management's need for direction; 2) bringing skills and perspectives that management may be lacking; 3) encouraging the development and examination of a range of options, bearing in mind risks; 4) being objective; 5) encouraging and listening to in-house expertise; 6) looking forward to the future, and taking the long-term view; and 7) thinking strategically. Ultimately, adding value means developing more and better interaction with the executive management, and working in a structured manner with the ownership entity.

One of the most important ways in which boards can add value is to contribute to the strategic orientation of the company. For this, it needs to be adequately empowered by the ownership function to assume its strategic role. Although the ownership function can play a role in encouraging the strategic orientation of the board, it should not impose its views. If for example, the ownership function sets the tone of board discussions, the strategic role of the board may be subjugated (further discussed in Chapter 6 on board efficiency).

Good practice: The State should inform the board of its objectives and priorities through proper channels to ensure the board maximum autonomy and independence.

The State should inform the board of its objectives and priorities through proper channels. Depending on the SOE and country practices, in some cases this is an iterative process in which the SOE and the State, via the ownership function, respond to proposals and jointly develop the strategy. In other cases, high level outcomes or expectations are defined by government, usually the ownership function, and a strategy is developed by the board and management to achieve these outcomes. Regardless of the method, going through proper channels will raise transparency and accountability, and avoid compromising the board's fiduciary duties.

Worst-case examples in this respect arguably involve cases where directly appointed CEOs take instructions directly from political circles, circumventing the board of directors and leads to a significant weakening of corporate (and public) governance. Another case to be avoided, as much as possible, is the appointment of a small number of “directors for the State” who act as custodians of the government interest from within the boardroom. The relevant decisions need to be made by, or communicated to, the board of directors, acting as a unit.

The proper fulfilment of the role of the board vis-a-vis the ownership function and executive management is in practice closely linked with the process by which board members are nominated, the profiles of board members themselves, and board composition. Ensuring strong nomination frameworks will shield the board from political intervention. So too will a board that is comprised of persons who display adequate leadership and the right mix of skills and competencies to ensure strategic guidance. These issues are covered in Chapters 2 and 3, respectively.

 
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