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

Board nomination frameworks and practices

The nomination ofSOE directors is one of the primary responsibilities of the state as an active owner. According to ownership structures (centralised, widely dispersed or dual structures involving two ministries) this may remain with individual ministers or involve the entire cabinet and/or executive powers. In exercising these powers, ministers need to be mindful of the fact that they are custodians of the public interest rather than the owners of companies. The process should be rules-based and overseen by a governmental ownership function. Insofar as the ownership function has discretionary powers, it is well-advised to exercise them along similar lines and private sector good practices. This could include relying on external recruitment consultants, building databases with pools of directors and engaging the active involvement of the incumbent boards of directors. Where SOEs have private sector minority investors, processes are usually in place to safeguard the minority representation.

^According to the SOE Guidelines the starting point for effective SOE boards is to ensure a well-structured and transparent policy nomination framework. This can be ensured by enshrining formal processes that are transparent (and, to the greatest extent possible, predictable), shields the board from ad hoc political intervention, and at the same time assuring an adequate degree of flexibility to ensure the long term success of the board and company. Overseeing the board nomination process is among the primary responsibilities of the ownership function.

However, achieving this in practice is far from uncontroversial. Historically, the nomination of SOE boards has proved to be one of the more contentious policy challenges in SOE reform. Politicisation of the appointment process (e.g. for patronage or to protect special interests served by the SOE's operations) in some jurisdictions, remains an impediment to consistent and transparent process. The formal role of ownership entities has been undermined by different Ministries or interest groups inside and outside the companies.

Political interference in the nomination process has in the past led to inefficient outcomes in the long term, resulting in excessive turnover, a lack of desired profiles on the board, or even stagnation due to lack of fresh faces or innovative persons (Frederick, 2011). Political intervention in the nomination process can undermine competition and the legitimacy of the recruitment process.

SOE Guidelines, Guideline II.F on board nomination processes

According to the SOE Guidelines, one of the primary responsibilities of the State as an active owner is to:

II.F.2. Establishing well structured and transparent board nomination processes in fully or majority owned SOEs, and actively participating in the nomination of all SOEs' boards.

Like any private company owner, the State acting in its capacity as shareholder needs to form ideas about whom it wants on the board to act in its own and the company's best interest. However, as mentioned earlier, unlike the private sector Ministers are not the “owners” of SOEs. The challenge is to avoid excessive politicisation and to base decisions on clear rationale and

justification. This can be ensured by putting into place an authority that will formally exercises, oversee or audit the nomination process, and to warrant a formal, competitive and transparent recruitment process that avoids ad hoc interventions or deviations from the (formally) stated procedures. That said, there is probably no way to entirely shield the board form some degree of political overlay.

Good practice: A robust nomination framework is one that clearly specifies the nominating power; is transparent; and is consistent in its application.

The key elements of a robust nomination framework will include clearly specifying the person or body responsible for nominating board members; being transparent about any qualifications that may be required, or guidelines that exist on appointments; and pursuing a consistent approach across all SOEs. Ultimately countries which follow a robust nomination framework report that they have that had the best possible outcomes in terms of finding qualified people for the job.

Robustness and transparency do not necessarily dictate formality. The level of formality will vary according to the level of commercialisation and corporatisation in addition to the stake in ownership (i.e. whole or partial ownership). It will also depend on institutional factors linked to the jurisdiction, in particular as they relate to centralised or decentralised ownership structures. The remainder of this chapter explores these issues starting from country practices concerning who formally exercises the nomination power. It examines the role of the ownership function, and contestability in the nomination process. It examines the tools that are used by ownership functions to identify suitable candidates, and the roles of the board and shareholders in nomination processes.

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