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

Exercising the nomination and appointment powers

According to the SOE Guidelines one of the primary responsibilities of the State acting as an owner is to participate actively in the nomination process. However, practices differ radically across jurisdictions. The right of nomination is almost invariably exercised by the relevant minister, or through some form of inter-ministerial process. Ministerial/Executive involvement in the appointment process is usually a requirement of the legal structure. It has the advantage of providing political legitimacy to the appointment process. The exact format that the Minister/Executive carries out this function is largely dependent upon the ownership model adopted (i.e. centralised or decentralised), and depending on the level of the State's stake in the company.

Good practice: Ministerial or Executive powers normally have the ultimate responsibility for nominations. This brings legitimacy to the process, but it should not undermine the role of the ownership function.

There is a fairly clear distinction between those jurisdictions that have centralised ownership, for instance through an ownership agency, and those that do not. In the former, one minister usually is in charge of the ownership function, and in the case of highly commercial SOEs usually is in charge of board nominations. Where SOEs are subject to sector interest (and sector regulation) it is more likely for the nomination process to be co-ordinated across government. In some cases, wider vetting by a group of ministers, the Cabinet, or Head of state to confirm the nomination decision is required in a consensus-based nomination process. In other cases, there may be an actual carve-up of the right to make board nomination across the Cabinet.

The latter system operates in both Braziland Turkey, where the central minister nominates one member, with the rest nominated by the sector Minister. In Estonia, the sector minister is responsible for half of the appointments to the Board, with the remainder appointed by the Ministry of Finance. Involving different ministries in the appointment process may lead to more diverse Boards, with a variety of skills and experience. However, the key risk with having the power of appointment between ministries is that it can lead to representative Boards, i.e. where board members see their principal role as being to represent their appointing ministry and their respective political interests, rather than owing their duties to the company as a whole.

A more unusual form of centralisation of the ownership function is found in a few jurisdictions, where the power of nominations has been formally devolved to the ownership entity (Chile and Slovenia). However, recent experience indicates that this legal construct may in practice not be sufficient to shield the nomination process from political interventions, which - if confirmed by fact - could lead to a loss of transparency rather than a gain in board independence.

Where ownership is vested with individual ministries (which in countries with strongly corporatised SOE sectors applies mostly to companies with strong non-commercial orientations) the relevant ministers are usually solely responsible for nominations, though parts of general government responsible for public finance may sometimes retain the right to appoint a representative to the board. In the case of dual ownership models, line Ministries share the appointment powers with a central ministry (typically the Ministry of Finance). In actual practice, this may take either of the following forms: i) each Ministry is attributed the powers for nominating a certain number of directors; ii) each director has to be nominated by consensus between the involved ministries. Where consensus is called for, co-ordinating agencies (such as COMU of New Zealand - see below) may play a central role in the process.

Good practices suggest that ministerial decisions concerning nominations should be subject to some form of consensus by a wider group of ministers, the Cabinet or Head of State, regardless of the formal appointment process. One proponent of this is Sweden, which considers this to be a key feature of their system as it provides for a consistent and widely-supported approach to board appointments: “Each nomination for a state owned company is made in agreement with all four governing parties. A decision by the Government Offices, formally made by the ministry responsible for the governance of the company, and then confirms the nomination decision.”

Good practice: Where feasible, board appointments should be subject to co-ordination or consensus on a whole-of-government basis.

Where government is the sole shareholder, nomination and appointment process tends to be one in the same thing, since the government, as shareholder in most cases, will have sole rights to appoint the board (subject to any employee representatives on the board). Ultimately, the power of appointment rests with the Annual General Meeting (AGM) of shareholders. The actual voting of shares in this case is usually undertaken by the relevant entity having the ownership role (i.e. either the central ownership unit, or a sector Ministry, depending on the ownership model adopted) in a minority of cases by an independent body invested with the ownership function. In the case of 100% state ownership, there is a risk that AGMs become considered by the involved government officials as purely a “matter of form”. However, where the SOEs operate according to company law (including the filing of AGM minutes with company registries) this is an important source of transparency - including concerning board appointments.

Good practice: Board appointments, even in wholly-owned SOEs, should be entrusted to the annual general meeting of shareholders.

Ministerial involvement in the board nomination process, whilst politically necessary, does potentially weaken a key ownership role from the entity exercising the ownership function and, in doing so, could weaken the direct accountability of board members toward the ownership function. Partly for this reason, a large number of national administrations have put into place methods to reinforce the role of the ownership function in the Ministerial nomination process and to improve the overall transparency. This is considered in the below sub-section.

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