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

Identification and selection of board members

Although the legal responsibility for exercising the nomination power usually lies with a Minister, good practice dictates that independent bodies weigh in on the appointment process.1 The annotations to the SOE Guidelines highlight the role of independent bodies can have an impact on depoliticising board appointments, noting that “even though such commissions or public boards might have only recommendation powers, they could have a strong influence in practice on increasing the independence and professionalism of SOE boards.” The actual job of helping identify and select board members is a priority for the ownership function. The ownership function can help to address challenges include being transparent about any qualifications that may be required; developing guidelines on appointments; and pursuing a consistent approach across all comparable SOEs.

Good practice: Establishing a transparent and consistent method to identify applicants from a wider pool of talent will improve board composition and bring uniformity in the assessment process.

When comparing the practices in OECD and other countries, two basic distinctions offer themselves. First, one needs to consider what precise role is assigned to the ownership function to assist (or, as the case may be, check) Ministerial powers in the nomination process. Secondly, ownership functions may use different tools and methods in exercising such discretionary or advisory powers as each of them have. On the first of these issues, national practices can be summarised as follows:

  • Pre-declaration of formal qualification requirements. A relatively small number of countries have stipulated in law minimum formal qualifications that individuals must possess to be eligible for board nomination. Where such exist they are usually backed by some form of accreditation mechanism attached to the ownership function. In Israel, sector ministers and the Minister of Finance are usually responsible for initiating nominations, but the Government Companies Authority (GCA), nevertheless plays a central role in managing the process. Board appointments are subject to an approval of a special Appointments Examination Committee that confirms that the educational qualifications and further criteria prescribed by the Government Companies Law are met. Similarly, Portugal has recently passed legislation instituting a system of non-binding recommendations by a Committee on Recruitment and Selection for Public Administration.
  • Informal processes to vet or advice on ministerial appointees. In some countries, a vetting process occurs on a more informal basis. In Australia, the co-ordination agency GBPFAU plays an informal role in advising the Minister on possible board candidates. In the United Kingdom, advice and recommendations are submitted by the Shareholder Executive or sponsoring Department following an open competitive process of selection. All appointments are then made by the relevant Secretary of State based on these recommendations. The arguably most sophisticated model of advice, vetting and ministerial interaction is found in New Zealand. This example described in detail below.

Formal or informal nomination committees. Large SOEs - following a practice also used by a number of listed companies - sometimes have external nomination committees attached to their AGMs. These committees may contain both civil servants and private sector representatives and (in case of mixed ownership) they can be elected by to the AGM. An informal similar structure is found in Sweden, where the board nomination process relies on informal working groups. A working group is set up for each company analysing the current need of expertise on the basis of the company's operations, current situation and future challenges as well as the board's composition. Recruitment needs are then established, after which requirement profiles are produced and the work of recruitment starts with looking for suitable candidates. Preparatory work is then done on these candidates and the acceptance of the government needs to be obtained. As mentioned, the unique approach followed by Sweden is that government decisions are taken on a consensus-based approach to ensuring that the decision reflects a collective government decision.

Good practice: A specialised body in charge of advising or accrediting the nominations can bring further objectivity and transparency to the nomination process.

New Zealand operates a dual ownership model but with a centralised ownership support unit, the Crown Ownership Monitoring Unit (COMU). It has adopted a comprehensive approach to board appointments, from soliciting, vetting and recommending candidates through to conducting induction training after an appointment has been made (Figure 2.1). COMU manages this process by advising the bodies responsible for appointment (i.e. the Minister after approval by a Cabinet Appointments and Honours Committee, and confirmation by Cabinet). It is responsible for developing a long and short list of candidates (with options) for consideration by the minister; conducting due diligence on preferred candidates (including conflict of interest clearance, background checks); managing the cabinet approval process; and managing the formal appointment process.

"Tools" available to the ownership function

As mentioned, different ownership functions have varying degrees of influence on the board nomination processes. Within such discretion, they employ a wide variety of tools to identify potential board members. Some jurisdictions have adopted gatekeeper arrangements to provide a clearing house for applications, enabling applicants to be considered from a wide variety of sources but nevertheless subject to a uniform assessment process. Where a centralised ownership unit has been established, it is common for the unit to have responsibility for soliciting/receiving applications and then vetting these applications against any pre-determined qualification criteria.

Figure 2.1. New Zealand board appointment process

The methods employed usually aim to improve the processes used to ensure that the nominating body had access to a wide pool of available talent; facilitate open access by prospective applicants to the nomination process; bolster the role of the board in advising on potential nominees or on skills needs of the board; and reinforce the role of the ownership function in the process. The methods applied in different countries include:

  • Pools of directors. The establishment of a pre-qualification mechanism for SOE board members based on a formal evaluation of interested candidates. Such systems can be based on a mechanism for self-nomination by persons interested in serving on SOE boards. In some countries this has been formalised in the form of a “directors' pool” from which new external directors to SOEs are drawn. In France, this pool is managed by the ownership function; whereas in Malaysia pools of candidates are held managed by the private institute of directors.
  • Recruitment professionals. Reliance on head-hunters and other management recruitment consultants to identify suitable SOE directors among individuals who might not themselves have taken the initiative. The recruitment consultant's role is generally limited to the identification and pre-screening of candidates, as an adjunct to the usual nomination processes. For example in Chile, head-hunters are commonly used to fill Chairmen roles in large SOEs or those facing particular challenges.
  • Reliance of the incumbent board. Nominations of individual directors are usually based on a “needs analysis” aimed at identifying qualifications that may be in short supply in the incumbent board. The board itself, and in particular its Chair, can play an essential role in this process. This is discussed in Chapter 3.

Finland apparently stands out in regards of modernising its selection procedures. The ownership agency outsources the development and maintenance of a database of pre-qualified candidates to a recruitment consulting firm. The outsourced contract is subject to competitive tender every four years. This arrangement would appear to offer some advantages over maintaining an internal database: it provides access to the networks and resources of the recruiting firm, who have specialist skills in sourcing candidates for private sector boards, especially international candidates; it reduces the risk of political involvement in the selection process; and it provides for a cost-effective, transparent and consistent process for dealing with applications received from a wide variety of sources. A solidly structured process which is applied on a consistent basis has proved to be beneficial in avoiding a number of political sensitivities. (Box 2.1)

Box 2.1. Reliance on recruitment management consultants in Finland A bidding contest

A bidding contest is arranged to hire a suitable executive search company, on the basis of four year consultancy contracts, in order to identify additional candidates. The justification of going with executive search companies is their profound database with suitable profiles. The bidding contest is run in the same way as any small public procurement, invitations are sent to five or six consultants and the most appropriate offer is selected. The contract is based on a fixed annual fee.

Resource bank

The consultancy is responsible for developing a Resource Bank, with suitable candidates are added to a pool of candidates based on the criteria set by the Ownership Steering Department (e.g. professional distinction, etc.). New candidates are added to the pool on a regular basis. The Ownership Steering Department also reserves the right to propose candidates whereby they are included according to the same systematic scrutiny applied by candidates identified by the consultancy. To complete the selection process, personal interviews may be conducted.

Selection from the pool of candidates

The Ownership Steering Department, based on its portfolio of companies, identifies a list of positions for which new candidates are needed. It also defines the particular qualities required from candidates for each position. These requirements are communicated to the consultant. Following this meeting, the consultancy will present a short list of candidates for each position. A company-by-company sorting process occurs, until two or three candidates are identified for each position taking into account the background, qualities and the capabilities as well as potential conflicts of interest of each candidate. A decision is made on the short list by the Ownership Steering Department following a proposal made to the AGM of each company.

Source: Finnish authorities' response to OECD questionnaire.

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