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

Board composition: Constraints and guidelines

A central recommendation of the SOE Guidelines is that boards should be composed to exercise "independent and objective judgment". In most countries SOE boards are composed of a mix of civil servants, other individuals tasked with pursuing the public interest and "independent" directors. The trend, fuelled by a growing commercialisation of SOEs, is toward a greater reliance on independent board members - or persons with relevant commercial experience. Ensuring the recruitment of suitable board members can be based on formal eligibility rules, processes to advice or vet ministerial candidates for board appointment or actual or de facto nomination committees proposing candidates of the ultimate decision of ministers. Board composition can be further influenced by limitations on the number of board positions and/or affirmative action targeting gender and minority groups. Employee representation on boards generally follows private sector practices, but can differ for some SOEs (especially in the context of privatisation).

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ompanies [...] should seek directors who are committed to improving the system and who can push for the changes that may be required to enhance the company's competitiveness in international markets - they should be people of integrity who are willing to make a difference. Companies can determine whether a person may be suitable by looking at his or her track record and reputation in the business community” (OECD, 2008).

Board composition is evidently important to a board's functioning and its performance. SOE directors should have the right skills and experience to contribute effectively to deliberations and respond to the needs of the SOE. In principle, the best boards are those made up of the individuals who are capable of exercising the qualities of a “good director”. Concrete skills, such as technical knowledge and business experience are obviously important - even if some of them may arguably be learnt on the job. A good director also needs to possess more tacit qualities like interpersonal and communication skills in order to work in a team, as well as personal integrity. The board is a collegial body and therefore nominating qualified individual for board memberships is normally not sufficient; thought must also be given to the subsequent working of the board as an entity (OECD, 2010) (this is further discussed in Chapter 6). Accordingly, many countries have established minimum requirements for SOE board members which often require a mix of tangible and intangible skills/experiences.

Recognising that country practices vary, the SOE Guidelines do not spell out requirements as to board composition. They recommend that the boards of SOEs “should be composed so that they can exercise objective and independent judgement” (see below). The annotations to the Guidelines further posit that they should be “protected from undue and direct political interference”. General consensus among OECD economies is that SOE directors cannot be directly linked with the executive power (e.g. ministers and their close associates); however civil servants and employee representatives can serve on boards depending on the country tradition and legal requirements.

SOE Guidelines, Guideline VI.C on board composition

The boards of SOEs should be composed so that they can exercise objective and independent judgment. Good practice calls for the Chair to be separate from the CEO.

Most OECD countries have a mix of directors for the state and “independent” directors on the boards of SOEs. Some also have a legal requirement, or tradition, for employee representatives on the board of some or all SOEs. This is consistent with the annotations of the Guidelines which propose that a sufficient number of the non-executive SOE directors be recruited from the non-State (and preferably private) sector - especially where the SOEs concerned operate in a commercial environment. As country practices indicate, in most SOEs it is nowadays uncommon to have boards that are made up by a majority of public sector representatives.

Many governments, either through law, subordinate regulation or circulars from the ownership function, establish certain constraints exist on who is eligible for nomination as a director. Such rules or guidance may relate to the behavioral characteristics of the person in question (i.e. integrity, honesty); educational or professional qualifications; and any other demonstrated qualities that are valued on the board (i.e. team player). But they also may be related to specific guidelines or constraints concerning quotas for gender, diversity, and representation of employee, state or other stakeholders on the board. Constraints concerning board size are also important but are dealt with in Chapter 6 of this report on board efficiency.1

Defining guidelines for board composition is ensures that boards are objective and independent. Importantly, board “independence” should not be confused with “independent” directors. An independent and objective board is one that operates under a legal framework, which is subject to public governance and that is designed based on board profiles. Independent directors (subject to national definitions) are individuals who are not directly representing any particular stakeholder interest in the company, but who are sought to bring certain skills and competencies to the board. The precise meaning of “independent” in the latter context is usually spelt out in national legislation - or reliance on national corporate governance codes and not limited to SOEs.

Although various board composition requirements may exist in a number of countries, all directors, in principle, should have the same responsibilities and be required to act in the best interests of the owner and/or the SOE. The various representatives on the board, especially if required by law or mandated by quotas, should not be seen as competing factions representing different interests. The best interests of the State should be weighed with that of the company (and in accordance with the high level objectives set by the ownership entity) (OECD, 2008).

The remainder of this chapter examines country practices with regard to board composition. It focuses on the question of board objectivity and independence by exploring the issue of public versus “independent” representatives on the board. It also looks at country practices concerning

employee representatives on the board. The remaining sub-section then focuses on board nomination eligibility requirements, including qualification requirements, and quotas/objectives terms of board size and composition.

 
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