Maintaining board objectivity and independence
One of the unusual characteristics of SOE boards, as compared with private sector boards, is the tradition in most countries (and sometimes legal requirement) to have direct representatives of the owner (public sector) representatives on the board. The question of how public and private representatives are combined on the board is central. Also, unlike in many private companies, the division is not merely between independent directors and “the rest”. Figure 3.1 suggests a continuum of dependency on the ownership function including:
- • Direct representatives (in some jurisdiction termed “controllers”) from the ownership function.
- • Other directors for the state, who by law or statutes are tasked with representing the governmental interest. In some countries these can be picked from the private sector or academia and “tasked” to act in the interest of the state, but in most cases they are civil servants.
- • Directors that are picked at the discretion of the nominating minister or the ownership function, but not specifically tasked with representing the state. (In some countries these may include representatives of political communities.)
- • Independent directors, picked according to national or SOE specific definitions of “independent”.
Figure 3.1. A continuum of board “independence”
Some specific mechanisms may be set up in order to reinforce the independence of SOE boards. In many countries directors may, for example, have set terms (usually from three to five years) and can only be dismissed for a cause. In the most extreme cases, even the nomination of independent representatives will result from bargaining among ministries concerned, possibly involving specific committees or organs.
In line with the SOE Guidelines, many countries have made it obligatory for the SOEs to have independent directors on SOE boards. The presence of independent board members varies a lot from one country to the other, as well as the understanding about what is meant by independence. Ultimately, the degree of independence of SOE boards also depends partially on the size and makeup of the board (i.e. mix of private, state and employee representatives).
SOE Guidelines, Annotations to Guideline VI.C on objective, independent boards
The Annotations to the Guidelines, in contrast, highlight the benefits of sourcing non-executive directors from the private sector: “A central requirement to enhance the objectivity of SOE boards is to nominate a sufficient number of competent non-executive board members who are capable of independent judgment. These board members should have the relevant competence and experience and it is advisable that they be recruited from the private sector. It will help in making boards more business-oriented, particularly for SOEs that operate in competitive markets.”