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The use of independent directors

As already mentioned, in SOEs as well as in private companies the trend is clearly toward a greater reliance on independent directors - reflecting, among other things, the stronger corporatisation of SOEs in a number of countries. In some jurisdictions, large and/or commercially operating SOEs are even requested to follow the best practice as set up by country codes, laws or regulation regarding the corporate governance of listed companies. This is the case in the United Kingdom, where the Combined Code on Corporate Governance is used as a benchmark for SOEs. This Combined Code requires a majority of independent directors on boards of large companies.

Good practice: Independent directors should be independent from management, government and business relationships. Specific safeguards should be established to verify that nominees comply with requirements.

“Independent” is taken to imply independence both from the ownership, the management and from business relationships with the SOE (as defined by company law). In Scandinavian countries as well as the Austria, Germany, Netherlands and New Zealand, most SOE board members (apart from employee or stakeholder representatives) come from the private sector and are categorised as independent directors. These countries appear to define independence more strictly than average. They also follow the SOE Guidelines in that the role of Chair of the board is separate from the CEO. The board is tasked with appointing the CEO, although responsible Ministers are, as a rule, consulted as part of the process.

Australia and Norway arguably go further in requiring that independent directors from the private sector not only do not have any business relations with the SOE but that they are also not engaged in competing business. In Greece, independent board members should not be an executive or the Chair of the board, have business or other professional relationship with the company, and not be a first or second relation of or be married to an executive member of the board, a senior executive, or a shareholder owning a majority stake.

Somewhat beyond the scope of this report, in some countries the listing of minority stakes of SOEs in the stock markets has served as a “backdoor” to making boards more independent. The companies and securities laws of most countries establish a required minimum number of independent directors. An example of the latter is Brazil where only listed SOEs are required to have independent board members. At least 20% of the board members have to be independent if an SOE is listed in the “Novo Mercado” or “Nivel 2” segments of the Brazilian Stock Exchange Market.

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