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

Eligibility requirements Skill-based qualifications

Structured and skills -based processes are at the heart of successful board nomination. Across OECD economies, ownership functions have in place recruitment processes that establish minimum criteria and ensure the right mix of skills and talent. These may be largely informal, but there are some countries that have formalised the eligibility requirements in the form of guidelines, and others have included stipulations in company bylaws. Regardless of the level of formalisation, there is a growing tendency for countries to rely less on quantitative requirements (education and professional background), and more on qualitative characteristics to describe appropriate board members. An outcomes-oriented approach can help to seek board members that have the right balance between skills, qualifications and personality characteristics.

In fact, some countries largely eschew formal requirements, preferring instead to rely on a case-by-case approach tailored to the board vacancies that are to be filled. As a general rule, formal eligibility criteria are prevalent in the case of boards with a predominance of State representatives. More “professional” boards where the majority of members are independent and/or from the private sector, the general preference is for ad hoc application of eligibility criteria.

Good practice: Certain eligibility requirements may be needed, but good practice increasingly relies on tailored approaches to identify the right mix between skills, experience and personal characteristics.

Australia has pioneered processes to develop specific eligibility guidelines. These include nominating individuals with an appropriate balance of relevant skills (such as commerce, finance, accounting, law, marketing, workplace relations and management) and contribute to the achievement of the GBE's objectives. Similarly, using the good governance recommendations provided by the New Zealand Securities Commission (NZSC), the Crown Ownership Monitoring Unit (COMU) provided guidelines for the public sector corporate entities. The guidelines from New Zealand place greater emphasis on potential board members' personal qualities.

In Italy, the company bylaws of unlisted SOEs were recently modified to introduce respectability and professional requirements among the criteria for nominating board members. A limit was also introduced to the number of board positions (executive as well as non-executive) that any individual may hold at the same time (OECD, 2011).

For those mandating minimum requirements, the most common provisions related to a minimum level of educational qualification, usually a degree, but in some jurisdictions this extended to a PhD level qualification. For example, Israelhas adopted a prescriptive system for mandating minimum qualifications. It has established a system of mandatory qualifications for all boards that requires both high level academic qualifications and minimum five years senior experience. For large SOEs, the Government Companies Authority (GCA) has established additional proficiency and suitability requirements that are established for each board on a case by case basis. The GCA has prescribed for each company the specific expertise required of each director to ensure that the board has the appropriate mix of skills and experience. In a small number of cases, the requirements included the type of education required, such as law, accounting or economics. The other quantifiable measure related to threshold levels of experience, for instance in Greece the requirement is for five years of high-level or executive experience in the public or private sectors.

Those jurisdictions that do not mandate threshold education/experience requirements mostly rely instead on more holistic descriptions of the qualities needed to serve as a board member. The advantage of this approach is that it can more flexibly accommodate board members whose profile might not meet standard criteria but who, nevertheless through their business experience might bring valuable skills to the board. Sweden describes its process thus: “The starting point for all board nominations is the need of expertise. The composition of the board shall ensure that the board always has knowledge of the industry and other relevant expertise for the company. To be considered for election to the board, a high level of expertise is required in corporate governance, business operations, business development, industry knowledge, financial issues or other relevant areas. Furthermore, integrity and the ability to see to the company's best interests are required. The composition of the board shall also ensure that a balance is achieved between background, area of expertise, experience and gender.”

Good practice: For all other than direct ownership representatives, relevant commercial or financial expertise is viewed as essential qualifications.

Relevant commercial and financial expertise is normally viewed as essential. Candidates who have worked as executives in a large or listed company, or have previously served on private sector boards, are usually sought after. Attracting executives from private sector companies can in practice be quite a challenge, given the increasing time commitment that is required of board members. This has in some countries led to an increasing reliance on professional board members (who devote themselves full time to board duties), many of whom may be retired corporate executives. This development is understandable, and perhaps unavoidable, but it needs to be counterbalanced by a stepped-up effort to recruit directors with recent hands- on experience. It also bears mentioning that, depending on the objectives of some SOEs with non-commercial orientation, relevant public sector experience is still sought in some cases, and is sometimes preferred over commercial and financial expertise.

 
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