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The legal and regulatory framework for SOEs

The legal architecture which underpins the activities of SOEs and foundations in Estonia and their corporate governance is based on three main pillars: the Commercial Code, which applies to private companies and SOEs; the State Assets Act, which lays out SOE and foundation rights and duties; and the Foundation Act, which focuses on foundations’ activities. There is moreover a statutory corporation called the State Forest Management Centre, which is a profit-making State agency, for which a separate law was elaborated. This separate law follows the principles established for private legal entities. The governing bodies of the Centre are also the council (supervisory board) and the management board. The members of the supervisory board are nominated by the

Government according to the principles laid down in the Forest Act. The Forest Management Center started its activities the 1st of January 1999. According to Estonian submissions, the objective was the separation of state responsibilities of forestry supervision and the management of state forests. The form of for-profit state agency was chosen, “to utilise the best characteristics of an enterprise” and at the same time retain “direct ownership and control of state forests”. The Forest Management Center’s objectives are prescribed by the Forest Act and specified in its statutes. This has resulted, according to Estonian officials “in a specific organisational structure and separated accounting so that every activity can be followed separately”.

SOE management boards are appointed similarly to private legal entities by the supervisory board. The tasks of these governing bodies are practically the same as in the case of private legal entities. Furthermore, disclosure requirements are the same as for private legal entities.

The Estonian State exercises its ownership rights through nine ministries. The State Forest Management Centre also has separate ownership rights. The three ministries maintaining ownership rights over the most companies are: the Ministry of Economic Affairs and Communications overseeing 21 SOEs; the Ministry of Environment which holds ownership rights over five SOEs; and the Ministry of Finance with direct ownership over three SOEs, along with authority to designate nominees for half the board members on all other SOE boards that are fully owned by the State. The Government of the Republic Act bars certain high government officials from serving on supervisory/management boards (these are ministers, assistant ministers, secretary generals and deputy secretary generals). However, appointment of members of Parliament and other active political party officials is permitted and is not uncommon. The Parliament is currently discussing a draft law which would ban members of the Parliament from serving on SOE supervisory boards. Ministers carry out suitability appraisals of supervisory board members they appoint without any requirements for public scrutiny of this process. They are legally guided in their selection by certain disqualifying criteria prohibiting appointment of members with conflicts of interest, a criminal record, or a Ministerial or other high-level position within the government that might present risks of undue political influence. But apart from a requirement that candidates submit information on their qualifications to the Minister, there are no formal requirements in the nomination process aimed at promoting board composition with an appropriate mix of complementary experience and qualifications.

It was suggested by many people interviewed by the review team that due to Estonia’s small size, “everyone knows everyone”, and that Estonians tend to prefer informal processes rather than formal mechanisms. However, the question of whether formal mechanisms may be necessary for board appointment processes to counteract the tendency towards politically-driven appointments to some SOE boards is taken up in greater detail in the boards section of this report.

Regarding the state ownership functions, ministries are obliged to set operational and financial objectives for each SOE, and report to the Ministry of Finance on these year on year. This forms the basis of the Ministry of Finance’s annual consolidated report, in which among other issues the State’s ownership policy is stated (although this is not done with the same level of detail every year). This consolidated annual report is then presented to Government. Companies in which the state possesses an interest are required within four months of the end of the financial year to present to the Ministry of Finance and State

Audit Office an audited and approved annual report. The Ministry that administers the state’s stocks or shares in a company is required to also present to the Ministry of Finance a yearly report of the administration of the state’s holdings.

The State has no golden shares conferring extra voting rights in SOEs. On the contrary, super-majority voting rules in two SOEs, AS Levira (State ownership stands at 51 per cent) and AS Eesti Metsataim (the State owns 60 per cent), require a 2/3 majority for certain decisions, effectively curtailing the state’s influence.

The governance regulation of SOEs stems primarily from the Commercial Code. In addition, the State Assets Act dictates the procedures for the participation of the State in SOEs, foundations and non-profit associations as stock owner, shareholder, founder or member and certain elements about the role of supervisors and ownership rights.

The interviews conducted conveyed a general sense of a commercially-oriented culture within SOEs. This has been reinforced by a government policy to appoint a significant number of businessmen to SOE boards. However, the National Audit Office (NAO) issued a critical report in 2007, regarding an assessment made of owner supervision in public undertakings conducted in 2005-2006 (during the time of a previous Government). The report referred to scandals associated with a couple of SOEs and highlighted some issues of concern regarding the running of SOEs. Some of the main findings were:

  • • There exists no single, agreed holding (ownership) policy.
  • • Ministers’ activities in directing and supervising SOEs are not transparent.
  • • The role of members of the board appointed by the Ministry of Finance is not clear (from the NAO’s perspective, the Ministry of Finance’s role should have been limited to finance and accounting issues, whereas the MoF considered that its board appointees should have a broad role similar to all other board members).
  • • Ministers’ opportunities in supervising subsidiaries of SOEs are limited.
  • • The requirement of establishing an audit committee is not justified.

This report proved controversial, as the Ministry of Finance disagreed with the NAO on a number of key points, while the Ministry of Economic Affairs and Communications and the Ministry of Agriculture concurred with the NAO findings. Some of these issues are discussed in greater detail below, in Section 4.1 on “Exercising ownership rights over SOEs".

The State Assets Act, enacted on 11 November 2009, initiated a number of important improvements concerning the state’s ownership role:

  • • SOEs will have to offer their products and services at prices that ensure a reasonable profit.
  • • It provides more details describing the objectives of the state participating in SOEs as well as the rights and duties of performers of the ownership rights.
  • • Under the previous law, the Ministers who held ownership rights had the right to give directions to supervisory board members who were appointed by him/her. In the 2009 State Assets Act, the right of ministers to give such directions has been abolished. All shareholders’ decisions and directions are determined by the shareholders meeting.
  • • According to the Commercial Code, all shareholders who have the same type of shares have the same rights. There was only one exception, which was that the State had the right to receive the minutes of board meetings of SOEs where the state had control.

Private shareholders of those SOEs did not have this right. However, the 2009 Act modified this clause so that other shareholders may also request this information.

  • • SOEs where the State has control are required to submit their quarterly reports to the Ministry of Finance. It will now be mandatory to publish these reports on SOEs’ public websites.
  • • The Government has maintained its position on the need for at least large SOEs to have audit committees. However, under the Auditing Act, smaller SOEs no longer have this obligation.14
  • • All SOEs are now required to report on how they are addressing the recommendations of Estonia’s “comply or explain” corporate governance code.
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