Home Political science Corporate Governance Corporate Governance in Estonia 2011.
In conducting this review particular attention was given to Guideline II.B, which calls for the government to “not be involved in the day-to-day management of SOEs and allow them full operational autonomy to achieve their defined objectives.”
Although interviews conducted and the information provided supported the idea of SOEs being generally well run, in a commercially-oriented manner, the law until recently contained certain provisions which appeared to be inconsistent with this Guideline. The previous law allowed ministers who performed ownership rights to give directions to supervisory board members who are appointed by him/her. Estonia’s self-review suggested that this was done only in exceptional cases where the SOE was acting inconsistently with broad government objectives. No recent cases of this power were recalled by Ministry officials. In case such directions were given by the minister to the supervisory board member s/he appointed, the board member was required to follow the instruction if it did not conflict with the interests of the SOE. The new States Assets Act abolishes this right of ministers to intervene in this manner. Instead all decisions from shareholders will be determined by the shareholders meeting.
One important example suggesting that boards are able to act independently of their shareholding ministry involves the case of AS Eesti Raudtee, the freight and railway maintenance SOE. After a bout of six years in private hands, when 66 per cent of the company was sold to Baltic Rail Services, it was bought back by the State in 2007. Estonian authorities explained that this decision was due to the private owners’ failure to fulfil their obligation regarding investments in infrastructure. In 2005-2006, while Eesti Raudtee was majority-owned by a private company, the Baltic Rail Services, the company sued the Government for lost income due to a tariff structure for the use of the rails established by the Ministry of Economic Affairs and Communications that the company claimed favoured Russian freight companies. The case was recently thrown out of court, but the supervisory board of the (now) fully nationalised company has decided to appeal the court’s decision, showing how seriously it takes its fiduciary obligations regarding the company’s interest. Although the Minister of Economic Affairs and Communications could have stopped the appeal with a direct intervention, he never instructed in writing the ministry’s representative on the board not to go ahead with this appeal. One of the possible reasons advanced for the minister not having used this option was that as the claim was substantial, halting the proceeding could have harmed the company financially. This case was still in court at the time of this writing.
Despite this particular positive example of board independence and commercial orientation, the review team found some indications of potential political influence on board activities, apparent in the nomination process and the composition of boards.
Guideline II.F.2 calls for “well-structured and transparent board nomination processes”. In Estonia, the Minister exercising ownership rights selects the supervisory board members who will represent the ministry on an SOE supervisory board. The law states two sets of requirements that anyone selected to represent the State on a supervisory board must fulfil. These are focused on knowledge and experience to perform their duties, and the duty of care they owe the State in the performance of their function. All people nominated to a board must submit in writing to the nominating Minister information of prior employment29 and confirmation that s/he is familiar with the requirements for the post, among others.
The State Assets Act also lists a set of criteria that preclude certain people from being the State representative on a supervisory board of an SOE. These criteria relate to conflicts of interest due to the person operating in the same area of activity as the SOE and a temporary restriction on people who have committed certain offences.
Beyond these basic requirements, the process followed for nominating board members could be clarified through adoption of a more formal and transparent nominating policy. The questionnaire response submitted to the review team by the Estonian authorities states that the process of nominating the supervisory board is not public. This lack of transparency is compounded by a somewhat unstructured process where “suitability appraisal is done by the ministries and no nomination committee is established”. This lack of scrutiny and transparency in the process of nomination may increase the potential for political considerations to take precedence over professional qualifications. However, the more recent supplementary submission from the Estonian authorities, while not having any formal status as government policy, spells out the nomination process followed in clearer detail, with increased emphasis on consideration of candidate professional qualifications.30
As the Guidelines state: “Competence and experience requirements should derive from an evaluation of the incumbent board and the demands that follows with the company’s long-term strategy. These evaluations should also take into consideration the role played by employee board representation when this is required by law or mutual agreements. To base nominations on such explicit competence requirements and evaluations will likely lead to more professional, accountable and business oriented boards.” (OECD, 2005).
Officials from the Ministry of Finance also pointed out that the current coalition government upon taking office had taken a decision to nominate people with business backgrounds to SOE boards, hence a large number of supervisory board members have professional business experience. However, according to Table 2.5 below, this process has also led to the appointment of at least one member of Parliament to six of Estonia’s 10 largest SOEs, and in some SOEs a majority of board members are considered to be “politicians,” that is, active members of political parties or local elected office.
Table 2.6. Composition of the supervisory boards of the ten largest SOE
by revenue 2009
While certain qualifying and disqualifying criteria are established in law as described above, it remains difficult to ascertain, without a formal policy in place, how different Ministries responsible for making their appointments will ensure on an ongoing basis that the board will have a good mix of the needed competencies and experience. It is worth noting that a proposal to bar parliamentarians from sitting on SOE supervisory boards is currently under Parliamentary consideration. The draft has passed its first reading and is currently being discussed in the Constitutional Committee of the Parliament. Nevertheless, it was decided to seek the opinion of the Chancellor of the Justice before the second reading. Some have argued that constitutional separation of powers should not allow for Parliamentarians to be precluded from serving on SOE boards, while on the other hand, some question whether Parliament members should be allowed to hold two state- remunerated positions simultaneously.
Nevertheless, many market observed suggested that currently SOEs are generally well managed. The CEOs from SOEs interviewed suggested that their current supervisory boards contained competent, experienced people. The nomination process, although not transparent or very structured, was described as a more informal process that could involve, for example, consultation with the Chamber of Commerce on possible business- oriented board members, or others on an ad hoc basis before announcing an appointment. A recurrent theme throughout the contact with market observers was that in a small country, a more formal approach is not as necessary because “everyone knows everyone”.
Although not expressed as a widespread view, a few market observers were more critical of the overall state oversight of SOEs, criticising in particular the state-owned company Eesti Energia and to a lesser extent Tallinn Ports for lacking a long-term, strategic approach to decision-making. It was suggested that lack of a consistent, long-term state policy regarding dividends makes infrastructure and investment planning for certain SOEs more difficult, as the government would regularly change its dividend policy depending on its need for cash to achieve budget balances. Pressures to change such policies have only increased during the crisis, when Estonia has posted large deficits in its accounts. The crisis, for instance, prompted accounting shifts from the government, as it retook control of 3 per cent of shares from Eesti Telecom that it had given to the Estonian Development fund (The State’s shares in Eesti Telekom have since been sold).
The 2007 NAO report described above cites a lack of transparency in the ministers’ activities in directing and supervising public undertakings. One of the main criticisms in this regard is that ministries communicated directly with the management board, as opposed to the supervisory board through the Minister. The NAO suggested that such instructions should be given to the supervisory board in writing. However, with the enactment of the State Assets Act, such direct instructions from the Minister are now prohibited and would need to be issued as part of the general shareholders’ meeting rather than on an ad hoc basis.
The NAO report also questioned the usefulness of the Ministry of Finance appointed board members in SOEs where this Ministry does not hold ownership rights, stating that the “sole responsibility for the prudent management of State companies belongs to the Minister engaged in the administration of the holding”. However, as noted in the landscape section of this report, the OECD Guidelines support the concept of having a central coordinating mechanism, in this case handled through the Ministry of Finance, to ensure consistent application of the government’s ownership policy. The Ministry of Finance therefore can play an important role in helping to ensure that board members possess complementary skills and experiences, and that they work for the good of the company as a whole rather than serving uniquely the interest of a specific shareholder. However, it would appear that further changes in the board appointment process are desirable to reinforce a balanced, professional and non-political board.
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