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Board nomination in partly- privatized SOEs: Some lessons from the European Telecoms Industry

  • 4 Royal Mint Court, London EC3N 4HJ, United Kingdom

  • Tel: 44 20 7073 0448 | Fax: 44 20 7481 6801

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Ownership and Control of European Telecoms (2002)

What is a high-quality board

    • An independent, competent and engaged board, capable of exercising its strategic and monitoring functions
    • …requires a managed nomination process that :
      • achieves the right balance between competence and independence of directors
      • …which, in turn, drives their engagement and effectiveness
      • …and thus ensures the right balance between the monitoring and strategic functions of the board

The two key operational constraints of SOEs

  • Politicization :

    • Company goals are defined politically…
    • …and, where public institutions are weak, clientelism prevails
    • …While perceptions of politicization constitute obstacles to growth
  • Lack of commercial incentives:

    • Government is a weak governance principal
    • Managerial incentives are weak and perverse
    • ..and employees are often civil servants, in law or in fact

Average composition of the board of directors of European Telecoms

Constituency boards and shareholder nominated boards: Key problems (1)

  • In constituency boards, there is important outside voice but…:

    • Loyalties are divided.
    • Competence might not be the primary concern of the nominating party
    • ..while management might not trust the board, resulting in weak board information
  • A divided and low-competence board is a weak driver of strategy and corporate values.

  • …a function crucial in all boards,

    • Institutional investors with more than USD 5.3 trillion AUM require a specific strategy function
  • …but especially important for SOEs in competitive industries

    • Board as primary change agent to counter politicization
    • Board identifies and manages the overall risk environment and policies in an organization not used to dealing with risk

Constituency boards and shareholder nominated boards: Key problems (2)

  • In companies that follow “regular” but not managed AGM nomination procedures:

    • Boards are often politicized in a non-transparent way
    • …or are captured by management.
    • Formal independence requirements are weak protections in the presence of a dominant investor
  • Cumulative voting—a limited dose of a constituency board-- might be the answer, where minorities can play a constructive role

  • While minority representation will play a role where minorities have CG competences, a board- managed, shareholder- oriented nomination process, independent from both management and government, might be the answer everywhere else

Nominating committees in European Telecom boards

The SOE nomination process

  • Director nomination by governments should de designed to facilitate both independent judgment and competence in the board:

    • The Swedish and Finnish experience
    • The French agency and the PRC SASAC
  • The Corporate Governance and Nomination Committee should (inter alia):

    • Define and maintain a relevant competency profile for the board and keep control of job description for board vacancies;
    • Solicit candidates from key majority and minority shareholders
    • Screen and opines on the nomination of majority/minority/constituency candidates
    • Develop processes for nominating board’s own candidates
    • Develop consultation processes with key shareholders on board’s own nominations
    • Ensure that board competencies are enhanced through well-designed board induction process and relevant director training
    • Lead yearly board evaluation process
    • Lead individual director evaluation processes, at least whenever director terms come to an end.
    • Lead the development of a corporate governance statement and annual reviews

Key lessons from the European Telecoms experience and challenges for China

  • Some minority shareholder power is important but In the long run, constituency boards should be discouraged

    • How can the CSRC avoid the pitfalls of constituency boards while remaining the ultimate authority in board nominations?
  • …replaced by a shareholder- oriented nomination process

    • Is the restrictive view of independence (less than 1% of votes) compatible with shareholder orientation?
    • Should the PRC envisage cumulative voting, especially in the largest important state- controlled enterprises?
  • …managed by the board through an active corporate governance/nomination committee

    • Does the board of Chinese companies have enough authority to manage the nomination process?
  • State ownership agencies need to develop explicit rules that are the “first filter” of good board composition

    • How can the director nomination guidelines of PRC SASAC aimed at facilitating independence and competence of government appointees in listed companies?

Thank you

  • www.nestoradvisors.com

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