Conference on ‘Governance and Board Effectiveness in...
Transcript of Conference on ‘Governance and Board Effectiveness in...
Conference on ‘Governance and Board Effectiveness in Public
Sector Enterprises’ April11, 2012
State Ownership Steering- The Finland Case Study
By:
Olli V. Virtanen Virtanen Associates Oy
Finland Independent since 1917
Small, homogeneous, multi-party democracy
Consensus society
World rankings Least Failed States (Fund For Peace 2011) 1
Best Countries in the World (Newsweek 2010) 1
World Happiness Index (UN 2012) 2
Least Corrupt Countries (Transparency Int. 2011) 2
PISA (student rankings, OECD 2011) 3
Most Competitive Countries (Global Economic Forum) 4
GDP per capita USD 50.090 13
Background in Finland After the WW2 state involved in heavy industries
Forest industry, metal and engineering, mining, fertilisers, tele…
SOEs accounted for about 20% of GDP (now 5-7%)
Companies poorly run, heavily in debt, state budget financed, and helped with periodical devaluations
Wake-up in the 1980s
Government statement on profitability in 1982
Concern over balance sheet and governance
Development phase (late 80s, early 90s)
Politicians recognised and approved development
Clean-up on Board of Directors
Abolishment of Supervisory Boards
Strengthening of the balance sheet
Stock market listings (SOEs)
No wholesale privatisations
Gradual expansion of ownership base
International capital markets
Last restrictions on foreign ownership abolished in -93
Corporate structure
Annual General Meeting
Shareholders
Board of Directors
Management
Auditors
Internal
audit
Comparison of Governance Models
Shareholders’
meeting
ONE-TIER
MODEL
TWO-TIER
MODEL
NORDIC MODEL
Ownership
level
Strategic
level
Operational
level
Supervisory Board
Management
Board
Board
Shareholders’
meeting
Shareholders’
meeting
Chair
CEO
Board
Chair
CEO
SOE - developments Division into three groups of SOE’s
Creation of Solidium, the holding company, 2008
Holding company, 100% owned by State
State minority stakes in listed companies
Total market value of state holdings on stock market € 22bn, about 14% of Helsinki stock exchange
Investor
interest
Strategic interest
Companies with
Strategic
importance
Companies with
Special
assignment
s
CATEGORIES OF STATE
HOLDINGS
Key principles of state ownership steering No separate state ownership code
Principles of ownership in Government Resolution
Separation of regulatory and ownership functions
In listed companies no state priviligies
Commercial companies run on commercial basis Efficiency and profitability
No distortaion of competitive market
State support measures equal to all
In all companies professional non-executive board members No politicians, maximum one civil servant
Structure of state ownership steering
PARLIAMENT
OPPOSITION
MINISTRIES MINISTRY OF
DEVELOPMENT
AID
PRIME
MINISTER’S
OFFICE
OWNERSHIP
STEERING DEPT.
GOVERNMENT
MINISTER IN CHARGE
126 74
Responsibilities of the Ownership Dept. Source: Ownership Department
Located in the Prime Minister's Office, but not under the Prime Minister
Directly accountable to the Minister responsible for Ownership Steering
Ownership strategy, analyses and monitoring, legal matters and communications
Independent organisation enables sufficient ability to react and exercise criticism
State role in SOEs
OWNERSHIP STEERING
OWNERSHIP
STEERING
DEPARTMENT
SOE
BOARD
CS
1
CS
2
CS
2
APPOINTED
MEMBER
CHAIR
Chinese wall
Premises and decision making Source: Ownership department
Essential legislation, corporate governance, government resolution and statement by the Cabinet Committee
Parliament sets shareholding limits, allocates budget resources and approves incorporation arrangements
Decisions on sales and acquisitions and on the overall governing principles are made in government plenary sessions
The Minister responsible for Ownership Steering exercises the right of action and is accountable to the Government and Parliament
Companies operating on market terms are under the Ownership Steering Department in the Prime Minister's Office
Lessons learned Pragmatism
Take your time
Motivate population (voters)
Focus on governance
Define categories for different interests
Find best people
Remember national interests
Olli V. Virtanen Virtanen Associates Oy
Hiidenkuja 6 B 4 02750 Espoo
Finland
Tel. +358-500-600462 [email protected]
www.virtanenassociates.com
Role Pakistan State Owned Policy Reforms
By:
Dr. Shamshad Akhtar
Pakistan: SOE Sector Privatization has helped scaled down the size and scale of SOE
sector
SBP data suggests: there are currently about 220 SOEs and perhaps now contribute 10% of GDP
About 140 or so are federal entities
23 of these SOEs are listed on KSE and constitute about one third of market capitalization include 7 FIs, 8 energy related entities and large companies such as PIA and PNSC
State’s presence remains overwhelmingly large in infrastructure sector 23 electricity and gas companies
17 transport and communication entities
15 financial institutions incl. insurance sector
38 manufacturing enterprises
38 support services entitites
2 mining and 2 agriculture enterprises
4/16/2012 19
Assessment of SOEs Sector is a complex endeavor –practices and trends are disturbing
The Government does not have consolidated data or central management information system which could offer a comprehensive perspective on operational and financial performance.
Ownership and oversight dispersed and fragmented being with Sector Ministries who do not have a transparent policy framework or reporting on SOEs under their domain
Quality of oversight varies as the Ministries lack capacities and understanding of the principles of governing state enterprises
Limited recognition of need for safeguarding the public assets and enhancing their market valuation
Pervasive State interference in SOE affairs and appointments, over-employment and skill mismatches
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Fiscal burden unsustainable Losses of SOEs have grown in recent years and according to some
estimates could be in the range of 1.5% of GDP or so. For e.g
Power sector is riddled with inter-enterprise arrears, tariff subsidies, rising cost of oil, and transmission losses and most of all IPP payments. The circular debt liabilities recently reached close to Rs391 billion – to raise liquidity for settling these liabilities Government floated T-bills/PIBs and is now obligated to assume this debt as well as the interest liabilities of Rs44.5 billion. Aside from continuous build up of these obligations the power entities have large receivables whose non payment generates additional complications.
PIA cumulative losses are estimated to be Rs111 billion over and above this the Government has offered to PIAC long term financing for working capital, guaranteed its borrowing and pays financial charges on selected debt securities.
4/16/2012 21
State Owned Enterprise Reforms Privatization of SOEs on agenda
The Council of Common Interest had endorsed privatization of 65 SOEs,
the Cabinet Committee for Privatization considered 23 cases including the generating and distributing companies, Pak Railways and insurance companies etc.
Progress stalled because of the political and economic uncertainty and concerns with the valuation of companies in current state.
Current focus is on developing and restructuring plans are being developed for railways, and PIAC etc.
Power Sector recovery plan: Genco Holding Company has been set up and has a private sector led Board, the four Gencos CEOs being appointed and Boards will include independent members , and PEPCO abolished and Other power related entities board transformation to follow. Circular debt issue only partially resolved but a complicated case
Restructuring plans for other SOEs under preparation incl. PIAC/Pak Railways
Good initiatives but
pace of implementation too slow,
Sequencing needs more reflection and efforts are fragmented
Sector Ministries not fully aligned with the mandate
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Strengthening Corporate Governance most crucial – reinforce few areas
Appointment of CEOs, Board and its composition.
Best way to insulate the process of appointment of CEOs and Board member from politics is to set up an independent Commission with high powered professionals to select
appoint Board members based on fit and proper criteria and a roaster of professional candidate.
CEO ought to be appointed by the Board based on defined fit and proper criteria including scrutiny of conflict of interest provisions and based on an open and competitive process and Board should ensure due process for misconduct.
The Board should include broad based and diverse skills including industry specialist, financial and human resource experts etc.
If the Government is sole or controlling owner, it is undoubtedly in a unique position to nominate and elect the board but there is often tendency to appoint excessive government representatives. Even if the government opts to nominate BOD it should perform effective due diligence in identifying, nominating and electing board members.
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Role and responsibility of Board.
The key is for the government and directors to understand that the SOE Board is accountable to shareholder and wider stakeholders and is responsible for SOE performance
Board and shareholders should have a clear understanding of the SOE Board roles and responsibility
SOE Board, like private companies, have to be involved in the Mission and Vision, strategy and oversight of the company, while delegating management to CEO
Good to have a recognition of that SOE Boards capacities need strengthening and Board has to have an understanding of the public role and functions SOEs
Directors need to develop a clear understanding of the risks and liabilities company faces and ensure risk mitigation strategies are applied to safeguard public assets and resources.
4/16/2012 24
Separation of the role of Chairman and CEOs This is quite common in Europe with German and Dutch regulators
requiring this split
In the United Kingdom, over 80% of large companies have an independent chairman, and
In US this proportion has steadily grown from a low of 16% to about 40% or so.
There is also a rise in the share of companies with independent Chairman.
Cleaving the CEO and chairman role makes senses as CEO is responsible for company management and cannot realistically be expected to self monitor and evaluate own role and performance.
Chairperson is responsible for driving the strategy and policy and for managing dynamic interaction among the Board and carrying greater compliance and reporting requirements.
Success depends on how effectively the role of Chairman and CEOs is defined and segregated.
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Formation of Committees.
The guidelines recommend rightly for SOEs to constitute range of Board committees:
audit,
risk,
human resource,
procurement etc.
These Committees to be chaired by Board members competent in this areas and be offer a clear mandate and accountability.
4/16/2012 26
Corporate Governance of SOEs The draft Public Sector Companies (Corporate Governance) Regulations
a first step but a necessary precondition for setting right the principles of internal governance at firm level.
The code for SOEs is similar to the Code of Corporate Governance applicable to the listed entities
23 SOEs who are publicly listed and are likely to be following most of the Requirements of the Code.
The proposed code offers to SOEs guidance consistent with the OECD Guidelines for Corporate Governance of State Owned Enterprises, 2005
Add to Code elucidations to offer more deeper guidance on SOEs
SOEs need to be held to higher standards of accountability than private companies as they are public assets and use tax payer money
State ownership does not automatically guarantee State control over the mission and activities of an SOE.
Recognition that the goals of SOEs are typically a more complex mixture of social, political, and commercial objectives.
there has to be simultaneous resolution of a host of external factors that adversely impact governance
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Fixing internal governance of companies is necessary but not sufficient for setting the governance right
Nurture a sound external governance framework
Consider pros and cons of decentralized model of ownership and oversight of Pakistan and centralize ownership model
Ensure competitive neutrality and contestability of markets in which SOEs operate – use the power of competition to introduce better results
Develop an objective and clear SOE policy
Convert SOEs to a proper legal structure
Develop a policy for public service obligations
Develop role and capacities of sector regulators
Develop a Watch dog and offer them tools such as corporate scorecard for ensuring transparency and compliance with the Code
4/16/2012 28
No one size fit model for centralized ownership model
A survey of OECD and study of the World Bank suggests a growing trend among its members to move from decentralized to a centralized ownership model. Under the centralized ownership model, the shareholding of SOEs have been transferred to a government holding company or in a designated Ministry or a coordinating body.
Role model being quoted world wide is Singapore established Temasek – an old Malay names “sea town” (or similar bodies with different characteristics in other countries)
Temasek is registered under Company Act and a Government linked Company
It is national holding company for SOEs shares & 100% owned by the MOF
Under Singapore’s Constitution and laws, neither the President of Singapore nor the Government can be involved in THL investment, divestment or other business decisions
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Singapore Temasek Temasek has substantial authority in its subsidiary companies and is
responsible for appointment of Board and CEOs. Exercise good government internally in THL and subscribes standards for its subsidiaries or independent statutory corporations
Strong and ethically sound civil service and statutory boards legislated by Parliament have full autonomy but accountability is strong and this together contributes to smooth function of Temasek
the President is custodial of the investments approves THL’s annual budget but there is clear separation of ownership and control and the Chairman and CEO operate with full flexibility
To institutionalize its role, Temasek has recently became more transparent and sought credit rating to establish it long term role and be supportive of raising capital
4/16/2012 30
Move to centralize ownership model In Poland, the bulk of SOEs are under the Ministry of the Treasury,
which has special units for privatization and SOE governance.
In Indonesia, the Ministry of State-Owned Enterprises exercises the states ownership rights in SOEs.
In Jordan, the ownership function are vested with the Jordan Investment Corporation
In Turkey, the Treasury and the Privatization Administration, are the legal owners of SOEs.
Re-examination of ownership functions are also critical as a uniform approach has to be adopted to nurture well SOEs for an eventual privatization that is often resisted by the relevant sector ministry whose interference in any case impacts the company performance and dilutes the accountability. In conjunction, the Government may consider
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Competitive Neutrality
State ownership should not entitle competitive edge to SOE so create a level playing field and nurture contestability in markets
Competition forces firms to minimize costs and to search for new and better ways of doing business and will enhance economic efficiency and innovation.
Enhance role and capacities of Regulators and Competition Commission to examine the SOEs role in transport, power generation and public utilities which often operate as ‘natural monopolies’ (even if private entry allowed) and examine whether state ownership is ensuring an adequate level of service provision.
Examine ways of generating competition within the market. For example, through competitive tendering – i.e. competition for the market – as an option: for e.g countries have allocated on a competitive tendering basis the public service obligation such as the domestic transport routes (air and railways), particularly for social and regional access
4/16/2012 32
Other Factors
Develop a clear SOE policy
The Government as a shareholder needs to communicate what the objectives, role and mandate of SOEs ought to be and what is their expectation regarding operational and financial performance.
The government to modernize the operating guidelines and rules.
SOEs should be allowed to be run on commercial principles, and held accountable to ensure judicious use of public resources, while serving the demands of society at an affordable price.
Convert most SOEs to standard legal structures
corporatize the departmental undertakings delivering services (such as Pakistan Railways), bodies set up under special Acts/Statues (PIA) and joint ventures (such as Development Financial Institutions).
Corporatization would contribute to overall transparency by requiring proper compilation of accounts and information, while bring companies under company and other laws and insulating companies from political intrusion. Boards should be empowered with full powers to oversee the companies.
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Other factors
Develop a policy for public service obligations.
Given its broad based implications for public, SOEs should make full disclosure of trade offs it faces, costs and quality of delivery etc.
Legislature to approve the PSO policy and its cost implications
The budget should annually provide for financing of the required subsidies in a transparent manner.
Develop the role and capacities of sector regulators
Enhance the regulatory frameworks in accordance with the sector policies
Check the compliance with sector policies, regulation and pricing regime
Involve stakeholders in consultations
Enhance advocacy of corporate governance beyond firm level and
develop awareness of the legislature and executive branch so that these bodies reinforce corporate governance.
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Conclusion: Compliance of Corporate Governance of SOEs
The Government and private sector need to reflect on how to institutionalize the reporting on compliance of Code
For listed companies, SECP is the main hub and SOEs come under the purview of standard covenants of company, securities and other key legislation and regulations.
Recommend setting up a focal unit – perhaps a public private partnership based on international best practice and sponsored with support of IFC a Commission or body which is empowered and mandated to
Collate the operational and financial performance and service standards offered vis a vis the corporate strategy and benchmarks
Develop a score card which both the listed and other SOE undertakings adopt and report their compliance relative to the corporate governance code
Offer online this information to public and the performance of comparative companies
4/16/2012 35
Thank you
Role of The Chairman in Managing Government Intervention in Board
Decisions
By:
Mr. Farooq Rahmatullah Chairman, Pakistan Refinery Limited
Cost of running state enterprises to
national exchequer & tax payer
The annual subsidy and support to state enterprises on an annualized
basis ranges from Rs.350 – 400 billion
Political
Interference!
I decide
who should be
promoted!
People to be
recruited
according to our
political needs!
I decide who
should be the
MD .
Professionalism to be
looked down upon!
Gain popularity.
Encourage
Unionism!
M.D
Chairman
Award contracts
to
people/Company
of my Choice!
Merit is not a
criteria acceptable
to political
leadership!
Nepotism &
Favoritism to
be the guiding
principles!
M.D
Chairman
Managing Government
Intervention In Board Decisions
Make sub-
committees of the
board participive &
effective!
Appointment
,remuneration in
terms & conditions of
employment of
MD/CEO and
executive directors! Help management to
identify competency
gaps within the
organization! Evaluate board
performance!
Establish a system
of sound internal
controls and to
have it effectively
implemented at all
levels!
Set targets & goals,
measure performance!
Exercise powers to
carry out fiduciary
duties with sense of
objective, judgment &
independence in best
interest of the
company!
Have directors attend
orientation courses!
Directors to elect
chairman of the
board!
Inculcate culture of
merit & rewarding
performance!
Help management in
eliminating/minimizi
ng external
interference in the
affairs of the
company!
Have qualification
and merit criteria to
appoint board of
directors!
Way forward If there is no political or government interference
and organizations work under merit regime; efficiency & performance of state own enterprises could increase by as much as 30-35%. For example OGDC’s annual revenue would increase by Rs.46 billion and profits by Rs. 20 billion.
Thank you
Making Government Directors Contribute Towards Board Effectiveness
By:
Syed Naseem Ahmad Chairman, Faysal Bank Limited
Performance of PSEs – How can it be improved
•Structure of PSEs (a) Under Companies’ Ordinance (b) Under a special enactment (c) Government involvement in Management (d) Separate ownership and management
•Mindset of the major stakeholders
•Explicitly stated intent of stakeholder (a) PSE will be left alone , no interference in day to day
management (b) What is expected of PSE - deliverables and targets.
Board of Directors
(a) Selection of qualified and experienced Directors
(b) Composition – all disciplines – financially literate
(c) Fully inducted into the organization
(d) Adopt Corporate Governance Principles
Corporate entities operating principles
(a) Systems & procedures (b) Trained & qualified personnel (c) Accountability - Financial - Ethics - Production - Sales & marketing
Thank you