board nomination in partly privatized soes some lessons from the european telecoms industry
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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 [email protected] www.nestoradvisors.com VAT Registration Number: 805 6770 21.

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board nomination in partly privatized soes some lessons from the european telecoms industry

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

[email protected]

www.nestoradvisors.com

VAT Registration Number: 805 6770 21

Stilpon Nestor, Principal

what is a high quality board
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
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
constituency boards and shareholder nominated boards key problems 1
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
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

the soe nomination process
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
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

Thank you

www.nestoradvisors.com

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