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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 info@nestoradvisors.com 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

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Board nomination in partly privatized soes some lessons from the european telecoms industry l.jpg

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

info@nestoradvisors.com

www.nestoradvisors.com

VAT Registration Number: 805 6770 21

Stilpon Nestor, Principal


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Ownership and Control of European Telecoms (2002)


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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


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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


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Average composition of the board of directors of European Telecoms


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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


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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


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Nominating committees in European Telecom boards


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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


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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?


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Thank you

www.nestoradvisors.com


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