Tuesday, November 18, 2008

(TIMES) Corporate governance in parastatals

Corporate governance in parastatals
. . .Case study of National Airports Corporation Limited Vs Zambian Airways, Tazara
By Eugene Chandi

IN the last four to five weeks, we have been treated to two live case studies in corporate governance in State-owned enterprises (SOEs)/parastatals, the first being National Airports Corporation Limited (NACL) and Zambian Airways and, secondly, Tanzania Zambia Railway Authority (Tazara).

The public- from the common man on the street to the business sector- have debated the two cases (particularly the former) with mixed views, not to mention the ministers responsible for looking after the affairs of the two parastatals.

At one point, we even had a diplomat weighing in with his opinion on the NACL versus Zambian Airways debate. Fascinating stuff! Indeed, this democracy and freedom of speech at their best. At the end of the day, I too have decided to weigh in, from a different angle.

I will start by sharing with you what is considered international or global best practice in the management of parastatals, using the Organisation of Economic Co-operation and Development (OECD) ‘Guidelines on Corporate Governance in SOEs’.

In the second article, we will play ‘Judge and jury’ using the OECD guidelines, modified, where necessary, to take into account relevant existing Government policies and legislation.

We will also look at similar cases in other parts of the world and how they were handled or decided upon.

Guidelines on Corporate Governance in SOEs

Prior to that, in the 1970s through to the early 1990s, privatisation of SOEs or parastatals was the general trend around the world, including Zambia.

Later, there was a realisation that the State could still play a vital role in the growth of the economy while maintaining a stake in parastatals and that good corporate governance was critical and a key component in ensuring the enterprises made a positive contribution to the country’s overall economic efficiency and competitiveness.

Experience around the world has at the same time shown that good corporate governance is a pre-requisite for economically effective privatisation, since it will make the enterprises more attractive to potential buyers and enhance their value (instead of selling the enterprise for a song!).

In 2005, the OECD came up with the Guidelines on Corporate Governance in State-owned Enterprises’mentioned above.

The guidelines are based on six principles, namely:

I. Ensuring an effective legal and regulatory framework for SOEs.
II. The State acting as an owner
III. Equitable treatment of shareholders
IV. Relations with stakeholders
V. Transparency and disclosure
VI. The responsibilities of the boards of SOEs.

In this article, we will focus on the guidelines most relevant to the two cases, namely:

• The State acting as an owner, and
• The responsibilities of the boards of SOEs, and will make brief comments, where necessary, before we go for the case studies in the second article.

We will also briefly touch on a new OECD draft on the “Implementation Guide for Transparency and Accountability in State Ownership”.

3. The State acting as an owner.

The general guide in the ‘State acting as owner’ is that: The state should act as informed and active owner and establish clear and consistent ownership policy, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness.

In particular, this section of the guide recommends the following:

a) State should develop and issue an ownership policy, defining:

i. the overall objectives of State ownership,
ii. the state’s role in corporate governance of SOEs, and
iii. how it will implement its ownership policy.

The guideline further recommends that:

“The State should go further than defining its main objectives as owner; it should also indicate its priorities and clarify how inherent trade-offs (ie between economic, social, strategic and, where relevant, political objectives) should be handled.

“In doing so, the State should avoid interfering in operational matters and, thereby, respect the independence of the board.

“A clear ownership policy will help in avoiding the situation where SOEs are given excessive autonomy in setting their own objectives or defining the nature and extent of their public service obligations.

“Moreover, the State should strive to be consistent in its ownership policy and avoid modifying the overall objectives too often.”

An ownership policy ensures transparency and accountability in the manner the government intends to manage parastatals.

Here probably lies part of our weakness in the effective management of parastatals currently- lack of a clear policy on parastatals!

In the Second Republic, the policy was clear and in black and white.

In the Third Republic, with the coming of a new market-oriented government in 1991, the policy was equally clear-privatisation.

We, however, did not come up with a policy on parastatals, which is understandable given that we planned to privatise all parastatals, including the ‘family silver’ (Zambia Consolidated Copper Mines)).

There were to be no ‘sacred cows’. There were to be no parastatals remaining in the hands of the Government.

After seeing and experiencing the negative social consequences of privatisation, however, there was policy re-think and the programme significantly slowed down, almost coming to a halt.

The Government changed policy and decided to hold on to some parastals, namely Zambia State Insurance Corporation, Zesco, Zambia Telecommination Company and ZCCM-IH), and go the route of commercialisation for entities such as Zesco.
This caused some confusion as to what exactly was the Government policy.

As a result, in the absence of an ownership policy, the governance of parastatals is full of landmines which can explode underneath management, board and government administrators any time, with unfortunate consequences, as the two cases illustrate.

b) The Government should not be involved in day-to-day management of SOEs

c) The State should let SOE boards exercise their responsibilities and respect their independence

d) The exercise of ownership rights should be clearly identified within the State administration. Maybe facilitated by:

i. Setting up a co-coordinating entity or, more, appropriately,

ii. by centralisation of ownership function.

In the Second Republic, ownership rights and management oversight was exercised centrally through the Industrial Development Corporation and, ultimately, Zambia Industrial and Mining Corporation.

In the Third Republic, with the privatisation and dismantling of parastatals, the initial plan was to set up the ‘Directorate of State Enterprises’.

This never materialised and the remaining parastatals ended up being run directly by respective ‘mother’ ministries.

At the same time, the legal owner (Ministry of Finance and National Planning) continued monitoring the finances and debt of all the parastatals as well as the privatisation process.

To strengthen the governance of parastatals, what we need is a strong well-resourced co-ordinating unit, either an independent or one under an identified ministry for policy-monitoring and reporting on the performance. This will ensure that the parastatals operate within agreed policies and guidelines and board and management meets agreed objectives and targets.

The unit will work closely with staff or units under each, ministry under which the respective parastatals fall.
4. The responsibilities of the boards of SOEs
The boards of State-owned enterprises should have the necessary authority, competencies and objectivity to carry out their function of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions.

The guideline in particular recommends:
a) The boards of SOEs should be assigned clear mandates and ultimate responsibility of the company’s performance.

This is to ensure accountability and transparency of annual objectives or medium-to-long-term goals the board and management of each parastatals are expected to meet or achieve.

Best practice calls for setting up and agreeing targets or key result areas (KRAs)/key performance indicators (KPIs).

The board’s performance should be evaluated at the end of the year (Refer to ‘d’ below) and this should be the basis for remunerating directors.

A fixed ‘sitting’ allowance (paid for showing up at a board meeting) normally paid to directors should only be a part of their remuneration to avoid directors that literally ‘sit’ or just warm-up a seat at a board meeting and do not add value.

It is also a transparent method or basis for dismissing the whole board or individual directors unless, of course, there is a serious transgression or misdemeanour against the board ethics or the law.
b) The board should be fully accountable to the owners, act in the best interest of the company and treat all shareholders equitably.

A formal and regular reporting system should be set up, not only from management to board but from board to ministry to ensure the board is held accountable at least quarterly and certainly annually, and is acting in the best interests of the company.

This will include production of audited annual accounts which the ultimate owners or shareholders (the tax payers or general public) should be able to easily access and ascertain how the parastatal is being managed, especially whether it is run profitably, and declaring a dividend.

The report should also be a summary of operational activities, including level and quality of service and any key events or developments during the year.
c) The boards of SOEs should be composed in such a way that they can exercise objective and independent judgment.

The board should have the power to appoint and remove the chief executive officer (CEO).
Good practice calls for the chairperson to be separate from the CEO.
d) SOE boards should carry out an annual evaluation to appraise their performance

Nearly all the parastatals currently do no conduct board evaluations.
The statues of most parastatals or articles of parastatals provide for a three-year term of office for board members, renewable for another three years.

A director can, therefore, ‘sit’ on the board for six years without adding value to the company.

To avoid this, directors’ performance should be individually and collectively evaluated annually.

This should form a transparent basis for removing a director or the whole board by the appointing authority.

Directors whose performance is below (even after given training, where relevant) should not be allowed to continue ‘sitting’ on a board.
5. Implementation guide for ‘Transparency and accountability in State ownership’.

In March this year, I was invited to the first meeting of the OECD ‘Global Network on Privatisation and Corporate Governance of State-owned assets’, at the OECD headquarters in Paris, together with the president of the Institute of Directors (IoD, and two officials from the Ministry of Finance and National Planning whom I had worked with earlier on corporate governance in parastatals in Zambia.

The focus of this meeting was to review a draft of the “Implementation Guide for Transparency and Accountability in State Ownership”.

The importance of transparency and accountability cannot be over-emphasised.
Transparency and accountability is a pre-requisite to and underpins public trust which, as the two cases illustrate, appears to be in short supply.

This was followed by another meeting, specifically for parastatals in southern Africa, held in Capetown in May, 2008.

For details of the two meetings above and the guidelines, you can Google them by typing ‘First Global Network on Privatisation and Corporate Governance of State-Owned Assets meeting’ on your search engine or contact the author at the address below

The experience gained in both meetings, together with the guidelines and local experience, will be used in the second article when we take the above two cases to the jury and judge.

The next article, as mentioned above, will use the above guidelines to look at the NACL Vs Zambian Airways and Tazara cases. Have a good day!

For comments on the article, please send them to eugene.chandi@elcconsult.com or emc@zamnet.zm

The author is the principal consultant of ELC Consultancy Limited and is a leading consultant in corporate governance locally and in Africa, working locally with the IoD and Lusaka Stock Exchange and internationally with the OECD, World Bank, Centre for International Private Enterprise and other institutions involved in the promotion of corporate governance.

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