Has the Governance of State-Owned Companies Improved over a Decade?

Has the Governance of State-Owned Companies Improved over a Decade?

Author: Andris Grafs, Vice President of the Baltic Institute of Corporate Governance, manager in Latvia

The quality of the governance of state-owned companies is vital, because these companies considerably affect national economy. The turnover of state-owned companies[1] is 3.4 billion EUR, which constitutes almost 6% of the turnover of all capital companies. The assets constitute 9.4 billion EUR or they exceed 13% of the assets of all commercial activities. State-owned companies have paid in taxes more than 800 million EUR, as well as they are paying in dividends almost 150 million EUR. At these companies there are employed more than 51 thousands employees. Well-governed state-owned (as well as - municipal) companies are important for private companies functioning in the market. Because it is a fair competition environment where private companies are not forced to leave the market. These are qualitative services of public enterprises for a commensurable price. These are equal and fair rules of the game regarding procurements, mutual relationships.

 

A Decade ago…

As we know, the year 2009 was important in the field of company governance because there were liquidated the councils of state-owned and municipalities-owned companies. Why? The composition of a council (as well as – of the board) was determined on the basis of political considerations according to “the principle of political quotas”. When a new government was formed and the responsibility fields regarding the management of ministries were divided among the political parties, alongside with the substitution of a minister there were accordingly substituted the members of the councils. The appointment of the members of councils and boards was not transparent; the same could be said about the information about companies’ goals, strategy, financial performance, remuneration and corporate governance on the whole. For example, only in 2010, when the Baltic Institute of Corporate Governance cooperated with the finance professionals and the Prime Minister’s office, there was the first report prepared on the state-owned assets in 2009[2]. It was concluded that the value of state-owned companies was 7.15 billion Lats. In this report there were also tasks identified that should be dealt with in the field of the governance of state-owned companies – to develop the state-ownership policy, to measure the results of companies’ performance, to increase the efficiency and competitiveness of companies, to form professional councils, to centralize the governance of companies in order to ensure consistent and professional governance, as well as to increase transparency.

 

Discussions on the Arrangement of Companies’ Governance and the Positive Influence of OECD

In fact, in 2010 and 2011 there were discussions started on the arrangement of companies’ governance, including the reinstating of professional councils of companies. Taking into consideration the orientation of Latvia towards OECD, the arrangement of companies’ governance was integrated into the declarations of several governments; however, practical changes were only the initiative of some state-owned companies’ management. In 2012 the government adopted the Conception on the Governance of State Capital Shares, defining the unacceptable corporate governance situation, as well as identifying scenarios of further actions. In September 2014 the government approved the first instruction for the selection of candidates for the positions of the members of councils and boards at the state-owned companies[3], determining the basic requirements for the candidates, as well as formalizing the principles of selection process, including on the formation of a nomination commission. Then also on 31 October 2014 Saeima adopted the new Law on the Governance of Capital Shares of a Public Person and Capital Companies[4]. Following the strengthening of the basic principles of corporate governance in the legislative acts, now the usual practice is to prepare annual reports about all sector of state-owned companies; such an annual report is prepared by Cross-Sectoral Coordination Centre[5]. And every year in the website www.valstskapitals.lv there are data disclosed on the financial indicators of all state-owned companies. The companies, like the companies listed at the stock exchange, has a duty to disclose information in conformity with the corporate governance principles and guidelines of OECD. The government approves for every company the general strategic goal, but the council or the shareholder of capital shares (where the council has not been formed) approves the company’s middle-term strategies. There are criteria and requirements defined for the selection of the members of board and council; at least half of the members of council are independent.

 

At present the performance of state-owned companies, included into the list of Latvian most valuable companies TOP 101, in the sphere of corporate governance is two times higher in comparison to the private capital companies. Among TOP 101 of 2019 there were included 16 state-owned companies, and their corporate governance assessment was 83.1 points out of 100. In comparison to situation of the year 2009 – those were, on average, 41.9 points, when there were 10 companies included into TOP 101. The performance of state-owned companies can be explained by amendments to the Latvian law made under the influence of OECD; thus was strengthened the duty to be transparent and to disclose information on the company’s structure, goals, financial results, officials, as well as to involve independent members of a council in the councils of large companies. It should be only added that the average assessment of the corporate governance of private capital companies included into TOP 101 in 2019 is 3.5 points out of 100, whereas for the companies, included into TOP 101 in 2009, it was 47.9 points, respectively.

 

Strengthening of Corporate Governance and the Period of Trials

The governance of state-owned companies, when comparing improvements made during the last decade, is like the contrast between a day and a night. But the day is very cloudy and sometimes seemingly peaceful situation turns into a storm – the scandals of corporate governance, drastic changes in the management of companies, as well as some companies have been visited even by the representatives of the Corruption Prevention and Combating Bureau. I would like to state that the decisive aspect for the successful governance and development of a company is a professional and experienced board, as well as an independent council, which is able to monitor the activities of board impartially and to add the value to the company. Therefore now for many state-owned companies and municipal companies it is the period for strengthening corporate governance and undergoing trials. There are still fresh memories about the catastrophic selection of the board of Latvian Television, as well as the unjustified and criticized substitution of the council of Latvenergo. Soon we will get information about the new members of the council of Latvenergo, at three large hospitals and Augstsprieguma tīkli, as well as we will get information about the new management of Latvijas Dzelzceļš. On the one hand, there is a defined resolution to organize understandable and clear selection process by outsourcing consultants of personnel selection, by precisely defining selection requirements and by guaranteeing confidentiality regarding the candidates’ names. On the other hand, the politicians have not lost their bad habit – a desire to push on their political confederates for the positions by justifying this with “a special situation”.

 

Latvia, like other OECD Member States, shall advance towards the model of centralized capital share governance, where the state-owned companies would be governed by a professional governor. Having observed the chaos in the governance of the capital companies of Riga City Council and the fact that “Rīgas satiksme” was studied in details by institutions combating corruption and by mass media, the corporate governance shall be finally strengthened also at the municipal companies. The state-owned companies and municipal companies shall be also oriented towards stock exchange, partially listing the shares of the largest state-owned companies in order to attract funding from investors for development. It should be added that good and arranged corporate governance is very important also for ports and higher education institutions, where the discussions on the change of of governance model are on the political agenda.

 

The society expects that the state-owned companies will set an example for business sustainability, honesty, transparency, qualitative services. In order to meet these expectations, it is necessary to have discipline and strong motivation, as well as continuous “pressure” to maintain principles of good governance in everyday practice. It is important that the governance of companies is no matter of chance, it should become the irreversible practice of responsible entrepreneurship.