Tackling inefficiencies and corruption in SOEs: A structured nomination process

In the recent debate on the issue of good governance in State-Owned Entreprises (SOEs) bodies, there has been a lot of talks about systemic inefficiencies in these institutions. How do we correct these inefficiencies , especially the lack of accountability and transparency? One of the ways of ensuring effective corporate governance is by getting rid of our present system of appointment of cronies on boards of SOEs

Effective corporate governance requires strong boards composed of qualified and competent members exercising objective and independent judgement to guide strategy development and monitor management. The key challenge in the nomination process of directors to SOE boards is to prevent the process to degenerate into a situation characterized as “political influence interference”. The political interference goes either through the nomination process itself, involving a complex political negotiation among different government organs, or through direct nomination of political appointees. This is often identified as a main weakness of SOE corporate governance, as too often Boards are populated with people chosen for their political allegiance rather than business acumen.

The main way of restricting such governmental or political interference in the nomination of SOE Boards and increasing their independence and professionalism is to put in place a structured nomination process, making sure that the ultimate selection criterion is competency. A growing number of countries maintain databases of qualified candidates. They also increasingly rely on the professional services of recruitment agencies or on advisory bodies. The key elements of a structured and transparent board nomination process of directors who are committed to the organization and possess skills, knowledge and other attributes needed in order for the board to effectively carry out its responsibilities include professionalising the nomination process, developing clear selection criteria and enhancing public scrutiny of results

Professionalising the nomination process

Many countries are taking steps to professionalise and streamline the nomination process to make it more merit-based by a) Effective board recruitment and nominations process in place. 

b) Involving an advisory body or private agency in the process c) Issuing a letter of appointment and, if necessary, d) Orientation Sessions.

i) An effective board recruitment and nominations 

The first board development practice, and by far the most important, is having an effective board recruitment and nominations process in place. Most board performance problems can often be traced to the casual or haphazard way that some organizations go about recruiting, selecting and orienting board directors. The identification and recruitment of organization will determine the long-term viability of the organization.

Establish a year-round nominations committee. Reflecting this long-range focus, the Nominations Committee will be involved in more than nominating people to serve on our boards. It truly is an ongoing, year-round function to professionalise the search for qualified individuals- recruiting, orienting, supporting, providing ongoing training, and evaluating board directors. The Committee should be staffed fully with non-executive and independent directors. The nominations committee must support the objective of a formal and transparent board member nomination process. The Committee objectives must be written and procedures must be documented.

ii) Involving an advisory body in the process

Giving the Advisory body the formal responsibility for actively managing and participating in the nominations process can help address the problem of political interference, among others, and improve the prospects of identifying and appointing more qualified and merit-based boards. A more formal role for the Advisory body means that it will be responsible for seeking and assessing potential director candidates and maintaining a database and evaluating nominations for appointments 

iii) Issuing letters of appointment

More and more organizations have found it helpful to develop a letter of appointment (LOA) statement or agreement for board directors following the final appointment. In addition to seeking the candidate’s acceptance, the LOA generally outlines relevant conditions of the appointment, such as the term, details of remuneration, dealing with conflict of interest and clarifies board responsibilities. The LOA sets forth the expectations the organization has of its board directors. The LOA and accompanying terms of reference or job description should be periodically reviewed and updated by the Board of Directors. It is a critical tool in recruitment of new board directors. 

Developing clear selection criteria  

The board should link recruitment to its strategic plan. It is important to match board recruitment activities with the requirements and demands called for by the strategic plan. The organization board or the Nominations Committee reviews their collective and individual skills against the strategic plan and compiles the board skills profile. The Plan’s components are prioritised and the corresponding skills needs are identified. Thus by reviewing the organization’s strategic plan as well as the profile of current board strengths and weaknesses, the Nominations Committee identifies the gap between the skills and knowledge needed on the board, and what board directors currently possess. Based on this analysis, the Committee will have a skills profile for new directors. Once the draft skills profile together with the position and person description are finalised and approved by the parent or shareholding Ministry, it will form the basis for a director search for board recruitment. 

The Advisory body will then take over and draw up an initial short list of candidates by matching the requirements of the position with the skills and experience of the potential candidates from a) the pool of potential directors in its database,b) from the pool of private sector talent that can be tapped for SOE boards and c) from representatives of a wider range of stakeholder groups. It is out of this list that the shareholding ministry will be recruiting the suitable candidate(s) for the SOE board. 

Ensuring public disclosure and scrutiny

Greater professionalism and transparency can be achieved by increasing public disclosure of the nomination process of the final appointments. Full disclosure on the Web site of the Advisory body and the shareholding Ministries of the nominations procedure and the experience and background of selected candidates will allow the public and stakeholders to assess the suitability and independence of each candidate. 

With this more professional approach in the nomination of SOE boards as established by this process which is supported and supervised by Advisory body there is a greater possibility of achieving competent and qualified boards.

6Harish Chundunsing, Akhil Mishra and 4 others

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