Public sector enterprises will require a new set of reforms to bring excellence in governance, in tune with the global trends. Clarity on state ownership and board policy should be the first steps towards evaluating accountability.
The Organisation for Economic Cooperation and Development (OECD), a developed world think-tank, says the government should form an ownership policy that defines the objectives of state ownership, and the state’s role in corporate governance at PSEs.
The ownership policy should specify the role and responsibilities that the government seeks in corporate governance, including mandatory compliance on policy, law and regulations. It should also provide for operational autonomy, by not involving itself in the day-to-day working of PSE boards.
Over the years, the government has invested R8.50 lakh crore in 277 PSEs, while the return on it in the last 15 years alone was R23.5 lakh crore, which is inclusive of dividend (R2.2 lakh crore), taxes/duties (R13.8 lakh crore), subsidy (R6.27 lakh crore) and disinvestment proceeds (R1.19 lakh crore).
The government is in a unique position to nominate and select the board members without the consent of other stakeholders. This puts a higher responsibility on the government to ensure that their appointment does not cause conflicts of interest and overcrowd the boards.
The government’s ownership should come through a single sovereign holding structure for PSEs. This will avoid complex and heterogeneous control through several ministries. Ownership through a sovereign committee will obviate the need for ministerial controls. Till the time a sovereign department comes into effect, there should be a strong coordination entity for inter- and intra-administrative ministries.
A prime task under the ownership policy should be to set lucrative remuneration schemes to attract the best talents to manage the boards at par with the best in similar industries. Setting up financial targets, capital structure objectives, and risk tolerance level must also form part of ownership policy.
The ownership policy must include monitoring and assessing the board, with scope for continuous dialogue with external auditors.The legal and regulatory framework for PSEs must ensure level playing with private entities.
A clear separation of ownership functions with day-to-day board level decision-making and commercial and social objectives is necessary. A strong arbitration system for unbiased grievance redressal is also required.
Subsidies running through PSEs must be identified, disclosed and funded by the government to prevent market distortion. So should be the dividend policy. The ownership policy should hold chairman of the enterprise responsible for board room efficiency and he should act as a liaison between the sovereign department and the enterprise.
A well documented ownership policy will allow evaluation of the owner’s performance and eliminate the scope for passive ownership.
The Swedish government’s ownership policy has the overall objective to create value for the owners. So has France’s. In the UK, the overall objective of the ‘shareholder executive’ is to ensure that government’s shareholdings deliver sustained, positive returns. The cost of capital is returned over time within the policy, regulatory and customer parameters.
In Finland, the core purpose of state ownership is to achieve an economic and social result. In New Zealand, the long-term ownership policy has four overarching goals, namely; (i) to be clearer with PSE boards about shareholding expectations; (ii) to provide stakeholders with enhanced value performance through benchmarking; (iii) to develop appropriate capital structures which impose financial disciplines to make operational investment decisions without any recourse; and (iv) to ensure that requests for capital are considered in line with the business needs of the PSEs.
In Norway, the policy includes; national ownership, control, securing important political goals, sector-independent considerations that companies must take into account, objectives for ownership of individual companies, their commercial objectives and required rate of return, the capital asset pricing model, companies with sectoral policy goals, etc.
How to develop ownership policy
Ownership policy is often arrived through an interactive process, involving several parties. The first step for developing an ownership policy is to survey existing documents, including legal or regulatory texts. Based on this, the ownership entity could develop a draft document for discussion, summarising the key elements of existing policies and identifying potential elements to be included in the new policy.
A specific working group comprising representatives from the ownership entity, parliamentary committees, ministries, the state audit institution and regulators may be required to formulate the policy. The objective is to ensure broad understanding and support by all concerned entities on the state ownership policy on the functions and responsibilities of the owner. A public discourse is also needed through various means, including a dedicated website.
Developing an ownership policy and a sovereign holding structure is a massive exercise and would require a serious approach and wide consultations.
By UD Chowbey
The author is director general, Scope. email:email@example.com