Board nomination in partly- privatized
SOEs: Some lessons from the
European Telecoms Industry
Stilpon Nestor, Principal
4 Royal Mint Court, London EC3N 4HJ, United Kingdom
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Tel: 44 20 7073 0448 | Fax: 44 20 7481 6801
info@nestoradvisors.com
www.nestoradvisors.com
Ownership and Control of European Telecoms (2002)
Gov’t
Ownership
Other Shareholders
Total
Free Float
Golden Share
OTE
33.8%
13.7%
47.5%
52.5%
No
Deutsche Telekom
43.1%
0.0%
43.1%
56.9%
No
France Télécom
60.6%
5.9%
66.5%
33.5%
No
Portugal Telecom
20.9%
5.2%
26.1%
73.9%
Yes
Swisscom
65.5%
0.0%
65.5%
34.5%
No
Telefonica
9.1%
0.0%
9.1%
90.9%
Yes
Telecom Italia
3.0%
55.0%
61.0%
39.0%
Yes
Telia
70.6%
12.8%
83.4%
16.6%
No
KPN
34.7%
0.0%
34.7%
65.3%
Yes
TDC
41.6%
7.8%
49.4%
50.6%
No
BT Group
0.0%
3.0%
3.0%
97.0%
No
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Company
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What is a high-quality board
– An independent, competent and engaged board, capable of
exercising its strategic and monitoring functions
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– …requires a managed nomination process that :
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•
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
The two key operational constraints of SOEs
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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
Average composition of the board of directors of
European Telecoms
Employee
representatives, 18.7%
Executives, 12.9%
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Shareholder appointees,
24.1%
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Independent, 6.7%
Non-executives, 37.6%
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.
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…a function crucial in all boards,
–
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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
Constituency boards and shareholder nominated boards:
Key problems (2)
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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
Nominating committees in European Telecom boards
% Executives
% NonExecutives
%
Independents
Participation of
CEO
# Meetings
Held
OTE
n/a
n/a
n/a
n/a
n/a
Deutsche Telekom
n/a
n/a
n/a
n/a
n/a
France Télécom
n/a
n/a
n/a
n/a
n/a
Portugal Telecom
n/a
n/a
n/a
n/a
n/a
Swisscom
n/a
n/a
n/a
n/a
n/a
Telefonica
0%
100%
75%
No
10
Telecom Italia
n/a
n/a
n/a
n/a
n/a
Telia
0%
20%*
0%
n/i
n/i
KPN
0%
100%
0%
Yes
4
TDC
n/a
n/a
n/a
n/a
n/a
BT Group
25%
75%
75%
No
n/i
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The SOE nomination process
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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
Key lessons from the European Telecoms experience
and challenges for China
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Some minority shareholder power is important but In the long run, constituency boards should
be discouraged
–
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…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 statecontrolled enterprises?
…managed by the board through an active corporate governance/nomination committee
–
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How can the CSRC avoid the pitfalls of constituency boards while remaining the ultimate
authority in board nominations?
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?
Thank you
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www.nestoradvisors.com