Impressions on SOE governance reform progress during the last 10 years

#Governance #Boards #Reforms ?

Last week, the SOE Governance Coordination Center (VKC) organized the presentation of the 2021/22 activity results of SOEs (state-owned enterprises) and MOEs (municipality-owned enterprises). It was very interesting to see the progress of SOEs achieved in the last 10 years, to get acquainted with the results of MOEs, and to learn about the challenges of Ukrainian SOE governance.

Respect to the VKC team for increasingly in-depth analysis and strengthening the voice of expertise. I hope that the expected changes in the legal acts will finally be adopted and there will be no more Lithuanian "hourly rate model" to remunerate board members, which is unique in the world, and replaced with a fixed-fee model. Another good news is planning to switch to an individual SOE dividend policy, because the current policy, strictly defined by the Government decree, I am presenting in my lectures at the Baltic Institute of Corporate Governance for the future board members as an example of misapplication of finance theory.

As it is the 10th year since our team delivered the Feasibility Study and drafted legislation for the governance reform that took place in Lithuania, it was very interesting to compare the current status of SOE governance with our insights and recommendations.

First, the SOE sector is significantly consolidated. If in 2009 there were about 300 SOEs that paid in dividends only about 40 mLTL (i.e. about 11.6 mEUR), then in 2021 there are only 46 SOEs, not counting subsidiaries. The total sales revenue of SOEs last year amounted to 3.5 billion euros, which amounted to 6 .4 percent of GDP, although the net profit of SOEs shrank to 280 mEUR vs. 345.9 mEUR in 2020.

It is planned to further centralize the governance, although I am not a supporter of such a step at the moment because there is a risk of concentrating power rather than competence (I saw up close what the first SOE holding, under the strange name Naftos Terminalas, looked like, which had both oil refinery Klaip?dos Nafta and the barber shop "?avesys" on the first floor of a condo in Klaip?da shares in its investment portfolio). I would give a higher priority to the long-awaited partial listing of SOEs on the stock exchange while maintaining control of strategic companies - this would both revive our capital market and automatically raise the quality of governance, as the activities of such companies would be scrutinized by market analysts.

This time, the VKC report contained a lot of gender indicators. Vidas Danielius made an interesting comment that relatively more women than men win seats on the boards, as fewer women apply than men. In my opinion, we don't need quotas, instead, we need to showcase role models, training, and mentoring programs (including the one planned by Association ?Lyder?“ ) so that there are more competent women applying - in order to win, you must first participate.

However, we still have a rather unique regulation of stock companies, combining two conceptually different management philosophies into one sentence - shareholders' supremacy vs. stakeholders’ supremacy, because Article 22.8 of the Law on Stock Companies imposes an obligation on management bodies to "act only for the benefit of [both] the company and its shareholders", which can sometimes be very different, not to mention the broader interests of stakeholders. And when we question the decisions of boards (LG, etc.), let's remember that their activities are defined by laws, so sometimes responsibility is sought not where it was lost. By the way, in Latvia and Estonia the director’s duty of care is very specific - to act in the interest of the company.

Similarly, the governance models of Lithuanian companies have elements of very different philosophies - both Anglo-Saxon with a Scandinavian notion and Germanic inserts with two-tier boards and compulsory employee representation. That must be kept in mind when comparing the governance of different companies because we have apples with oranges.

The groups of challenges to be solved remain the same, an area for continuous improvement. Unfortunately, not all recommendations of Alternative B (Qualitative Leap) from our Feasibility Study have been implemented yet, although some of our suggestions from Alternative C (Substantial Transformation) have been already applied.

And I would really like us to redefine some of the terms and definitions – first of all the "dependent" board member - it doesn't matter if you were delegated by the largest shareholder or if you are related in some other way, when acting on the board you must act freely and independently, taking full personal responsibility for all your decisions. Also, not every company needs independent members in the strictest sense of the term (no personal or financial ties) - in many cases, an external member with broader insights than internal members overloaded with routine can be perfectly sufficient. The need for independence is most important when the ownership is very distant from the executive powers, like SOEs, where every citizen can be considered a shareholder, or listed companies with a large number of minority shareholders.

I am attaching a few clippings from our Feasibility Study of October 2011 (in Lithuanian) while a summary of the slides and insights shown by the VKC team can be found here: https://governance.lt/naujienos/dideja-valstybes-valdomu-imoniu-vvi-indelis-i-valstybes-biudzeta/