PSEs - they can’t breathe on their own-II

State firms need professional boards, effective governance model


January 03, 2021
PHOTO: REUTERS

LONDON:

Governance of public sector enterprises (PSEs) has been the biggest challenge confronting Pakistan for the past many years.

The following paragraphs cover results of a review of the governance structure and board compositions of a few select multinational PSEs and guidelines of the Organisation for Economic Co-operation and Development (OECD) in this regard.

SABIC is a Saudi Arabian petrochemicals giant having operations in over 50 countries and earned $45 billion in revenue in 2018 alone. Its chairman is a PhD in chemical engineering from the US, who started his career from the company.

Earlier, he served as chairman of a joint venture of ExxonMobil and SABIC for 12 years and on boards of Aramco and Ma’aden. How many PSEs in Pakistan have got chairpersons of this stature? All the other directors have similar profiles. Malaysia’s oil and gas giant Petronas has annual revenue of $55 billion and has presence in 35 countries. Its chairman is a graduate of Ohio University and he started his career in 1981 from Petronas.

Another member is a leading economist, another an engineer who started his career from Petronas with all others having similar profiles. Compare this with the current board of any PSE in Pakistan and we would know the reasons for them being on ventilators. Ma’aden is a Saudi mining PSE having $6 billion in annual revenue. The reason for its success is its nine-member board of directors. Amongst other leading relevant professionals on its board, it has two expatriates who are accomplished professionals in mining and corporate leadership. Where does PMDC stand in this regard?

Statoil is an oil and gas PSE of Norway with annual revenue of $80 billion and presence in more than 30 countries. The reason for its success is its 11-member professional board of directors. Its chairman is a geophysicist with extensive relevant corporate experience, another director is an engineer, an economist and an ex-CEO of Shell, and all others having similar profiles.

Similarly, the Annual Corporate Governance Report of an energy company generating annual revenue of $50-60 billion proudly lists a set of essential skills for a board to possess as a whole and the percentage availability in its board as follows: top management experience 87%, energy sector knowledge 80%, international experience 93%, financing and accounting knowledge 73%, risk management 93%, strategy 87%, institutional experience and public sector 60%, legal and corporate governance 87% and technology 47%. How many PSEs in Pakistan can boast of this experience?

Also, the OECD provides explicit guidelines for the efficient management of PSEs vide “OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition”. While presenting prime responsibilities of the state or ministry, it describes them as “establishing well-structured, merit-based and transparent board nomination processes”.

At another place, it states “the nomination of SOE boards should be … based on … competencies and experiences required.”

An assessment report of the World Bank on Pakistan’s corporate governance in light of the OECD guidelines also repeatedly highlights the importance of professional boards.

A few of its observations and recommendations are that “the ministries play a strong role in taking many decisions that good practice assigns to the board of directors or management”. “In practice, the boards of most PSCs are seen as weak, with ineffective oversight and prone to political interference.”

As to the ministry’s foremost responsibility, it defines it as “professionalise and create the infrastructure for the process of board appointments”. And this is where we have failed.

First, our boards are populated mostly with irrelevant directors and then bureaucrats have invariably strong presence in every board. This not only compromises the independence of boards but their interaction with the management results in creation of factions and sacrifice of professionalism.

The atmosphere, coupled with the fact that independent directors also mostly remain aligned with the bureaucrats, proves too stifling for merit and professionalism.

Thus, the root causes of current status of the PSEs come out to be as follows: 1) Absence of required competence at the board level. 2) Lack of independence of boards because of the bureaucrats serving as directors and even the independent directors being selected by the ministry. 3) The decline of PSEs’ performance does not affect the career of any director.

So, what should be done, then? A few suggestions are: First, professional boards are essential. In this regard, guidelines of the OECD are quite explicit. Also, the implementation of the yardstick in the PSC (Corporate Governance) Rules 2013 ie “is a reputed businessman or a recognised professional with relevant sectoral experience” for a director is essential.

How many reputed businessmen and recognised professionals with relevant sector experience are deployed in our boards?

Second, there is a need to develop a transparent process and an independent advisory board authorised to nominate board members and later also evaluate the performance of the board of directors. This board should consist of eminent professionals. Third, annual performance contracting between the government and each PSE is essential. Fourth, independent boards can never be achieved until sufficient “social distancing” is created between the PSEs and ministries as per the available models such as Norwegian and Middle Eastern or the holding companies’ model (Temasek Holdings, Khazana, Sasac, etc).

Fifth, a measurable yardstick should be introduced for the annual evaluation of board of directors. So, as demonstrated above, in order to make our PSEs genuine engines of progress, they just need professional boards and an effective governance model, which should be priority No 1 for the government.

The writer is a corporate lawyer holding a post-graduate law degree from the UK and based there

 

 

Published in The Express Tribune, January 4th, 2021.

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