The relationship with non-state shareholders
The SOE Guidelines emphasises the involvement of non-state shareholders' participation in the election of the board. The focus of the Guidelines in this respect is more on preserving the rights of minority shareholders, rather than the more complicated question of how interactions between Government and non-Government shareholders might impact on the quality of boards. On the positive side, the participation of non-state elected representatives might be expected to bring relevant expertise to the board. The need for consensus might also act as a discipline on the quality of Government nominated candidates. Conversely, the processes and mechanisms that moderate the relationship between the shareholders might lead to boards that are factional or representative of particular shareholder interests.
SOE Guidelines, Annotations to Guideline III.D on preserving the rights of minority shareholders
Guideline III.D provides that “the participation of minority shareholders’ in shareholder meetings should be facilitated in order to allow them to take part in fundamental corporate decisions such as board election.” The Annotations go on to note that “to participate in general shareholder meetings is a fundamental shareholder right. To encourage minority shareholders to actively participate in SOEs general shareholder meetings and to facilitate the exercise of their rights specific mechanisms could be adopted by SOEs [...]. These could include [...] the possibility to use special election rules, such as cumulative voting.”
Good practice: Mechanisms should exist to facilitate non-government shareholders participation in the board nomination process.
The formal mechanisms through which minority shareholders can be guaranteed a board representation differ across countries. In order from general to specific they include: legal provisions in general company law or specific SOE legislation; stipulations in the bylaws of individual state-owned enterprises; and shareholder agreements between the state and the minority investors. They are discussed briefly below.
- • Legal provisions. At the most primary level, the relevant company laws often provide a voting framework or protections to ensure adequate representation of shareholders. Voting procedures at the AGM provide an opportunity for informal discussions amongst the shareholders to attempt to obtain consensus on board appointments (Slovenia and Poland, for example). In Poland's case, the strong rights afforded to minority shareholders to appoint representatives (by group voting of shareholders cumulatively having minimum 20% of voting rights) seems to be the key factor in promoting dialogue between the shareholders. This, however, seems to be rather an exception: few OECD countries systematically apply cumulative voting rules to their SOEs.) Norway has one of the more structured processes for involving non-governmental shareholders: “The preparatory work for the nomination of board members in listed companies is carried out through separate nomination committees, where the State, in conjunction with representatives of the other shareholders, seeks to achieve the best possible composition of the companies' governing bodies.” Further, Norway has a Code requirement that at least two of the members of the board elected by shareholders should be independent of the company's main shareholder.2
- • Bylaws and articles of association. The company bylaws in some countries contain voting procedures that enshrine the rights of the various shareholders and, in doing so, promote a degree of co-ordination between the various shareholders. For example, in Italy, the bylaws of some non-listed SOE's impose a “listing vote system”, a form of cumulative voting that ensures that minority shareholders are always represented in the board. Brazil also adopts various voting procedures through the SOE bylaws that guarantee representation for minority shareholders, such as a guarantee of board representation for any shareholder holding greater than 15% of the voting stock. In Turkey, non-Government shareholders have a right to board representation where their holdings are greater than 20%.
- • Shareholder agreements. The shareholder agreement model is in practice only feasible when the minority shareholders are themselves block-holders, as for example in the case where the government owns and enterprise jointly with a “strategic partner”. It is extensively used in countries such as
Denmark, Finland and Sweden where shareholder agreements guarantee each shareholder a right to appoint a certain number of representatives in several SOEs.
Finally, an important point is the question of whether the CEO should be on the board. Under a two tier system the question is moot, but many OECD countries have unified boards. In a unified board, the separation of the role of chair and CEO is viewed as necessary to underscore the separation of oversight and executive functions, but views differ regarding whether this also implies that the CEO should be excluded from the board of directors. Although this falls beyond the scope of this report, it is an important consideration to be made concerning board composition which is covered in Chapter 3.