Board nomination in partly- privatized SOEs: Some lessons from the European Telecoms Industry

1. Board nomination in partly- privatized SOEs: Some lessons from the European Telecoms Industry 4 Royal Mint Court, London EC3N 4HJ, United Kingdom Tel: 44 20 7073 0448 | Fax: 44 20 7481 6801 info@nestoradvisors.com www.nestoradvisors.com VAT Registration Number: 805 6770 21 Stilpon Nestor, Principal

2. Ownership and Control of European Telecoms (2002)

3. What is a high-quality board • An independent, competent and engaged board, capable of exercising its strategic and monitoring functions • …requires a managed nomination process that : • 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

4. The two key operational constraints of SOEs • 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

5. Average composition of the board of directors of European Telecoms

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. • …a function crucial in all boards, • 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

7. Constituency boards and shareholder nominated boards:Key problems (2) • 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

8. Nominating committees in European Telecom boards

9. The SOE nomination process • 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

10. Key lessons from the European Telecoms experience and challenges for China • Some minority shareholder power is important but In the long run, constituency boards should be discouraged • How can the CSRC avoid the pitfalls of constituency boards while remaining the ultimate authority in board nominations? • …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 state- controlled enterprises? • …managed by the board through an active corporate governance/nomination committee • 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?

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