Governance changes key to sustaining state-owned firms

This is a continuation from last week’s article, which shone a light on outside interference that undermines the authority of those put in charge of state-owned enterprises.

When these firms are regarded as departments within ministries, it gives certain individuals within the government a sense of entitlement and the mistaken belief that they can freely expend the resources of these entities.

A former colleague once shared that the entity he led had purchased vehicles for essential service delivery to customers, only to be asked by the ministry to provide two cars from the purchase for its own use. He was bold enough and declined.

Unfortunately, this is a common occurrence. Despite the need for these entities to deliver vital services to customers, they are routinely asked to let go of their vehicles as though they are redundant. When managements send inquiries about these requests to higher authorities, they are sometimes told that the individuals making such demands were not even authorised to do so.

It is crucial to establish a law that explicitly states that these entities are independent and governed by their respective boards of directors. To enable these entities to compete effectively, it is essential to empower those responsible with the ability to act without interference.

The government should ensure that state-owned enterprises operate without unnecessary encumbrances. Issues concerning shareholders should be addressed during annual general meeting. If the results are unsatisfactory, the board, chairperson, or managing director can be replaced.

Constant interference flies in the face of the principle of good governance and undermines managements and boards, which are ultimately responsible and accountable for running these institutions.

Another aspect that adversely affects performance is the procurement process. Many state-owned enterprises are subjected to the same procurement procedures as those followed by other government departments despite facing stiff competition.

Their competitors, on the other hand, finalise decisions swiftly and start offering services without delay. In some cases, tender advertising alone can take up to two months, followed by tender board meetings, approvals from commissions and contract vetting by the Office of the Attorney General.

These processes come with costs and if the CEO is not bold enough, memos and external interferences can further complicate matters. As a result, these entities experience delays in project implementation, which, in turn, increase costs.

Another key factor is the appointment process for board chairpersons, members and CEOs of these organisations. In most privately-owned firms, these appointments are made through competitive processes, which often involve headhunting a few qualified individuals and subjecting them to rigorous interviews conducted by industry experts.

This process typically ensures that the best candidates are taken on board. However, the procedures in state-owned enterprises are quite different. Appointments are often made without interviews or competition among candidates, which can undermine the selection of qualified individuals.

While it is understandable if an appointee comes from a similar position in another company, the lack of competition can hinder the on-boarding of the best possible candidates.

If we want meaningful changes, we must replace the current appointment process with one that fosters competition. Positions should be advertised, allowing individuals to apply, or in cases of headhunting/poaching, a few suitable candidates should be selected on meritocracy based on their qualifications and then subjected to rigorous interviews.

These processes will ensure that these institutions are led by competent individuals. By adopting such procedures, we can avoid situations where CEOs or board chairpersons are appointed without any industry knowledge or leadership experience. This approach will also help prevent the appointment of board members who lack industry expertise and leadership backgrounds, ensuring that those in decision-making roles are qualified and prepared for their responsibilities.

When it comes to budgeting, in private companies boards of directors typically have the final say on budget approvals, but in state-owned firms, final decisions often require ministerial approval.

While the ministry represents the main shareholder, in this case the government, and appoints the board to safeguard its interest, it is the board’s role to oversee management, set targets through the budget and ensure management executes these budgets in the best interest of the shareholder. Instead of interfering during the process, the main shareholder (government) should raise any concerns during the AGM, allowing the board and management to operate effectively and independently in the interim.

In the next and the last instalment of this series, more will be shared with regard to those entrusted with running these institutions being reduced to mere figureheads and conclusions and recommendations for improvement will be provided.

Dr Muhsin Salim Masoud is a seasoned banker and academic, who has also served as managing director of the People’s Bank of Zanzibar and Amana Bank. [email protected]