GOVERNMENT-OWNED COMPANIES

Opposing views on political influence

Few people would argue that the rules issued by the state (government) must also be correctly and strictly observed by that same state. It cannot be well conceived that, for example, the police and Public Prosecutor’s Office (as instruments of the state) should be allowed to violate the law with impunity.

Though there may be very different opinions about the nature and the role of the state (particularly from a philosophical and jurisprudential viewpoint), here we address the question of how we should consider government-owned companies, and in particular, what level of influence the government should be allowed to exercise over these companies (government-owned foundations will not be discussed in this context).

It is probably true for most government-owned companies that their activities originally belonged within the remit of regular governmental duties. At some point, these activities were grouped together, forming one united organization (often some form of legal spin-off), concluding with the creation of a publicly held company which then oversees those activities.

Being a director of a government-owned company is certainly not always easy. Neither is being a shareholder in a government-owned company. The directors will usually complain that there is too much influence from politicians, while conversely the politicians will argue that they have too little influence over government-owned companies. This conflict raises two principal concerns that ought to be considered:

  • Where are the boundaries between the government and the market?
  • How much distance should there be between government and government-owned companies?

Let us first consider the boundaries between the government and the market. Which activities should be considered as duties of the government and which can be left to the market? Generally speaking, there is a consensus of opinion that the government should regulate public interests through legislation and regulations. As a result, to use an example, the government should not have to nationalize bread production in order to guarantee that this daily necessity remains affordable, though it may effectively control affordability by means of price regulation.

However, as we have seen with the banking crisis, there are sometimes special situations where it is necessary for the government to intervene (for example, the government in The Netherlands has become shareholder of ABN Amro Bank and Fortis Bank Nederland (which merged in 2010)). However, even with this intervention the starting point is that the government will eventually dispose of these shares again. There is no reason to keep these shares in the hands of the government indefinitely.

We will also consider how much distance there should be between government and government-owned companies. There are principally two opposing views which need analysis:

  • Government at a distance
  • Government not at a distance

Government at a distance

Proponents of this viewpoint believe that government should remain at a distance as much as possible and behave as an “ordinary” shareholder of a government-owned company. In other words, government-owned companies must be managed and run commercially from a business perspective. There are several reasons that support this argument:

  • Politicians are too busy to concern themselves with business operations
  • Politicians have no powers of judgment regarding “business” matters
  • Politicians manage from a social perspective and undermine the business aspect
  • The involvement of politicians risks too much party-political interference, which puts the company’s integrity in danger

Proponents of the government at a distance viewpoint argue that:

  • Politicians should set policy frameworks, establish priorities and set standards
  • Politicians should develop a justification protocol and steer towards results
  • Politicians should leave the actual business operations in the hands of experts
  • Supervision and control on standards should be led by (independent) supervisory directors

In theory, this approach should result in the best possible product or service, for the lowest cost and the maximum profit.

Government not at a distance

The opposing view is that government should not be at a distance, but the government-owned company should be managed as if it were a government service and therefore part of a department (ministry). The arguments supporting this point of view are as follows:

  • Politicians are always called to account and should therefore be able to involve themselves in day-to-day business operations
  • Politicians are there to guard the patrimonio nashonal (national heritage) and to protect it against the commercial interests of individuals
  • Government-owned companies serve the common social (and not commercial) interest
  • Government-owned companies do not fit in a more businesslike sphere

The direct participation by political parties in the supervisory board and board of directors increases the influence that politicians have on the government-owned company. As a result, political parties indirectly exert influence on important decisions within a government-owned company, including:

  • Appointments
  • Recruitment of staff
  • Tendering processes

Politicians promote member loyalty by giving away positions within the government-owned company, and this phenomenon has been a concern in Curaçao for quite some time.

It is my opinion that a government-owned company is no longer part of the public sector, but (apart from matters regarding concessions, licenses and other public interests) must be safeguarded against, and be able to function independently from, direct or indirect politically determined government influence, with the exception of the influence that directly ensues from the business (company) position of the government as shareholder. On a daily basis, we can read in the newspapers that the practice is different here in Curaçao.

In my opinion, a government-owned company must function in a manner that is to a large degree comparable to every other professionally run commercial company. It should be in free competition with other market parties, and be oriented towards achieving financial gain for the shareholder (in this case, the government or the community).

In addition, it seems desirable to me that the government should make a clear choice. If any of its activities are placed in a public limited liability company or a private limited company, then the government’s direct influence over those activities should be kept at a minimum, to ensure good corporate governance. If the government wishes to exert a larger influence of the activities, then they should remain within the duties of government itself and fall within the remit of the national budget, so that everyone knows where they stand.

I do not believe that Curaçao corporate law currently imposes an obligation on the shareholding government to appoint the best candidate as director or supervisory director (rather than merely the candidate who best represents a particular political party). Provided a shareholder does not abuse his voting rights, he is free to appoint whoever he wants. The appointment of political “friends” (provided they at least marginally meet the quality test) is therefore not a form of abuse under general corporate law (it could be seen as an abuse of administrative law, though that is another matter, of course).

However, the Organization for Economic Co-operation and Development (OECD) has issued guidelines (Guidelines on Corporate Governance of State-owned Enterprises) on the matter, which state:

The state should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of the state-owned enterprises (SOEs) is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness. (…) The government should not be involved in the day-to-day management of SOEs and allow them full operational autonomy to achieve their defined objectives. (…) The state should let SOE boards exercise their responsibilities and respect their independence.

The OECD believes that policies should be formulated so that it is clear how the government should behave as shareholder. The basic principles of transparency and accountability to the state (the public) should be adhered to, with the government taking a professional and results-oriented approach. The government:

  • Should not be involved in the daily management of the enterprise (day-to-day business)
  • Should allow the enterprise full operational autonomy

The OECD Guidelines remain the international benchmark with respect to corporate governance. Policies should be formulated that:

  • Make it clear how government will behave as shareholder
  • Adopt the basic principles of transparency and public accountability
  • Encourage the government to adopt a professional and results-orientated position

In my opinion, supervisory directors must be independent, also of politicians and political parties. Finally, in my opinion, prior to appointing a member of the managing board or the supervisory board, potential candidates should be thoroughly screened, evaluated and interviewed to accurately assess their skill levels and to ensure not only the best match for the position, but also to ensure their integrity.

Karel Frielink
Attorney (Lawyer) / Partner

(17 February 2014)

Ps

According to some politicians in St. Maarten, they don’t need a Corporate Governance Council to come tell them how to do their job. They want to disband the Corporate Governance Council as soon as possible. All members of the Corporate Governance Council in St. Maarten have resigned from their position since yesterday. In a press release, referred to in Today, Chairman Louis Duzanson expressed the council’s dissatisfaction with the way the government has handled its mandate, and with the way it has been removing members “one by one.”

According to Today’s opinion “Dillydallying“:

it is no secret that there is no love lost between the government and the Corporate Governance Council. The sad result is now that the members of the current council have announced that they call it quits. They have had enough of the dillydallying with their mandate and they leave it now up to the government to take the next step. (…) If the Corporate Governance Council heads for the same destiny as, say, the Monument Council, it could take years before there ever is a functioning board in place again. That is the way things go in St. Maarten. It is not right, but it is a reality.

Finally, read my contribution to the debate published in The Daily Herald ‘Corporate governance and bad habits‘ (22 December 2011)

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