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The State As Owner The ownership role As an owner, the state should: (i) ensure state-owned railway governance is transparent and accountable; (ii) establish a clear and consistent ownership policy; (iii) be an informed and active owner; and (iv) clarify and prioritize its objectives. State ownership policy and overall objectives should remain broad, clear, and consistent over the longer term, providing the railway, the market, and the public with predictability and a clear understanding of railways' long-term commitments. Objectives should be developed with public consultation. The ownership policy and objectives should be recorded on publicly available documents, widely circulated among relevant ministries, agencies, railway boards, management, and parliament. As an owner, the state should decide what is required from state-owned railways and how the company should be administered. The state should not meddle in daily management; instead, it should allow the railway full operational autonomy to achieve business objectives. Similarly, the state should respect board of directors’ independence, except for exercising the state role as owner, regulator, and contractor for services provided to citizens and customers. All objectives, policies, regulations, and contracts should be fully disclosed in publicly available documents. The state as owner exercises power, almost without exception, in the shareholders’ meeting, where a board is elected to be legally and financially responsible for the railway company. Management independence does not mean that managers of state-owned railway can set objectives that contradict the objectives of the state as owner; nor can management define the limits of public services. If serious differences arise, the state as owner retains the right to replace board members, including the chairman, if necessary to align railway business objectives with those of the government. This organizational model is based on typical powers of the state as railway owner and typical uses of ownership powers and responsibilities. The state as owner is responsible for making this model work, but the model will fail if government allows politics to influence decisions that should be made by the railway company. Another risk to the effectiveness of this model is political interference in recruitment, which can undermine the process of hiring competent and professional railway management. Therefore, governance structures for the state and the railway enterprise must be comprehensive, precise, and clear to all participants and the public. Roles and staffing of the ownership entityA centralized ownership entity is recommended for the state to exercise its complex ownership responsibilities, established under law and acting in accordance with a publicly disclosed ownership policy. Some ownership entities are called ‘Board of Supervisors’ or ‘Supervisory Board’ and their responsibilities include collecting inputs from all government entities involved in transport policy (e.g., the Ministries of Transport, Finance, and Environment). The unit designated to execute state ownership could be created in a specific ministry department or directorate—often the ministry responsible for state-owned companies—or an autonomous agency, or other entity. State ownership functions should be strictly separated from regulatory functions in the railway sector69. The state as owner acts through the ownership entity such as the Board of Supervisors, discussed above, in a manner similar to any major shareholder to protect and optimize its ownership interests. As defined by the OECD Principles of Corporate Governance, basic shareholder rights include: (i) to participate and vote in shareholder meetings; (ii) to obtain adequate information on the corporation on a timely and regular basis; (iii) to elect and remove members of the board; and (iv) to approve extraordinary transactions. Staffing the ownership unit The ownership entity should include competencies related to railways’ public services obligations, specifically expertise in managing contractual relationships for public service contracts (PSCs), and multi-annual maintenance and operation contracts for railway infrastructure. Finally, the ownership entity requires a degree of budgetary autonomy. It must be able to contract for external advice from independent specialists, to carry out evaluations or monitor railways results in specific domains, and it must have sufficient flexibility in staff recruitment, remuneration, and retention, including from the private sector. Ownership unit staff responsibilities related to government and parliament
Ownership unit tasks relative to state-owned railways
Detailed information is presented below about the role of the ownership entity in selecting board members, appointing the CEO, and separating management decisionmaking powers. Selecting the board of directorsIf the state is the sole railway owner, it is responsible for nominating and electing the entire board without consulting any other authority. The ownership entity should ensure that the appointment process is transparent, based exclusively on skills, competencies, and experience required in fulfilling the long-term strategy of the state-owned company. To this end, the ownership entity may find it useful to establish and maintain a database of qualified railway board candidates, using an open competitive process, professional staffing agencies, or international advertising to expand the list of highly skilled potential candidates—particularly with private sector and international expertise and experience. Incorporating international experts into the Board is a good idea (although rarely followed), when the country involved lacks experience or expertise in the railway domain. A good example of this approach is the Board of the railway infrastructure manager in Great Britain (currently Network Rail, former Railtrack), which included foreign experts. Board members must be professional, independent of political influence, and act in the sole interest of the railway, rather than represent interests of any other constituencies. To this end, the supervisory entity should develop guidelines or a code of ethics for its own members and board appointees, including state officials. Any potential conflicts of interest should be carefully evaluated and relevant trading regulations should be adhered to for those who have any personal financial stake in the railway, suppliers, or customers. Board members should have a clear mandate and full responsibility for company performance, and must be fully accountable to the owner(s) for their actions. Appointing the CEOThe CEO must be nominated and appointed against professional criteria using transparent rules and procedures that maintain a line of accountability from the CEO to the board and the ownership entity. Appointing and dismissing the CEO is a key board function and responsibility. Without authority over the CEO, boards would be unable to fully exercise their monitoring function or take responsibility for state-owned railway performance. Sometimes, the board consults with the ownership entity to select the CEO, or the CEO is appointed directly by ownership entity decision, in which case it is highly recommended to consult the board to preserve its authority. Since the board must assess management performance, it should decisively influence CEO compensation, which should be tied to CEO performance, and publicly disclosed. Separating the board chairman from the CEOA well-functioning board should be structured to facilitate objective and independent judgments, accurate monitoring of senior management, and strategic decision making. To enhance board independence, the OECD Principles of Corporate Governance consider it good practice to separate the chair from the CEO if the state-owned railway is organized in a single board structure, “achieving an appropriate balance of power, increasing accountability and improving the board’s capacity for decision making independent of management.” Implementing this principle requires clearly defined board and chair functions to prevent conflicts with company management71. Separating the board chair from the CEO is fundamental to an efficiently functioning state-owned railway board, and to empowering board independence from management. The chair could guide board members, assign individual responsibilities from among strategic board responsibilities, and seek agreement with the ownership entity on solutions for improving board efficiency. << Previous | Next >>69 This refers to the need of appointing different state entities to address ownership and regulation issues. The issue of independence of regulatory agency from the government is much more complex. It could be fully implemented in technical and safety questions, but economic regulators are easily subject to political interference. The only way to break this link is through enhanced market competition. |
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