Governance changes key to sustaining state-owned firms

By Muhsin Masoud

In today’s final instalment of my latest series, I will discuss further interference in decision-making that undermines the authority of those entrusted with the responsibility of running state-owned enterprises and provide recommendations for improvement.

There is an incident worth mentioning. One evening after a new financial year had begun and a certain institution already had commitments that needed to be taken care of, a letter was received from a senior government official instructing the management to abandon the approved budget.

This abrupt decision threatened to bring the business to a standstill. Fortunately, an appeal was made to higher authorities and the institution was eventually allowed to proceed with its budget.

This arbitrary decision, made by a single individual without bothering to consult the board or CEO, highlights the dangers of such unilateral interference in the governance of state-owned entities.

It is crucial, particularly for entities facing competition, to adopt a governance structure similar to that of private entities. In this model, the government should appoint competent boards of directors, which, in turn, select and appoint the CEOs.

The primary interest of the shareholder is to earn dividends and ensure share growth, which often leads to other forms of positive impact, including job creation, tax payment and contribution to community development.

By setting clear targets for the boards, they will be motivated to push management to excel. It is essential to trust these boards by granting them the necessary obligations and decision-making powers that come with their appointments by the shareholder.

Many MDs or CEOs who transition from the private sector identify significant obstacles to enhancing the performance of state-owned firms.

These firms are expected to compete effectively with their private counterparts in delivering quality services.

Unfortunately, bureaucratic interference and lengthy procedures distract these leaders from focusing on the core business operations and keeping up with the competition.

When an individual is entrusted with responsibility, it is essential to empower them with the authority to make decisions. This approach will enable more accurate assessments of their performance and effectiveness.

To ensure that state-owned firms can effectively compete and outperform private entities, essential changes must be made.

These include granting autonomy in the employment and remuneration procedures, streamlining procurement processes and allowing for the development of flexible organizational structures.

It is crucial to stop perceiving these organisations as mere departments within ministries.

Instead, competent boards should be appointed to select capable CEOs and senior management teams.

Furthermore, management and CEOs should not be involved in meetings that are irrelevant to their responsibilities.

By making these adjustments, state-owned firms can enhance their performance and be in a position to better meet the demands of a competitive landscape.

It is imperative to place trust in the boards and management entrusted with the responsibility of running these institutions.

Simon Sinek states on Page 93 of his book Leaders Eat Last that, “Put simply, the more pressure the leaders of a public company feel to meet the expectations of outside constituency, the more likely they are to reduce their capacity for better products and services.”

Bureaucracy, excessive memos, constant calls and unnecessary meetings add to this pressure, distracting them from their primary focus of enhancing services and products.

By eliminating these burdens and granting autonomy, state-owned enterprises will be better equipped to thrive in a competitive landscape.

Empowering management and boards to make decisions without undue interference will lead to improved performance, innovation and, ultimately, greater service delivery to the public.

As Sinek emphasises, it is crucial to grant decision-making power to those who bear the primary responsibility to run these institutions.

He poignantly states on Page 103 that, “When we do not feel safe from each other in the environments in which we work, our instincts drive us to protect ourselves at all costs instead of sharing our accountability for our actions.”

To foster a culture of accountability and responsibility within boards and management, it is essential to appoint competent individuals, entrust them with decision-making authority and hold them accountable for their actions.

By creating environments where individuals feel secure in their roles, we can shift the focus from self-protection to shared responsibility, ultimately leading to better governance and performance in state-owned enterprises.

“Responsibility is not doing as we are told, that’s obedience. Responsibility is doing what is right,” Sinek says on Page 146 of his book. Let us do what is right and be responsible.

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.