Distinct Approach to Raise the Quality of Corporate Governance in the State-owned Companies

Along with many factors, the specificity of the state-owned enterprises consists of the fact that they are controlled and managed directly by the budgetary agencies. Basically, such enterprise is a company, where state owns minimum 50% share of it. It is a controversial issue how positively we can measure an existence of the public enterprises, especially if we acknowledge two fundamental circumstances:

1. Georgia is a post-soviet country with a transitional macroeconomic architecture and with a low share of GDP per capita;
2. In our reality, such enterprises are mainly represented in the form of vital strategic facilities, such as electricity, oil and gas industry, railway line and transport services.

Considering all of these circumstances, an agenda raises the question of whether the full or partial privatization of the above-mentioned type of enterprises assist to enlarge various parameters of the country’s economy and strengthen the security atmosphere.

Some kind of argument may exist in favor of privatization, but to give the importance of the two circumstances described above, I assume, that the energy and railway industries should invariably be retained as a status quo under the state ownership.

This point of view is a consequence of the following factors:

• The basic functions of the state-owned enterprises are the following: operation of the electricity grid and transmission lines, exploitation of the strategically important electricity lines, dispatch of the power plants by an electric utility and establishing united and unified platform to trade by electricity, operating main pipelines of oil and gas and management and control of transnational trading of the energy resources, importing natural gas, project and construct of the main gas pipelines, ensuring transportation of the passengers and cargo by railway lines. Such strategically important functions should execute only state-owned enterprises, because these spheres are one of the fundamental cornerstones of the national economical, energetical and transport security.
• With the transport and logistical significance, Georgian railway line has also the economic and military geo-strategical meaning.
• If we allow the possibility of full or partial privatization of such enterprises along with the reservation, prohibit private Georgian based company to resail certain shares of the company to one or more foreign companies, we will get a complicated reality. Particularly, with such prohibition, on the one hand, the state will interfere into the principle of the free contractual will and on the other hand, it will be difficult to predict whether Georgian private investment will be able to carry out its activities in long term period in order to avoid the danger of the lack of the revenue. Neither private investor can offer such guarantee to the state despite of the existence of the best analytical business plans. It is possible to make several calculations ahead in favor of few years, but it is unimaginable to do it in the long-term period and it will be risky not only for one enterprise, but also for the whole strategical national interest of the country.
• To ensure the security of the energy facilities and the railway line, there is a necessity to plan and execute number of the state law-enforcement measures. In case of the private investment, it cannot be followed qualified protection and it will cause tremendous damage and disturbance of the country’s whole economic interest.

Therefore, if we agree to leave the status quo, then we should try to establish more modern system of ownership, control and management of such enterprises than it is today. In particular, I refer on the several energy companies operated by JSC “Partnership Fund” as well as Georgian Railway, because among Georgian state-owned companies this fund in a best way represents the specifics of the state-funded companies.

It is more actual to establish modern corporate governance model for the state-owned enterprises, if we consider Georgia’s not so distant soviet past, when all enterprises were managed by the planned economic principles.

According to the law of Georgia on “JSC Partnership Fund”:

• The JSC Partnership Fund is a Joint Stock Company provided by the law of Georgia on “entrepreneurs” and founded by the state;
• The supervisory board is composed of representatives of the government of Georgia and persons invited from the private sector. The supervisory board is headed by the prime minister of Georgia. The composition of the supervisory board is determined by the government of Georgia.
• Projects are managed by the chief executive officer, who will be appointed and may be dismissed by the supervisory board. The management board shall agree its structure and the number of its members with the supervisory board.[1]

An issue of stable operation of the state-owned enterprises under the management of the JSC “Partnership Fund” is largely depended on the transformation of the governmental officials. This factor negatively impacts on the long-term balanced functioning of these enterprises and in its turn, it may damage numerous strategical spheres of the economy.

The fact that the supervisory board of the “Partnership Fund”, along with the executive branch also includes persons from the private sector, should be positively assessed. Contrary to this, neither legislation nor any recommendation provides the thesis that at least one or more of these persons should be independent member(s).

Relied only on the above-mentioned law and the relevant provisions of the charter of the fund will be difficult to conclude that the enterprises under the management of the fund foresee modern corporate governance’s achievements and recommendations.

It is important to elaborate one of the best models of the corporate governance for such enterprises because of the following reasons:

• Contrary to the change of the governmental officials, corporations should uninterruptedly continue their activity;
• It is important to attract a lot of profitable direct investors, investment funds and international financial institutions regarding to the projects, which are planned by the state-owned corporations;
• Better corporate governance model will open the way for these enterprises to have easier access to the international portfolio investments, as well as create more favorable environment for the development of the local portfolio investment potential, which will bring enlarged financial returns and other long-term benefits.

More or less uniformed standard of corporate governance should be established for each state-owned enterprise, which in a high quality separates the functions of the ownership, supervision and executive management of the company.

Discussing to establish better model of corporate governance, I mean along with Georgian appropriate legislation to unify modern methods of management in favor of state-owned enterprises, which should be based on the achievements of the best international practice and recommendations of international financial institutions and nominated stock institutions as a soft law.

The code of corporate governance of state-owned enterprises or the unified rules or a document with a different title should regulate the following issues:

• Ensuring uninterrupted function of the fund and all of its enterprises, especially during the transitional period, which means transformation the whole cabinet of the ministers;
• To appoint more members of the supervisory board from the private sector and among them to choose at least one independent member;
• An audit committee with one or more independent members should be composed within the supervisory board;
• Corporate governance model should consist of the transparent standards to appoint and dismiss director and board of directors. It should also regulate an accountability clause of the directorate;
• Personalized dissociation of the members of the supervisory board and directorate, when at least an ordinary member of the directorate should not be the member of the supervisory board at the same period;
• Constant disclosure of the results of the independent audit not only for shareholders, but also for the public.

Instead of a conclusion

Presented considerations focus only on the JSC “Partnership Fund” and its subsidiary companies, but this does not mean that a corporate governance document should be elaborated exclusively for this fund. The purpose of this review is to focus on the necessity to develop a better corporate governance model for all state-owned enterprises and not only for the “Partnership Fund”. In particular, uniform corporate governance standards for the state-owned enterprises should be based on the specifications of the companies owned by the fund due to the following circumstances: these companies are strategically important for the economic security of the county and they have a complicated organizational structure.

After upgrading corporate governance model on behalf of the companies operating under the “Partnership Fund”, an excellent precedent will be set for the other state-owned companies and it brings only positive consequences for the economic prosperity of the country.

Levan Kokaia

Master in Law. Attorney at Law. Legal consultant on corporate governance issues. Currently serves as a corporate lawyer at one of the energy companies. Member of Georgian Bar Association. Author of more than 40 publications. Guest lecturer and trainer at GIPA.

[1] Law of Georgia on “JSC Partnership Fund”: First clause of the first article, first-three clauses of the sixths article and second and third clauses of the seventh article.