Fondul Proprietatea: The lack of corporate governance in state-owned companies threatens Romania’s economic interests

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Fondul Proprietatea (hereinafter “the Fund”) expresses its disappointment with the prolonged lack of implementation of corporate governance legislation in state-owned companies and urges the Ministry of Economy, Energy and Business Environment and the Ministry of Transports, Infrastructure and Communications to take immediate measures to ensure the rightful and effective application of GEO 109/2011 on corporate governance in companies in which they are shareholders. It is the second time the Fund raises a red flag on the topic of corporate governance in the last two weeks. The recurrent violations continue to threaten the long-term stability of the businesses and are against Romania’s economic interest, as well as that of Romanian citizens.

The ongoing lack of implementation of corporate governance legislation in state-owned companies is especially evident in eight of the Fund’s portfolio companies, but not limited to them: Complexul Energetic Oltenia SA, Societatea Nationala a Sarii SA Salrom, C.N. Aeroporturi Bucuresti SA, S.N. Aeroportul Timisoara-Traian Vuia S.A., C.N. Administratia Porturilor Maritime Galati, CN Administratia Porturilor Maritime S.A. Constanta, CN Administratia Porturilor Dunarii Fluviale Giurgiu and Plafar. Based on the Fund’s data, the appointment of over 90% of the Government’s representatives in the Administration Boards of these companies are non-conformant with corporate governance rules, as provided in GEO 109/2011, as appointees either lack political independence or relevant professional experience.

The implementation of the legislation on corporate governance (GEO 109/2011) at the level of the Administration Boards has been circumvented or openly violated in many more SOEs through appointments of politically connected individuals, repeated appointments of interim board members and managers as well as indefinite postponement of the selection processes for the appointment of Board members for full 4-year terms. In some instances, we have seen current board members participate in selection processes carried out by the board themselves, implying an obvious conflict of interest and lack of regard for corporate governance principles.

The Fund notes that frequent appointments that ignore proper selection procedures negatively impact the financial results of the companies, the motivation of the management and employees, the implementation of planned investments, as well as relations with unions or business partners. Over the long term, they inhibit the companies’ financial potential and create instability.

Commenting on the violation of corporate governance law in SOEs, Johan Meyer, CEO of Franklin Templeton Investments and Portfolio Manager of Fondul Proprietatea said: “It is profoundly disappointing to see the appointment  of politically connected board members and general managers continues to be a practice in Romanian state-owned companies. It should be clear by now that reversing this trend would translate into significant economic and social benefits, from reducing the risk of fraud and corruption to improving companies’ operational performance and increasing the profit for Romanian State, thus unlocking their full economic potential and making them truly competitive. We should not forget that SOEs are the property of all Romanians and should thus be organized and managed to maximize their profit in the interest of all citizens.

It is all the more disappointing that the disregard for corporate governance principles continues in the context in which the State needs SOEs to operate at its full potential in order to contribute to the local economy in a difficult period, through jobs, taxes and, wherever possible, dividends.

The government still has a great opportunity to break away from the damaging legacy of the past through the adherence to legislation and the implementation of sound governance practices that advance the interest of all citizens.”

The Fund’s research further reveals that many of the appointments in the abovementioned eight companies are politically affiliated or politically supported, while the majority of candidates are without professional experience, or in a conflict of interest. Moreover, more than 70% of the Government’s representatives have been recently re-appointed for interim mandates (50% for 4-month mandates), which prolongs the damaging practice of failing to organize professional selection processes for full 4-year terms, that would ensure stability, transparency and predictability in the company.

The Fund welcomes the recent statements made by the Minister of Public Finances on the need for professional management in SOEs and the ministry’s determination to oversee the proper implementation of GEO 209/2011. Furthermore, to ensure the legislation on corporate governance is implemented in SOEs, the Fund demands the Ministry of Economy, Energy and Business Environment and the Ministry of Transports, Infrastructure and Communications takes or facilitates the following urgent measures:

  • Eliminate political influence in the management of state-owned companies and encourage professionalism and high ethical business standards. This will decrease corruption-related risks, as integrity and reputation are key criteria in the selection and evaluation processes for management bodies.
  • Establish and observe clear selection procedures for Administration Boards and executive management teams, for full 4-year terms. The measure will increase stability and allow the companies to plan and implement long-term investments.
  • Establish clear processes and responsibilities regarding decision making, which will create predictability and increase transparency in the company. Over long term, it will vastly improve the responsibility of the management towards employees, shareholders and the company.
  • Determine performance criteria for management bodies, thus ensuring the overall performance of the company which can be assessed transparently and independently.
  • Implement a code of ethics with clear rules regarding conflicts of interests and promoting adequate pay based on performance and profitability for all employees, which will improve their motivation.
  • Observe the provisions of GEO 109/2011 which prohibits ministries to interfere with the day to day management of the state-owned companies.

Ultimately, professional and transparent management of state-owned companies benefits the companies themselves, the state budget, and the economy in general. At the same time, it solidifies public trust in the Government’s capacity to manage the economy responsibly, especially necessary at such a critical time. As such, the Fund urges the Government to fully and immediately implement the corporate governance legislation in all SOEs and thus assure SOEs’ sustainable development.

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