Transparency of Selecting Candidates for the Boards and Councils of Public Entity Enterprises (LV0021)

Status quo: Different practices in procedures for the selection of candidates for the membership on the board and council of a public entity enterprise; the process is often not transparent, which casts doubt on whether the most suitable candidates are being approved. Main objective: To nominate candidates for the posts of board and council members on the basis of professional competence criteria (education, experience, knowledge of the field, finance, management, etc.), in which a candidate's political affiliation is not a decisive factor.

✪ 4. Open, fair and professional selection of candidates for the membership on the boards and councils of public entity enterprises

Commitment Text:

Status quo: Different practices in procedures for the selection of candidates for the membership on the board and council of a public entity enterprise; the process is often not transparent, which casts doubt on whether the most suitable candidates are being approved.

Main objective: To nominate candidates for the posts of board and council members on the basis of professional competence criteria (education, experience, knowledge of the field, finance, management, etc.), in which a candidate's political affiliation is not a decisive factor.

Responsible institution: State Chancellery/Cross-sectoral Coordination Centre

Supporting institution(s): NA

Start date: 2014.................... End date: 2016

Context and Objectives

Government-owned enterprises manage a significant amount of public resources; therefore, it is important to ensure their effective management and avoid conflicts of interest among supervisory board members. Supervisory boards of state-owned enterprises (SOEs) were abolished in Latvia in 2009, as journalists and corruption analysts discovered that their politically appointed members were generous donors to political parties. ^{See the article, http://www.diena.lv/raksts/latvija/politika/delna-valsts-un-pasvaldibu-uznemumi-joprojam-tiek-izmantoti-ka-partiju-barotnes-13900312.}

Having ministry officials oversee the enterprises did not solve the problem of proper and sufficient state control, however. The Baltic Institute for Corporate Governance (BICG) stated that “[O]fficials tasked with SOE oversight are clearly stretched beyond the limits of their technical and physical capacity. The absence of properly established professional boards of directors, or structures better able to monitor management…could be leaving Latvian SOEs vulnerable to further governance failures in the future.” ^{Baltic Institute of Corporate Governance, Governance of State-Owned Enterprises in the Baltic States (2012), http://bit.ly/2jFdW0R.}  Taking into account OECD recommendations, the government decided to renew the supervisory boards.

The commitment seeks to nominate members on the basis of their professional qualifications. Though the commitment text above does not specify which new mechanisms, procedures, or tools will promote the “open, fair and professional” selection of board members, the new procedures are set out in the Law on Governance of Capital Shares of a Public Person and Capital Companies, and in a set of Cabinet of Ministers instructions, both of which are cited in the action plan. ^{Government of Latvia, Second OGP Action Plan, 2015-2017, http://bit.ly/2ptZ0sq } Among other things, the Law specifies that there will be a public application procedure and a nomination committee that will nominate candidates. It also outlines the disqualifying criteria for candidates. ^{Government of Latvia, Law On Governance of Capital Shares of a Public Person and Capital Companies, 18 June 2015, http://bit.ly/2pdA1sG } For this reason, the commitment is considered to have a high level of specificity.

Similarly, while the commitment text above does not make clear how the proposed new procedures would involve the public, the Law cited in the action plan specifies that the nomination committees must include independent experts, and if necessary, independent observers with advisory rights. ^{Ibid, Section 31.}  In addition, the Cabinet of Ministers regulation cited in the action plan establishes a requirement to “inform the public about the candidates and the selection process of candidates, and the results of the evaluation process…” ^{Cabinet of Ministers, Amendments to Regulations No.686, http://bit.ly/2pqlgkK } As a result, the commitment is considered relevant to both access to information and civic participation.

By involving citizens in the monitoring process of nominating and selecting board and council members, the commitment could help minimize the misuse of public resources. Concretely, the commitment could significantly improve openness by allowing journalists and society to monitor whether the income generated from serving on a board is redirected to political parties. Given that there was limited public information about this important process prior to the action plan, the active involvement of citizens in monitoring would go beyond mere transparency of the process and would represent a significant departure from the status quo.

Completion

Drafting a law to manage public person-owned enterprises and procedures for selecting board members took place under Latvia’s first action plan. The draft Law on Governance of Capital Shares of a Public Person and Capital Companies was adopted in the second reading on 3 July 2014. The draft Cabinet of Ministers’ Instruction, “Procedures for selecting candidates for membership on a board or a council in companies in which the State as shareholder has the right to nominate board or council members,” was adopted at the Cabinet of Ministers meeting on 23 September 2014. Parliament approved the bill and it came into force on 1 January 2015. ^{See the official law data base, http://likumi.lv/ta/id/269907-publiskas-personas-kapitala-dalu-un-kapitalsabiedribu-parvaldibas-likums.}  The bill set procedures for publicly announcing a tender, establishing a nominating committee, publicizing names of elected board members, and setting criteria for professional competence, including education, experience, knowledge of the field, finance, and management.  

During the current plan, the government delegated supervisory functions to the Cross-Sectoral Coordination Centre, ^{Official law data base, http://likumi.lv/ta/id/274282-par-valsts-kapitalsabiedribu-un-valsts-kapitala-dalu-parvaldibas-koordinacijas-instituciju.}  a government strategic and policy-planning institution that reports to the Prime Minister. ^{Home page of the Cabinet of Ministers, http://www.pkc.gov.lv/par-pkc.}  In addition, the government established new procedures, including announcing tenders, establishing a committee, and publishing names and qualification of candidates.

Early Results (if any)

By the end of May 2016, three boards were selected according to the new procedures. The new procedures require publishing the intent to select a board, advertising a tender outlining criteria for the selection of candidates, including social partners in nomination committees (such as the Latvian Employee Federation), and publishing names of selected candidates as well as the framework for their remuneration. The process was transparent in that journalists and the public could follow the tenders on the internet — from publication of the advertisement to publication of the final list of nominees. ^{Home page of the Cabinet of Ministers, http://www.pkc.gov.lv/kapit%C4%81lsabiedr%C4%ABbu-p%C4%81rvald%C4%ABba.}  Yet, some candidates selected were in one way or another linked to other SOEs. ^{See http://financenet.tvnet.lv/zinas/610687-valsts_uznemumu_padomes_joprojam_izvelas_politiki.}  Consequently, stakeholders identified shortcomings in the selection process and in the criteria used to choose potential board members.

The BICG is a well-organized stakeholder forum for this commitment. ^{The Baltic Institute of Corporate Governance (BICG) is a non-profit, non-governmental initiative with strong involvement from Baltic businesses and political leaders. BICG is a leader in helping to create better governed public and private companies. It provides studies and guidelines on corporate governance for private sector entities and state-owned enterprises, and implements education programs for top managers, business owners, and members of supervisory and management boards.}  To assess why the new selection procedures did not yield the expected results, BICG organized a public debate entitled, “How to Create Professional Supervisory Boards in State-Owned Enterprises,” in March 2016 with representatives from ministries and SOEs, entrepreneurs, and experts. From the discussion and OECD corporate governance principles, BICG developed a list of recommendations that were presented to government institutions. The recommendations are available in both Latvian ^{See the BCIG home page at http://www.bicg.eu/wp-content/uploads/2016/07/BICG-Recommendations-on-Nomination-Process-of-Supervisory-Board-Members-in-Latvian-SOEs.pdf.}  and English. ^{BCIG home page, http://www.bicg.eu/wp-content/uploads/2016/07/Recommendations-2.pdf.}

There are four recommendations:

1.Change the strategy for selecting supervisory board members;

2.Use new guidelines to recruit nominating committees;

3.Define requirements for potential supervisory board candidates in line with the needs of the particular enterprise and its board; and

4. Enhance communication practices to ensure transparency in the selection process. ^{BCIG, http://www.bicg.eu/wp-content/uploads/2016/07/Recommendations-2.pdf.}

Each recommendation is explained in greater detail in the publication, including practical steps to be implemented for future selection processes. Interviews show that the BICG recommendations were well received by the Cross-Sectoral Coordination Centre, which prepared the necessary amendments to the law. The amendments were approved in October 2016—after the close of the period under evaluation in this report—and will be assessed in the IRM end-of-term report.

Next Steps

The NGOs interviewed ^{Interviews with Iveta Kažoka, Policy Centre “Providus,” 22 August 2016; Jānis Volberts, TI local Chapter “Delna,” 22 August 2016; Liene Gātere, TI local Chapter “Delna,” 22 August 2016; and Andris Grafs, Baltic Institute for Corporate Governance, 23 August 2016.}

 proposed widening the commitment to establish close oversight of board members at government-owned enterprises and the recruitment of managers at national and local government institutions. The IRM researcher agrees with the BICG’s suggestions. The IRM End-of-Term report will evaluate the government’s progress in implementing these recommendations.

Even if good selection measures are in place, as was the case at the end of the first action plan, not all aspects and outcomes of the process can be foreseen. For this reason, the IRM researcher suggests continued monitoring of the issue, specifically, public monitoring of the selection of management personnel for local and national government institutions. 

✪ Commitment 4. Open Board Selection

Commitment Text:

Open, fair and professional selection of candidates for the positions of board and council members of companies owned by a public person

Different practises in procedures for the selection of candidates for the posts of the board and council members of a capital company; the process is often not transparent, which casts doubt on whether the most suitable candidates are being approved.

Main objective: It is essential to establish a transparent procedure for the nomination of candidates for the posts of board and council members on the basis of professional competence criteria (education, experience, knowledge of the field, finance, management, etc.), where a candidate's political affiliation is not a decisive factor.

Responsible Institution: Cross-sectoral Coordination Centre

Supporting Institutions: All shareholders of a public person

Start Date: 2015 ...... ...................... End Date: 2017

Editorial Note: The commitment text above is drawn from the updated version of the action plan, published in October 2016 and available at http://bit.ly/2EK34dH. The original version of the action plan is available at http://bit.ly/2ptZ0sq. To see the changes between the two versions, visit http://bit.ly/2FPvK4r.

Commitment Aim

Government-owned enterprises manage a significant amount of public resources. In 2016, the aggregate revenue of Latvia’s 65 state-owned enterprises (SOEs) reached 3.26 billion euros. ^{“Aggregate Revenue to Latvian State-Owned Enterprises Reach EUR 3.26 bln in 2016,” The Baltic Course, 10 November 2017, http://www.baltic-course.com/eng/markets_and_companies/?doc=134952.} Therefore, it is important to ensure effective resource management and avoid any conflicts of interest among board members. Supervisory boards of SOEs were abolished in Latvia in 2009, since they were regarded as a source of income for political parties. Journalists and corruption analysts discovered that politically appointed members of boards were generous donors to political parties. ^{“Delna: State and Local Government Companies Are Still Used as Parties’ Feeds,” Diena, 27 August 2011, http://www.diena.lv/raksts/latvija/politika/delna-valsts-un-pasvaldibu-uznemumi-joprojam-tiek-izmantoti-ka-partiju-barotnes-13900312.}

Nonetheless, having ministry officials oversee the enterprises did not lead to proper and sufficient state control. As a result, and considering the Organisation for Economic Cooperation and Development (OECD) recommendations, the government decided to renew the supervisory boards in large SOEs and open the selection process for both executive and advisory board members.

This commitment aims to improve the governance of SOEs by nominating and selecting boards and advisory board members based on their professional qualities. The revised version of the action plan explicitly describes the expected outcome as having all public entities and shareholders in SOEs follow new procedures for selecting board and council candidates.

Although the commitment text above does not specify the mechanisms that will promote the “open, fair and professional” selection of board members, the Law on Governance of Capital Shares of a Public Person and Capital Companies and a set of Cabinet of Ministers regulations, both cited in the original action plan, ^{Government of Latvia, Open Government Partnership Second National Action Plan of Latvia, 2015–2017, http://bit.ly/2ptZ0s.q.} specify the proposed procedures. These procedures include aspects of open government such as publishing the intent to select a board, advertising a tender outlining criteria for the selection of candidates, including social partners in nomination committees (such as the Employer’s Confederation of Latvia), and publishing names of selected candidates. Under the proposed procedures, board members must also declare their income and publish most of their declarations.

This commitment thus has the potential to significantly improve openness by making it possible for journalists and society at large to monitor each step of the selection process, identify candidates’ conflicts of interest based on their declarations, and participate directly in the selection process through nomination committees that involve members of the public.

Status

Midterm: Substantial

Parliament drafted the Law on Governance of Capital Shares of a Public Person and Capital Companies during the implementation of Latvia’s first action plan. The body approved the bill on 3 July 2014. The relevant Cabinet of Ministers regulations were later adopted on 23 September 2014. Both documents came into force on 1 January 2015. ^{“Public Entity Capital and Capital Management Law,” Legislation of the Republic of Latvia, official law data base, http://likumi.lv/ta/id/269907-publiskas-personas-kapitala-dalu-un-kapitalsabiedribu-parvaldibas-likums.} The bill envisaged the procedures listed above, including publicly announcing a tender; establishing a nominating committee; and setting and publicising criteria for professional competence, such as education, experience, knowledge of the field, finance, and management.

During the first year of the second action plan, the government implemented the new procedures, including announcing tenders, establishing a committee, and publishing the names and qualifications of candidates. The functions of the supervisory institution were delegated to the Cross-Sectoral Coordination Centre, a government strategic and policy-planning institution that reports to the prime minister. ^{“About PKC,” Cabinet of Ministers, http://www.pkc.gov.lv/par-pkc.} For more information, see the 2015–2016 IRM midterm report. ^{Open Government Partnership, Independent Reporting Mechanism (IRM): Latvia Progress Report 2015–2016, https://www.opengovpartnership.org/wp-content/uploads/2001/01/Latvia_Progress-Report_2015-2017_for-public-comment_0.pdf.}

End of term: Complete

The second year of implementation brought two major outputs: (1) a web page with data ^{“Management of National Capital Agencies,” Cross-Sectoral Coordination Centre, http://www.valstskapitals.lv.} on SOEs and (2) guidelines for the selection of board and supervisory board members. ^{“Vadlinijas Kapitalsabiedribas Valdes un Padomes Loceklu Kandidatu Atlasei un Izvertesanai, Kapitalsabiedribas, Kuras Valstij ka Dalibniekam ir Tiesibas Izvirzit Valdes vai Padomes Loceklus,” Cross-Sectoral Coordination Centre, http://www.pkc.gov.lv/sites/default/files/images-legacy/Kapitalsabiedribas/Vadlinijas_kap_sab_valde_padome.pdf.}

According to the new guidelines approved on 16 October 2016, each nomination commission shall describe the procedures and criteria for selections, which are examined by the Cross-Sectoral Coordination Centre. To ensure the openness of the procedure, the government publishes information about the vacancy, the candidates, selection results, and the procedure that was applied on the web pages of the SOE and shareholder (the state institution with the majority of shares in the SOE). Tender announcements and their results are published on http://www.valstskapitals.lv/.

Although not directly linked to the commitment objective, the database at http://www.valstskapitals.lv/ provides annual reports on SOEs, general indicators, balance sheets, profitability and financial stability indicators, financial indicators, and funding from and contributions toward the state budget. It also gives lists of the shares and shareholders of SOEs. The data are free and reusable, are provided in an open data format, and can be downloaded in Excel format by anyone without authorisation.

The web page also contains a section called “Public Participation,” which includes the following subsections directly linked to this commitment: (1) policy documents, laws, regulations, and guidelines that are being drafted; (2) current vacancies for board and advisory board members in SOEs; and (3) selected members of boards and advisory boards.

Did It Open Government?

Access to Information: Major

Civic Participation: Major

The commitment made important strides in publishing more information about the selection process of SOE board members and involving citizens in the process. In practise, the government established a regulatory framework and guidelines, ^Ibid. and there is now oversight for each particular tender. The government informs the general public about tenders, the candidates for the vacancies, the process of selecting candidates, and the final results. There is also easily accessible information on both the enterprises and the board vacancies on a website (http://www.valstskapitals.lv/), which contains data on SOEs in an open data format. Specifically, the new website has a dedicated page listing all vacancies ^{“Vacancies in Capital Companies,” Management of National Capital Agencies, Cross-Sectoral Coordination Centre, http://www.valstskapitals.gov.lv/lv/sabiedribas-lidzdaliba/vakances-kapitalsabiedribas/.} and another featuring information on selected board and council members. ^{“Information about Elected Board and Council Members,” Management of National Capital Agencies, Cross-Sectoral Coordination Centre, http://www.valstskapitals.gov.lv/lv/sabiedribas-lidzdaliba/informacija-par-ieveletiem-valdes-un-padomes-locekliem/.} Compared to the limited public information available about the selection process for SOE board members prior to the action plan, this commitment led to a major change in access to information.

The commitment also led to a major change in civic participation. For example, NGOs (such as the Employers’ Confederation of Latvia) are now included in the nomination commissions that outline the procedures for selecting board members. While these commissions do not have a decision-making role, they monitor the selection process. In addition, after the initial trial run of the new board selection processes in 2016, ministerial and SOE representatives worked closely with the Baltic Institute of Corporate Governance (BICG) and other NGOs to improve the procedures for selection. ^{Open Government Partnership, Latvija Progresa Zinojums 2015–2016, http://bit.ly/2AJnG7a.} Most of the BICG recommendations were integrated into the new guidelines, highlighting the powerful role of civil society during this process.

As for how the procedures impacted the selection process, the Latvian government began implementing the new procedures in early 2016. By May 2016, three boards were selected following the new procedures (publishing the intent to select a board, publicising the tender, outlining the selection criteria, including civil society organisations in nomination committees, and publishing the names of the selected candidates and their compensation models). While there was greater transparency, in that the public could follow the process from start to finish, some of the candidates selected still had strong political ties. ^{“National Business Councils Are Still Chosen by Politicians,” Finance Net, 29 May 2016, http://bit.ly/2BHD18n.} Thus, this problem has persisted. Recently, a new member selected for the Latvian Radio board suspended her work with a political party only one day before submitting her board application. ^{“Vejonis: The Appointment of a Member of the Latvian Radio Board ‘Creates a Reflection,’ but the Procedure Has Been Followed,” Latvian Public Media, 19 December 2017, http://bit.ly/2o1rtDs.} This is an example of how the government has not yet fully achieved the ultimate goal of reducing public doubts about the professional merits of new SOE board and council members, even if this commitment contributed to important changes in government openness.

Carried Forward?

The IRM researcher suggests continued monitoring of this issue, and greater transparency regarding and public oversight of the selection of management personnel for local government institutions such as transport companies co-owned by local governments. In addition, an expert from the BICG ^{Andris Grafs (Baltic Institute of Corporate Governance), interview by IRM researcher, 12 September 2017.} proposed several measures for more openness: renewing data on enterprises quarterly (not annually, as it is done now) and adding information to the database related to the public services delivered by the enterprises. So far, the database provides only economic information.

The third action plan builds on this commitment and looks to further improve the transparency of SOEs. A commitment in the third plan includes activities such as publishing nonfinancial data, disclosing the public functions of SOEs, achieving better exchanges of data, publishing quarterly reports to reduce risks in a timely manner, and building on best practises. The government’s plans do not, however, include a focus on local government institutions at this stage.