Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

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Railway Reform: Toolkit for Improving Rail Sector Performance 10. Corporate Governance formation, and how minority shareholders are protected. Local law also determines the board of directors’ liabilities—generally, the board has fiduciary responsibility to shareholders and is legally liable for enterprise conduct. 116 The enterprise compensates board members and expects them to spend significant time on company business. Other important structures shown in the governance diagram and features specific to a railway enterprise are discussed in detail below. 10.2.2 Selecting board members Board members are selected—or elected, in private enterprises—by shareholders or by a supervisory board, usually in an annual shareholders’ meeting or on a schedule stipulated in the company charter. Generally, board members serve staggered multi-year terms; this provides stability and continuity because all members do not leave the board simultaneously. Shareholders or the supervisory board can remove and replace board members at any time. The board composition and number of members must be matched to the duties and responsibilities it is expected to carry out effectively and efficiently. A large railway will have several special board committees, for example, compensation, audit, planning and strategy, finance, executive search, and so forth. Each committee should be headed by a board member with specialized professional experience in committee issues. On average, the board of a large corporation might have 15 to 17 members; smaller companies may have 5 to 7. A board of more than 25 members should be avoided as unwieldy. There should be an odd number of board members to avoid voting ties. Shareholders must consider railway company business maturity and business direction when nominating board members for an enterprise that has substantial financial, operational, market, and technological complexity. Because of this complexity, it is useful to have board members with broad expertise in finance, operations and logistics, technology, human resources, and members who are specialists in law and government, since railways are usually heavily regulated. Some boards also include employee representative(s) from one or more of the powerful unions that work on railways. Often, the corporate charter and local laws will determine eligibility to serve on the board, especially for state-owned enterprises. The enterprise CEO is often a board member; but management representation should be limited to ensure the board maintains supervisory independence. Even for state-owned railways, the majority of board members should be independent of the main owner(s). Most board members should have commercial and corporate experience. In most countries, boards must consider gender distribution, and sometimes they should consider race or ethnicity. Prospective board nominees must be capable, available for the time needed to fulfill their roles and responsibilities, and free of any bias that would encumber 116 A fiduciary responsibility is a responsibility based on trust. In this case, it refers to a group, business, or person (the board members in this case) who may act for another (the shareholders) with total trust, good faith, and honesty. The World Bank Page 158
Railway Reform: Toolkit for Improving Rail Sector Performance 10. Corporate Governance their decision making. Ensuring that these criteria are met is not only the responsibility of shareholders but also of prospective board members. 117 The board chair must be selected based on qualifications and ability to allocate time necessary for the role; the chair should not be the railway CEO, or a past CEO. Large railways will require board chairs to be available almost full time since they usually serve on several committees, advise the CEO, and are often the political figurehead and spokesperson. If the duties are considered full-time, the railways may need an executive chairperson, who might assume a hands-on role in daily management. In effect, an executive chairperson is head of the independent board of directors and the company’s executive officers. However, this can create an imbalance in corporate governance by reducing both the board of directors’ independence and the shareholders’ influence in corporate governance, and increasing the influence of corporate management. Therefore, the executive chairperson should be able to represent shareholders and remain independent of company management. 10.2.3 Board of directors functions Shareholders influence management by nominating board members and the board has full legal and financial accountability for the company, responsible for the following functions, among others. • Nominate and dismiss the CEO and key corporate officers, and set their compensation levels • Establish the enterprise organization • Establish company values and mission • Set the enterprise’s strategic direction • Supervise management and monitor company performance • Monitor company financial performance and manage financial risks • Approve all important investments and strategic issues • Develop company succession plans The CEO and management make common daily business decisions; the board makes decisions on strategic issues affecting the company. The CEO and management team play a central role in preparing and presenting materials on strategic issues and may recommend board actions on those issues. The board will draw on a range of resources to fulfill its duties to shareholders. Many boards organize internal committees to help manage responsibilities, and may hire specialist consulting firms to help conduct governance, oversight, and strategic responsibilities. 117 The issue of independence and resources should be assessed continuously (not only at the time of nomination). The World Bank Page 159
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Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

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