Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

Railway Reform: Toolkit for Improving Rail Sector Performance
10. Corporate Governance
an array of risk factors linked to railway services—the overall state of the economy,
major investment projects, labor contracts, input-cost factors, customers,
accidents, among other issues. The board must weigh the degree of self-insurance
the policy environment permits and develop policies related to how such risks
can or should be insured.
The management team prepares financing plans and risk assessments and makes
risk management recommendations to the board.
Decision making framework
To fulfill its oversight responsibilities, the board often defines a flexible decision
making framework that covers investment, spending, and customer contracts.
The degree of flexibility and details may vary depending on railway size and the
board’s confidence in the CEO and management team. A framework may authorize
a hierarchy of capital investment spending levels that can be carried out without
prior approval; for example, the chief engineer can sign contracts and pursue
projects up to a value of $100,000; a vice-president, $250,000; and a CEO,
$1,000,000. Larger projects or contracts are considered to have strategic importance
and must seek board approval. In practice, this type of hierarchy is used
often for transportation contracts with customers, and the largest and longest
contracts require board approval. The framework provides management flexibility,
allows decisions to be made by those closest to the decision point, and pushes
strategic decisions up to the next organizational level.
10.2.4 Accounting to stakeholders for enterprise performance
The board is directly responsible to shareholders for company performance.
Typically in the private sector, the board reports to shareholders through quarterly
communications on financial performance, in annual reports, and at annual
shareholder meetings. Quarterly and annual reports must meet local jurisdiction
legal requirements and may have to meet requirements for the financial community,
especially if company shares are traded publicly on an exchange. The board
must ensure that all reporting requirements are met, and that shareholders are
informed about financial and operating performance, strategy, markets, and
other issues that affect company performance.
The relationship between the board and state owners can be more complicated
because the state is a shareholder and state-appointed directors may feel conflicted
about their responsibility to the state. For example, the board may include
government ministers, or board members who report to government ministries.
This situation has obvious conflicts; board members have fiduciary responsibilities
to shareholders, thus board members are obligated to exercise judgment to
the benefit of the enterprise; but they also represent a state entity, whose interests
may conflict with those of the enterprise.
To minimize the impact of these conflicts, state decision making and authority
should be combined and centralized, often in a Ministry of State-owned Enterprises,
or a state supervisory board, which can communicate state shareholder
preferences effectively and with one voice.
The World Bank Page 162