Boards - VKC | Valdymo koordinavimo centras

About the boards

FORMATION OF COLLEGIAL BODIES

Boards (both Supervisory board and Board of directors) are regarded as one of the most important parts of effective governance of state-owned enterprises (SOEs). In global SOE governance practice an extraordinary attention is paid both for the formation and activity principles of these bodies. Functions of the boards are considered to be essential in seeking to ensure professional and high-quality management and in limiting direct political influence over state-owned enterprises. Global standards indicate that the State should seek to ensure that boards of SOEs would be depoliticised, have sufficient autonomy to perform their functions and would be formed following the principles of transparent and professional selection.

Seeking to implement these provisions, the principles of the composition and selection of SOE collegial bodies in Lithuania are explicitly specified and established in legislation. The main legal act, which sets selection procedures and principles of the composition of SOE collegial bodies, is the Procedures for the Nomination of Candidates to the Collegial Supervisory or Management Body of a State or Municipal Enterprise, to the State Owned or Municipally Owned Enterprise or its Subsidiary (Nomination Guidelines) approved by Resolution No. 631 of the Government of the Republic of Lithuania of 17 June 2015. The State has established the following essential principles in the Nomination Guidelines:

This includes the appointment of independent board members and restrictions imposed on the state politicians on taking part in the activities of these bodies. All SOEs are subject to the requirement that at least half of all board members must meet the independence criteria in the collegial body directly elected by a shareholder (the owner). Meanwhile, state politicians or civil servants of political confidence cannot be appointed to the board.
Boards of SOEs are formed on the basis of the principle of competence, also taking into consideration the specific nature and strategic objectives of a certain SOE. Legal acts establish that board of SOE must have adequate competences in the fields of strategic planning and corporate governance, financial management and market knowledge under which SOE operates. Other necessary competences are set according to an individual demand. On the basis of this principle, selection of members of a collegial body is made.
Professional and transparent selection. Explicit selection procedures are applied for the selection of independent members starting with initiation of selection and ending with the appointment of board members. The established selection procedures are public and follow the principles of detailed examination of the individuals where a candidate is assessed by both the professional selection agency and the Selection Commission set up specially for selection purposes.
Functions of collegial bodies of state-owned enterprises (SOEs) do not differ from global governance practices, that is, these bodies follow the universally-accepted corporate governance principles: power to appoint and remove the CEO, power to adopt corporate strategy and supervise its implementation. At the present time, power of the boards of statutory enterprises, which has legal form of State enterprise (SE), are restricted and these bodies act more as advisory boards.

Seeking to ensure that the ownership functions would be separated from the regulatory functions, individuals whose activities and functions they perform are related to the policy-making of the market in which SOE operates, cannot be appointed to the collegial body of SOEs.

Taking into consideration the significance of the SOE activities, collegial bodies must be formed in enterprises of public-interest (most often such enterprises are attributed to the category of large SOEs), as well as in enterprises which, according to the Republic of Lithuania Law on the Protection of Objects of Importance to Ensuring National Security, are attributed to the category of the enterprises of importance to ensuring national security. Other state-owned enterprises have the right to form collegial bodies on an optional basis. At state-owned limited liability companies both supervisory boards and boards of directors (on the basis of the provisions laid down in the Law on Companies) can be formed, whereas at state enterprises (SE) only board of directors can be formed.

Requirements for independent members of collegial bodies

Boards of SOEs shall be formed on the basis of the competence principle, i.e., the board must have all necessary competences for efficient board work. The Nomination Guidelines specify the essential requirements, such as the criteria, which the members being appointed to the SOE collegial body, should satisfy. These criteria are divided into three groups:

General requirements. These requirements are related to the educational level of the board member, impeccable reputation and management of conflicts of interest.
Independence requirements. To a large extent, independence requirements are applied to the candidates for independent members only. Thereby these requirements it is sought to ensure that a member of a collegial body would not be related to the institution representing the State (or other SOE shareholders), to which the SOE is subordinate, would not be related to the SOE, would not be an auditor of a SOE and would not be related to other independent board members of SOE.
Special requirements. These requirements are based on the principle of competences, i.e., are established taking into consideration the specific needs of a company and can differ depending on the competences sought. Usually special requirements include competences of the areas of corporate management, financial management, strategic planning and market knowledge According to the needs of the SOE, other competences can be determined too.

Setting special requirements for the candidates is one of especially important components of the formation of a collegial body, therefore, pursuing the SOE governance policy developed by the Government, the following institutions and establishments that have respective competences are involved:

An institution representing the State (a shareholder).
Professional external selection agency.
Governance Coordination Centre (GCC).
A SOE collegial body (if it is formed at the time of selection)
A state-owned enterprise.

Besides the requirements laid down in legal acts, members of SOE collegial bodies must satisfy common expectations in corporate governance:

Leadership and the ability to make decisions in complicated situations.
Business management knowledge and experience as C-level executive or member of the board.
Compliance with high ethical standards.
A high level of involvement.
Ability to work in a team and represent stakeholders.

OPERATING PRINCIPLES OF COLLEGIAL BODIES

Operating principles of collegial bodies of state-owned enterprises do not differ from the global principles of corporate governance (applied to private market players). These principles encompass practices of organisation of work of the board, including practices of assessing its own activities, drawing up annual action plans, decision-making of a strategic level, ensuring the supervision of the company’s activities, maintaining communication with the company’s shareholder and the chief executive officer and the periodic accountability.

On account of granting autonomy to a collegial body of the SOE, the application of the principles of corporate governance and proper maintenance of communication between the institution (shareholder) representing the State and the collegial body become especially important. For its part, the State maintains communication through meetings with the Chairman of the board and through the Letter of Expectations prepared for the company. The Letter of Expectations is the most important formalised document in which the State’s expectations are defined and operating principles are agreed upon. The board is requested to ensure the periodic accountability to the shareholder both when presenting action plans to the latter and informing the shareholder about the activities of the collegial body, as well as about the most significant decisions taken or the events related to the company.

The responsibility for the organisation of the board work rests with the board itself, however, the expectations are raised that a board should follow the principles of corporate governance and should ensure effective performance. One of such practices is a periodic and structural assessment of its own activities. In global practice, self-assessment is considered one of the major measures to improve and assess performance of the board. Every year boards of SOEs should carry out a structural self-assessment during which drawbacks should be identified and an action plan to overcome these drawbacks should be developed. The process of self-assessment should be initiated and implemented by the Chair who takes a decision on both the methods on the basis of which the assessment shall be carried out and on carrying out the procedures, summarising the results and submitting them to the shareholder (the institution representing the State).

Self-evaluation guidelines for the boards, in Lithuanian

Self-evaluation form for the boards, in Lithuanian

Each member of the board is expected to become adequately involved in the activities of the collegial body and to be able to devote sufficient time to the performance of his/her duties. The level of involvement depends on the specific nature of an individual company and the existing situation; however, a board should organise board meetings at least once every quarter, and a board member should dedicate at least 2-3 days, and the Chair – at least 3-4 days per month.

Usually the SOE supervisory board or the board of directors is elected for a four-year term of office. Independent members of a collegial body can be re-elected for a second term of office, while the number of terms of office of other members is not restricted. All board members elected during the term of office of a board are appointed only until the end of the term of the office of the board.

Guidelines for evaluating the performance of collegial bodies

VKC prepared guidelines for the evaluation of the activities of collegial bodies

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REMUNERATION OF MEMBERS OF COLLEGIAL BODIES

Independent board members are compensated based on the decision of the institution representing the State (or general meeting). The size of the remuneration itself can vary significantly among various SOEs. Depending of the legal form of the company, the remuneration policy of board members is regulated by two Resolutions of the Government: the remuneration policy of state-owned limited liability companies is regulated by Resolution No. 665 of the Government of the Republic of Lithuania of 6 June 2012 On the Approval of the Description of the Procedure for the Implementation of Property and Non-property Rights of the State in State-owned Enterprises; the remuneration policy of state enterprises is regulated by Resolution No.1092 of the Government of the Republic of Lithuania of 14 October 2015 On the Approval of the Description of the Procedure for the Remuneration of Members of the Boards of State and Municipal Enterprises and Insurance of the third-party Liability of the Members of the Boards.

The remuneration policy of the board members of state enterprises (SE) stipulates that board members are subject to an hourly pay system; the board members shall fill in activity reports and their working hours are remunerated at the hourly rate (the rate is set by the institution, which exercises ownership rights). The remuneration of a member of the board may not exceed 1/5 of the salary of the CEO. The remuneration of the board members who are civil servants shall be not less than 1/8 and not more than 1/4 of the remuneration paid to the CEO. In addition to the contractual remuneration, the travelling expenses incurred may be reimbursed.

Various remuneration practices can be applied to the members of the boards of state-owned limited liability companies – they can be paid for the number of hours worked, meetings attended or a fixed annual compensation (the ultimate decision is taken by the general meeting of the shareholders of the company). The policy established by the Government recommends that the remuneration of the chairman of the board should be at least 1/3 of the total salary paid to the CEO and that of other members – at least of 1/4 of the total remuneration set for the CEO. In addition to the contractual remuneration, the travelling and other agreed expenses incurred may be reimbursed.

The chairman of the board is most often paid a higher remuneration for additional responsibilities than other board members. An additional remuneration is also paid for work on the committees of the board (provided that they are set up).

Operating contracts with SOE board members are concluded. Such agreements define the member’s responsibilities and obligations, as well as the issues related to the remuneration and other reimbursements.

Selection procedure

Collegial bodies of state-owned enterprises are formed following the nomination policy (Nomination Guidelines) established by the Government of the Republic of Lithuania. The Nomination Guidelines define the entire selection process from establishing the qualification criteria for the candidate to the interviews with the candidates and the appointment of candidates to the board of SOEs. The Guidelines also sets the time limits of the selection procedures, responsible bodies and their roles. The selection procedure follows such principles:

Public and transparent manner. The applied selection procedures are explicitly specified in the Nomination Guidelines, which are public and accessible to all interested parties.
Competence-oriented selection. Selection is carried out in accordance with the needs of specific competences for the board work, i.e., prior to the search of potential candidates, clear qualification criteria are established and formulated for each position of a board.
Professional evaluation of the candidates. The selection process provides for three stages of the evaluation of the candidates during which a candidate is assessed by a professional and independent selection agency, the Nomination Commission set up specially for selection and respective services.
Confidentiality throughout the entire process of selection. During the selection procedures any information regarding participating candidates cannot be revealed to the third parties.

Selection of the candidates for independent board members are public, and all candidates that satisfy the established nomination criteria has the right to participate therein. Apart from a public selection, a direct search for potential candidates (“headhunting’) is also carried out; it is conducted by professional selection agencies.

Information on applicable selection procedures
(for candidates for independent members)

The selection policy is applied to a collegial body directly elected by the shareholder (owner) of the state-owned enterprises and their subsidiaries. If both supervisory board and board of directors is established (two-tier system) the provisions of the selection policy is applied only to supervisory board.

Selection guidelines

LRV 2015 June 17 Resolution no. 631 “On Approval of the Description of the Procedure for Selection of Candidates for the Board of a State Enterprise or Municipal Enterprise”

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Guidelines for conducting the selection of collegial bodies

VKC prepared guidelines for the selection of collegial bodies

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Templates of selection documents

Exemplary document templates used in selections of collegial bodies (in Word format)

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Members of the Boards of Directors

Following the provisions of the Ownership Guidelines, the boards of directors (or the Supervisory boards) must be formed at all SOEs of public interest or at those SOEs, which are attributed to the enterprises that are considered of importance for ensuring national security. Collegial bodies may not be established at other SOEs.

At the beginning of January of 2023, boards were formed at 36 out of 44 SOEs.

Following the Republic of Lithuania Law on Companies, the boards of state-owned limited liability companies must be composed of at least 3 board members, and following the provisions of the Republic of Lithuania Law on State and Municipal Enterprise, the boards of state enterprises must be composed of at least 5 board members. The Nomination Guidelines also specify that at least ½ of all board members of state-owned enterprises must comply with the independence criteria. It is also compulsory that at the boards of state enterprises at least 1/5 of all board members would be representatives of the employees.

According to the data available on 1 January 2023, there were 165 seats on the boards of directors of SOEs, which were occupied by 144 members (a part of the board members acts on more than one board). Independent board members accounted for 61% of all the members.

List of board members (at the beginning of January 2023)

Members of the Supervisory Boards

Supervisory boards can be appointed only at state-owned limited liability companies, at state enterprises (SE) supervisory boards are not appointed. The SOE governance policy does not provide for the obligation to establish supervisory boards at any SOE.

At the beginning of January 2023, supervisory boards were formed at 5 out of 44 state-owned enterprises.

According to the provisions of the Republic of Lithuania Law on Companies, supervisory boards must consist of at least 3 and not more than 15 members. The Nomination Guidelines also stipulate that at least ½ of all supervisory board members of state-owned enterprises must satisfy the independence criteria.

According to the data available on 1 January 2023, there were 22 seats on the supervisory boards of SOEs which were occupied by 20 members (a part of the supervisory board members acts on more than one supervisory board). Independent supervisory board members accounted for 64% of all the members.

List of members of supervisory boards (at the beginning of January 2023)