Direct Speech, Financial Services, Latvia, Legislation, Markets and Companies

Regarding state-owned enterprises (SOEs) it is important how their Management Boards are being supervised, their strategies defined and the financial targets and objectives balanced with the non-financial targets aimed at meeting the social and national development needs. Mainly this is the issue of company supervisory boards, which were abolished in Latvia back in year 2009 as they were politicized, and therefore, excluded as players from the standard corporate governance structure.

If Latvia is promising to re-establish supervisory boards of SOEs, the OECD is expecting practical results. There are very few examples giving evidence that the state is improving governance practice towards SOEs not only in words, but also in deeds. Currently few tenders have been announced to reestablish supervisory boards in largest SOEs, also at Latvian Post and Riga International Airport. Legislation on the nomination process of supervisory board members has been sorted out and Cabinet of Ministers Regulations approved, and work should be continued to develop guidelines for shareholders; however, it is not clear in practice who, for example, will be the independent board members, unrelated to the Ministry or the company itself with ability to exercise independent judgement.

The way in which good governance principles on supervisory boards, described in great detail by the OECD, would be implemented in real life, is very important. OECD assesses two aspects concerning supervisory boards of Latvian SOEs, the first being, how the board itself is re-established and how it fits into the corporate governance structure, along with a clear picture of the distribution of roles between shareholders, board, and the Management Board. The way we choose those supervisory board members is another story. In late December of last year, the Cabinet of Ministers adopted a procedure which states point by point the principles and conditions to be taken into account, and after having read the procedure, everything seems to be written down in good manner. However, so far it has not been tested in practice.

An issue for the future is that the state should move towards greater centralisation by establishing a single nomination committee to select candidates for supervisory boards of SOEs, as is the current practice with the ministry state secretaries.

It is also important to define what are state expectations from each of SOEs: should they be kept as state-owned companies or should they be sold (e. g., Lattelecom and LMT); how should we attract investors (airBaltic), how to introduce best governance practice in Rail Baltica project and joint venture RB Rail; what to do with hospitals, theatres (if we should expect a profit), and what return on equity is expected by companies operating in the competitive environment (Latvenergo, Latvijas Valsts Mezi), and if they should hold a monopoly position in their sectors, etc.

Defining and balancing of the objectives should lead to the development of business plans (which had to be in place by the end of March when all the companies had to have completed work on medium term strategies). Unfortunately, no information regarding progress of the process or the expected results is publicly available.

There is a positive signal regarding disclosure of information, which has been quite a challenge until now. Currently, all SOEs are publishing their quarterly reports, and Ministries also place on their websites material information. The Cross-Sectoral Coordination Centre, which is responsible for the coordination of SOEs, has developed guidelines and published an aggregate report on SOEs in 2014. Transparency is the only area where Latvia has shown visible progress in SOEs governance. All other issues are still in the implementation phase, where, from the legislation point of view, the trend is positive and in line with the international practice, while proactive approach is still missing.

The fact that the governance of SOEs would be essential in the accession to the OECD is known from historical experience, where Slovenia hoped that the OECD would turn a blind eye on the SOEs governance issue, which did not happen. Anyway, Slovenia became member of OECD in 2010.