factors such as age and number of Boards in which directors sit are also recommended in the corporate governance codes either at the country or the company levels.

Which ones of this long list of requirements matter most for ensuring the effectiveness of Boards for SOEs in developing countries? Transforming an SOE, previously run as a government department, into a corporation under the company law poses formidable challenges, but present several potential opportunities. Corporatization brings about insulation, because, almost universally, company laws limit the right of shareholders to directly manage the enterprise. Management rights are delegated to the chief executive and are monitored by company’s Board of Directors, unless otherwise stipulated. In addition, insulation from political interference can be reinforced by empowering SOE Boards. Whereas the government, as the shareholder of SOEs, has a legitimate right to influence SOEs, the scope and extent of influence in practice has been excessive and calls for some limitations. Namely, appropriate roles for the government includes setting objectives and performance targets, appointing directors, monitoring the performance of the enterprise and its Board. Aside from these intervention rights – which need to be clearly spelled out and publicly disclosed – the remaining authority should sit with a professional Board and management.

The implementation challenges are nevertheless huge (see Gómez-Ibáñez, 2007 and Vagliasindi, 2008a). For developing markets where the rule of law is not widely respected the benefits of a legal separation of SOEs from government and greater transparency may not materialize. Similarly, building competent and well-functioning SOE Boards is more difficult, not least because there are fewer qualified individuals available to serve as directors. Too often, SOE Boards are populated with people chosen for their political allegiance rather than business acumen. In many countries, for example, the Boards of many SOEs are still filled with senior government or military officials who do not possess relevant skills and experience. Statutes often called for Ministers to hold seats on Boards (see Box 1). Many such appointees are not active members of the Board.

# **<mark>Box 1 The Cases of Bosnia and Herzegovina (BIH) and Zambia</mark>**

<mark>In BiH, corporatisation was slow process, partly as a result of the challenge of producing inventories of assets and liabilities for the successor utilities. The utilities were initially chartered under special sectoral legislation, but later transformed into government-owned joint stock companies under company laws. In both entities of BiH, in the case of the power utilities it was the Ministry of Energy which was responsible for representing the government’s ownership interest, with the Minister or Assistant of Energy sitting as Chairman of the utilities’ Supervisory Boards. In theory, members of Supervisory Boards have employment contracts with the company, and can only be removed with due cause. In practice, all members of Supervisory Boards, at all levels of government, are replaced when a new government takes office. This reinforces the perception that Supervisory Boards fulfill a political or regulatory role, the goals of which are set by the government in office; rather than a professional one, the goal of which is to ensure that the utility is operated as a going concern. The utilities’ Boards of Directors in other countries of Africa (such as Zambia) do not exert the most important influence on the company, even in the presence of independent directors. The crucial oversight relationships are not between the utility and its formal government and regulatory overseers – but between the chief executive of the utility and the office of the President.</mark> _<mark>Source:</mark>_ <mark>Martin and Cox (2004) and Vagliasindi (2008b)</mark> 3