State owned firms referred in this article are entities owned by the government, either at local or central level, or by state-controlled organs. These institutions generate their revenues and cover their expenditures on their own.
Some of these entities are facing competition from private companies and have obligation to pay dividends to the government. To ensure these institutions flourish, decision-making power must be entrusted to those who are responsible for and accountable for running these firms on a day-to-day basis.
I did my PhD during Tanzania’s period of massive privatization of public entities. My study involved firms that were state-owned and those that had been privatized. The findings of my research rejected the idea that privatization alone improves the welfare of stakeholders interacting with the formerly state-owned firms. Instead, the results emphasized the importance of competition and managerial characteristics over ownership status.
This was 17 years ago. From 2015 to 2024, I had an opportunity to lead two business entities: one, 100% privately owned company, and the other, 100% state-owned firm. My prior teaching at the universities involved leadership roles, first at a private university followed by a public university.
The experience provided me with additional insights, and I discovered that it is not only competition and managers’ characteristics that matter. There are also fundamental governance issues that need to change for state-owned firms to perform well, whether or not they face competition. These prepositions stem from my own experience and from what I learned through interactions with other leaders of state-owned and private entities.
One fundamental factor that hinders prosperity of state-owned firms is interference from other entities in decision-making. Along with that, is the prolonged procedures involved in public entities, such as procurement, employment, organizational restructuring, budget approvals and employee renumeration.
A critical concern is lack of competition in the appointment of CEOs, chairpersons of the board of directors, and board members. Additionally, there are constant demands for the management of the state-owned firms to attend various meetings some of which holding little or no relevance at all to their operations.
In private entities, decisions are made by management or the board of directors. However, in state-owned entities, many decisions must be submitted to other government organs for approval. Despite having board of directors, which are supposed to be independent, their independence is frequently undermined. The extent of this interference depends on the leadership of these organizations and the strength of their boards. To overcome these obstacles, fundamental changes are needed in the laws governing these entities.
One may ask how long it takes to change the organizational structure at all levels in a private company in comparison with the same in a state-owned entity.
In a private company, changes are made by getting approvals from the board of directors, typically only for the upper part of the organization structure, those involving the board, the managing director (MD) or CEO and those reporting to the CEO. The rest is left to management to decide.
This makes sense, as the lower positions fall under the authority of senior officers who report to the CEO, and they are granted the independence to adjust their structure to meet the business needs. In private companies, decision-making power is entrusted to those who are directly responsible and accountable.
The situation is different in some state-owned firms. The process begins at the management and board level, followed by presentations of the proposal at the ministerial level. After that, the document is submitted to the Commission for Work for further discussion and final approval.
In some cases, this process can take one to two years, and in certain instances, the approval is obtained when the structure is already outdated. Additionally, changes are sometimes made contrary to what the management and the board initially proposed. The approved organizational structure often covers all positions, from the top to the bottom.
For someone leading such organizations, it becomes very difficult to compete. While rivals in the industry move forward with time. The entity is required to strictly follow the approved structure for all the positions, with absolutely no flexibility for changes.
If management takes an initiative to introduce quick changes based on business needs without approvals, which often takes a long time, they attract audit query and, in some cases, management is subjected to interrogations by other government organs. Why not decentralize decision-making to those who are responsible and accountable? If the structure does not work in this case, who should be blamed?
Another lengthy process in state-owned firms is employment procedures. In a private entity, the board approves the budget for new employees alongside the annual budget, and the responsibility for recruitment is left to the management who are accountable for the employees they hire.
In contrast, state-owned firms must obtain government approval before they proceed, and in some cases, even the recruitment procedures and the interviews are conducted outside the entity’s domain.
When management wants to recruit a promising talented candidate from the industry to a state-owned firm, the process often takes too long, practically around six to nine months to complete. In the private sector, the difference is stark, the candidate is approached, and recruitment process is often completed within a month or less, leading to more efficient operations and better performance.
Sometimes, the entire recruitment process is followed, permits, interviews, vetting and everything is completed according to the prescribed procedures. Then, suddenly, management receives a call from a senior government official questioning why a certain candidate was recruited or why someone else wasn’t. If the leader is not strong enough, the entire process might have to start over, adding another six months of delay.
How can these entities compete under such conditions? As an example from one case well known to me, one CEO faced a situation where, even after obtaining all the necessary approvals, the process was halted by interference from another government organ without any valid reason and letters of appointment were withheld preventing the candidates from being officially hired. As a result, services and operations were disrupted, and yet, management was blamed for the situation.
If we want meaningful changes, we must replace the current appointments process with one that fosters competition
The procedures don’t stop with just onboarding new employees. Even the remunerations and incentives are dictated by government-approved salary scales. Bonuses in some cases, must also be approved by shareholders, even when performance targets have been significantly exceeded.
The situation differs significantly from the companies with which these state-owned firms are competing. How can state-owned firms attract top talent and deliver better services when their incentives are controlled and lower compared to those of the private competitors?
Most of the time, complaints are directed at management, criticizing poor service quality compared to private competitors and employees’ performance being below industry standards.
There was one instance in one of the cases I know of, where the managing director of a certain-state owned firm received instruction from the ministry to abolish certain incentives granted to managers, despite the entity’s strong performance.
The CEO refused, risking his position to defend the decision. This overlooked the fact that the industry these employees worked in involved significantly higher risks and more demanding duties than those in other government departments. These are just some examples of the obstacles that state-owned firms face in human resource management due to lack of decision-making power granted to those who are entrusted and accountable for running these organizations.
These kinds of interferences often persist due to perception that these entities are merely extensions of ministries. At times, heads of department within a ministry may believe that they have the authority to instruct a CEO to take certain actions.
One CEO was once called by a department head in a ministry and instructed to contact managers from other institutions to arrange for a meeting. Instead of focusing on core responsibilities of the entity, the CEO was expected to perform secretarial tasks. A colleague once told me that, in reality, the MD or CEO of these independent entities is comparable to a ministry Permanent Secretary because they are also Accounting Officers, sometimes managing budgets larger than those of Ministries. Unfortunately, this fact is frequently overlooked.
A colleague leading a large public entity once shared with me that he was summoned to a ministry with only an hour’s notice, without being informed of the meeting’s agenda. He refused to attend, demanding proper notice and details of the discussion. He was bold.
I remember a similar experience when I was in the middle of a meeting and was urgently summoned to attend another one, with warnings of repercussions if I didn’t comply. When I arrived, I found the meeting entirely irrelevant to my role. After half an hour, I decided to leave and return to my office to continue with the duties that I was primarily responsible and accountable for.
Being regarded as a department within a ministry often gives certain officials and others government personnel a sense of entitlement to use the resources of these entities.
A colleague once shared that he had purchased vehicles for essential service delivery to customers, only to be asked by the ministry to provide two cars from the purchase for their use. He was bold and refused.
Unfortunately, this is a common occurrence. Despite the need for these entities to deliver vital services to the customers, they are asked to allocate these vehicles as though they are redundant. When management inquiries about these requests with higher authorities, they are sometimes told that the individuals making such demand were not even authorized to do so.
It is crucial to establish a law that explicitly states that these entities are independent and governed by their respective boards of directors. To enable these entities to compete effectively, it is essential to empower those responsible abilities to act freely.
The government, as the shareholder should operate similarly to the private sectors. Issues concerning shareholder should be addressed during the Annual General Meeting (AGM). If the results are unsatisfactory, the board, chairperson, or managing director can be replaced. Constant interference undermines the principle of good governance and hampers the management and boards, who are ultimately responsible and accountable for running these institutions, from competing effectively.
Being regarded as a department within the ministry often gives certain officials and other government personnel a sense of entitlement to use the resources of these entities.
Another aspect that slows down the performance is the procurement process. Many state-owned entities are subjected to the same procurement procedures as those followed by other government departments, despite facing direct competition.
Competitors on the other hand, finalizes decisions quickly and start offering the services without delay. In some cases, tender advertisement alone can take up to two months, followed by tender board meetings, approvals from the commissions and contract vetting by the office of the Attorney General. These processes also come with costs, and if the CEO lacks authority, memos and external interferences can further complicate matters. As a result, these entities experience delays in project implementation, which in turn increases costs.
Another key factor is the appointment process for the chairperson of the board, board members, and the CEO of these organizations. In most privately owned firms, these appointments are made through competitive processes, which often involve headhunting a few qualified individuals and subjecting them to rigorous interviews conducted by industry experts.
This process typically ensures that the best candidates are on board. However, the procedures in state-owned firms are quite different. Appointments are often made without interviews or competition among candidates, which can undermine the selection of qualified individuals. While it is understandable if an appointee comes from a similar position at another company, the lack of competition can hinder the on boarding of the best possible candidates.
If we want meaningful changes, we must replace the current appointments process with one that fosters competition. Positions should be advertised, allowing individuals to apply, or in cases of headhunting/poaching, a few suitable candidates should be selected on meritocracy based on their qualifications and experiences and then be subjected to rigorous interviews, with their consents.
These processes will ensure that these institutions are led by competent individuals. By adopting such procedures, we can avoid situations where CEOs or board chairpersons are appointed without any knowledge of the industry or leadership experience.
This approach will also help prevent the appointment of board members who lack industry expertise and leadership backgrounds, ensuring that those in decision making roles are qualified and prepared for their responsibilities.
When it comes to budgeting, in private companies, the board of directors typically has the final say on budget approvals, but in state-owned firms, the final decision often requires a ministerial nodding.
While the ministry represents the shareholder and appoints the board to safeguard its interest, it is the board’s role to oversee management, set targets through the budget and ensure management meets these budgets in the best interest of the shareholders.
Instead of interfering during the process, the shareholder (Government) should raise any concerns during the AGM, allowing the board and management to operate effectively and independently in the interim.
An incident worth mentioning occurred in a state-owned institution. One evening, after the fiscal year had commenced and the institution had already entered into several commitments, a letter was received from a certain government organ instructing management to halt the use of the previously approved budget. This abrupt decision threatened to bring the business to a standstill. Fortunately, an appeal was made to higher authorities, and the institution was eventually allowed to proceed with the budget’s utilization. This arbitrary decision, made by a single individual without even consulting the board or CEO, highlights the dangers of such unilateral interference in governance process of a state-owned entity.
It is crucial, particularly for entities facing competition, to adopt a governance structure similar to that of private entities. In this model, the government, as the shareholder should appoint competent boards of directors who, in turn, select and appoint the CEO.
The primary interest of the shareholder is to achieve dividends and share growth, which often leads to other forms of growth, including job creation, tax payments and contribution to community development.
By setting clear targets for the boards, they will be motivated to push management to excel. It is essential to trust these boards by granting them the necessary obligations, and responsibilities and decision-making powers that come with their appointments by the shareholder.
Many MDs or CEOs who transition from the private sector identify significant obstacles to enhancing the performance of state-owned firms. These firms are expected to compete effectively with their private counterparts in the industry delivering quality services.
Unfortunately, many of the bureaucratic interferences and lengthy procedures distract these leaders from focusing on the core business operations and keeping up with the competition. When an individual is entrusted with responsibility, it is essential to empower them with the authority to make decisions. This approach will enable more accurate assessments of their performance and effectiveness.
To ensure state-owned firms can effectively compete and outperform private entities, essential changes must be made. These include granting autonomy in the employment and remuneration procedures, streamlining procurement processes, and allowing for the development of flexible organizational structures.
It is crucial to stop perceiving these organizations as mere departments within ministries. Instead, competent boards should be appointed to select capable CEOs and senior management teams.
Furthermore, management and CEOs should not be involved in meetings that are irrelevant to their responsibilities. By making these adjustments, state-owned firms can enhance their performance and better meet the demands of a competitive landscape.
It is imperative to place trust in the boards and management entrusted with the responsibility of running these institutions. Referring to Simon Sinek page 93 from his book Leaders Eat Last he stated that “Put simply, the more pressure the leaders of public company feel to meet the expectations of outside constituency, the more likely are to reduce their capacity for better products and services”. The presence of bureaucracy, excessive memos, constant calls and unnecessary meetings, adds to this pressure, distracting them from primary focus of enhancing services and products.
Responsibility is not doing as we are told, that is obedience; responsibility is doing what is right
By eliminating these burdens and granting autonomy, state-owned enterprises will be better equipped to thrive in a competitive landscape. Empowering management and boards to make decisions without undue interference will lead to improved performance, innovation, and ultimately, greater service delivery to the public.
As Simon Sinek emphasizes, it is crucial to grant decision-making power to those who bear the primary responsibility to run these institutions. He poignantly states that “When we do not feel safe from each other in the environments in which we work, our instincts drive us to protect ourselves at all costs instead of sharing our accountability for our actions.”
To foster a culture of accountability and responsibility within boards and management, it is essential to appoint competent individuals, entrust them with decision-making authority and hold them accountable for their actions.
By creating environments where individuals feel secure in their roles, we can shift the focus from self-protection to shared responsibility, ultimately leading to better governance and performance in state-owned enterprises.
One quotation from Simon Sinek, Leaders Eat Last, can form a good ending of this article, “Responsibility is not doing as we are told, that is obedience; responsibility is doing what is right.” Let us do what is right and be responsible.
