boards / CEO / corporate governance / independent / state agency / state-owned enterprise

The Boards Role in appointing the CEO, the case of Horse Racing Ireland

The coverage of the re-appointment of the existing CEO of Horse Racing Ireland(HRI) and the boards involvement in that decision highlights a key board role, that is, the boards control role (O’Conor 2017). The board of directors  has three key roles: control, strategy and service  (Zahra & Pearce 1989). The boards control role derives from agency theory where the boards role is to protect investors interests from the self-serving interests of management and involves ensuring objectives are achieved and holding the management accountable (Fama & Jensen 1983).  In order to motivate and hold management accountable the board can align management incentives with that of the investors, through, for example, performance pay.  As a result, CEO pay is studied extensively as a measure of agency issues, that is, that the relationship between executive compensation and firm performance  (Bebchuk & Fried 2003; Bebchuk & Fried 2005). If the board, perhaps prompted by investors, determines that management is underperforming it is the board’s role to dismiss the current CEO and appoint a successor.  To facilitate these key roles boards are recommended to have a nominations committee which will evaluate the exiting balance of skills, knowledge and experience of the board, engage in succession planning and make recommendations for new appointments to the board, and a remuneration committee responsible for setting remuneration for directors and senior management  (Mallin 2010; Financial Reporting Council 2016).

However, Horse Racing Ireland is a state owned organisation, that is, it is structurally separated from Government Ministers and Departments; but it has performance contracting or accountability, that is, it is accountable in some manner to the Government Minister or Department  (McGauran et al. 2005). Thus it is subject to government rules on CEO pay and CEO tenure.  As a result, the SOE boards control role can be diminished by a lack of autonomy and freedom and may appear to indicate a lower control role for SOE boards than for other organisation types (Dyck & Wruck 1999).  However,  the lack of the for-profit and non-profit external control mechanisms, such as competition or takeover risk, may actually increase the importance of the control role of the SOE board (Menozzi et al. 2011). For example, excessive length of service of a CEO can cause agency and governance issues in SOEs similar to for-profits  (Vagliasindi 2008). This risk is recognised under Irish government guidelines, which limits Irish SOE CEOs to a single term of seven years (O’Conor 2017). The reappointment of the HRI CEO for a third term thus may indicate a failure of the boards control role, and raise concerns about the effective governance of HRI. Following the public controversy on the re-appointment and pay of HRI CEO in contravention of government guidelines, the need for improved governance and governance training was recognised in a report to the relevant Oireachtas Committee (Joint Oireachtas Committee on Agriculture, Food and the Marine 2017).

HRI does have a nominations committee (Appointments and Remuneration) (Horse Racing Ireland 2015, p.4). However, the structure of the HRI board may impact governance quality.  The majority of the HRI board are stakeholder appointed representatives and are thus not unaffiliated.  (Horse Racing Ireland 2015, p.3). Unaffiliated is similar to the concept of director independence, a key feature of good governance, but unaffiliated is a broader concept applied to SOE boards to take account of the fact of stakeholder, government and departmental appointees who due to their method of appointment may have conflicts of interests and thus may not act independently (Peng 2004).   As the majority of HRIs board are affiliated, they may not focus their efforts on exercising their control role, an issue recognised by the OECD who emphasise the importance of governance training for stakeholder appointed SOE directors (OECD 2015).  Induction and ongoing training for SOE directors is thus critical to ensure they are aware of their control role and obligations.

References

Bebchuk, L.A. & Fried, J.M., 2003. Executive Compensation as an Agency Problem. Journal of Economic Perspectives, 17(3), pp.71–92.

Bebchuk, L.A. & Fried, J.M., 2005. Pay Without Performance: Overview of the Issues. Journal of Applied Corporate Finance, 17(4), pp.8–23.

Dept of Public Expenditure and Reform, 2016. Code of Practice for the Governance of State Bodies Remuneration and Superannuation, Dublin, Ireland.

Fama, E. & Jensen, M., 1983. Separation of ownership and control. Journal of law and economics, pp.301–325.

Financial Reporting Council, 2016. The UK Corporate Governance Code (April 2016). , (April), pp.1–37.

Horse Racing Ireland, 2015. Horse Racing Ireland Annual Report,

Joint Oireachtas Committee on Agriculture, Food and the Marine (2017). Horse Racing Ireland Opening Statement 07 March 2017. Retrieved from http://www.oireachtas.ie/parliament/oireachtasbusiness/committees_list/agriculturefoodandthemarine/presentations/

Mallin, C.A., 2010. Corporate Governance Third Edit., New York: Oxford University Press Inc.

McGauran, A., Verhoest, K. & Humphreys, P.C., 2005. The corporate governance of agencies in Ireland: Non-commercial national agencies Vol 6., Dublin, Ireland: Insitute of Public Administration.

Menozzi, A., Gutierrez Urtiaga, M. & Vannoni, D., 2011. Board composition, political connections, and performance in state-owned enterprises. Industrial and Corporate Change, 21(3), pp.671–698.

O’Conor, W., 2017. Racing body questioned over CEO’s €190k pay. Sunday Independent.

OECD, 2015. OECD Guidelines on Corporate Governance of State-owned Enterprises, Paris, France.

Peng, M.W., 2004. Outside directors and firm performance during institutional transitions. Strategic Management Journal, 25(5), pp.453–471.

Vagliasindi, M., 2008. The Effectiveness of Boards of Directors of State Owned Enterprises in Developing Countries. Policy Reseach Working Paper. The World Bank, 4579(March), p.30.

Zahra, S.A. & Pearce, J.A., 1989. Boards of Directors and Corporate Financial Performance: A Review and Integrative Model. Journal of Management, 15(2), pp.291–334.

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