“If changes are required to improve the management of Codelco, I’m fully in agreement,” declared the then-candidate for the Chilean presidency, Michelle Bachelet (El Mercurio, July 3, 2005).Now two years into her term of office, Bachelet is beginning to realize that the Chilean firm must make some adjustments to the way it is run. But with the prevailing corporate governance setup, there is no guarantee that any such modifications will be a success.
An autonomous state-owned corporation, Codelco is engaged in the exploration, development, processing and marketing of copper ore resources and byproducts in Chile. In addition to being the world’s largest source of fine copper, producing some 1.78 million tonnes in 2006, the company’s reserves of the red metal are the biggest anywhere, accounting for almost 20% of the world total. What, then, are the challenges facing the corporation, and how is it handling them?
The trend of public opinion in Chile today is that Codelco’s corporate governance is not up to the tasks facing it in the present international copper production scenario. As was stated last year in the explanatory notes to a bill before the Chilean Congress, the company “does not have a modern corporate governance and management model in place that meets the requirements of a world-class enterprise.” By law, Codelco’s governing board is comprised of the ministers of Mining and Finance, representatives of the armed forces, union officials and two independent directors, all of them chosen by the President of the country. The current legislation governing the corporation dates back to 1976, and has not been reviewed since the last time it was amended in March 1990.
Three major challenges now confronting Codelco require particular attention. The first one relates to the system of incentives offered to board members, which aims to minimize personal risk rather than maximize corporate value. At this time, directors must answer not only to the company but also to whoever appointed them. They therefore represent not just the corporation’s business commitments but various individual political commitments as well. Moreover, they are not accountable for the errors of their own administration. In this sense Codelco’s top management is not necessarily the best team of executives and managers for an enterprise of such importance.
The second challenge stems from the fact that board members hold office only as long as the government that named them is in power. Unlike the private sector, where company directors provide continuity and stability over the long term, Codelco is constantly subject to the vagaries of the current political situation.
The third challenge that must be dealt with has to do with board members’ lack of effective control over the chief executive officer. They cannot, for example, insist on the institution of structures that would maximize the long-term value of the company; indeed, they do not have the power to implement the board’s decisions.
Are there solutions to these challenges? Fortunately, it appears that public debate is coming to a consensus beyond mere considerations of political party commitments. There is now broad agreement that Codelco’s governing board should display the same qualities of responsibility and flexibility as directors of private sector companies. This means they should:
(1) be independent and highly competent (2) have effective control over the CEO (3) ensure that the company is subject to
effective external oversight These criteria are also in line with recent recommendations of international organiza- tions. In April 2005 the Organization for Economic Co-operations and Development (OECD) published its “Guidelines on Corporate Governance of State-Owned Enterprises,” which seek to apply standards and practices of governance designed originally for private-sector firms to the administration of government companies.
As the “representative of the owners”, the Chilean government has sent a bill to the Congress that addresses these very challenges.
The bill would create a new category of independent and highly competent directors. Two of the seven board members would be named by the Chilean President from a list drawn up by the Senior Public Service Commission, an autonomous government body that chooses high-level civil servants. Of the remaining five directors, the bill states that four would be appointed directly by the President, the remaining one to be elected by Codelco employees, although there has been some discussion of increasing employee representation. All seven would hold office for three years, one fewer than the current four-year term designed to coincide with that of the presidency.
Also proposed in the bill is that directors be compensated at a level comparable to that of the private sector, including incentive bonuses for meeting annual profit targets. Such a policy, it is felt, would enable Codelco to attract the highly qualified talent it needs. Directors would have more direct control over the CEO, with the ability to approve major investment projects and designate the top-level executives at the company’s subsidiaries. Thus, the board would be genuinely responsible for managing the company and determining the functions of the CEO, as is the case in private sector firms.
Finally, the bill would establish external control mechanisms. These should be relatively easy to implement since such systems have in fact been applied since 2002, the first year Codelco floated its own corporate bonds. As a bond issuer, the corporation is now subject to inspection by a government regulatory body. It continues to issue debt both in the domestic market and abroad, thanks to the positive response of financial markets and the excellent evaluations it has received from credit rating agencies.
The overall purpose of the bill is to provide Codelco with a flexible, high quality, professional and autonomous board of directors. These goals can be achieved without resorting to the involvement of private owners, a highly contentious issue in Chile that continues to spark heated public discussion. The proposed legislation is not intended to call into question or open up for debate the subject of the government’s exclusive ownership of Codelco.
Jorge Candia is a member of Board of Codelco Chile; Dr. Roberto de la Vega and Dr. Sigifredo Laengle (firstname.lastname@example.org) are professors at Universidad de Chile.