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    The privatisation of public sector assets can be a complicated and challenging time. Alexandra Cain outlines the duties and responsibilities of directors in ensuring a smooth transition.


    Privatising public sector assets is an issue that polarises public sentiment. Which is one of the reasons why directors of public sector businesses must pay such close attention to their fiduciary duties.

    With a range of public assets slated to be transferred to private sector hands, including three electricity and transmission distribution businesses in New South Wales and the ports of Melbourne and Fremantle, the onus is on directors of these and other government-owned businesses to ensure they are properly discharging their responsibilities.

    Someone who knows only too well about directors’ responsibilities during privatisations is Frank Sartor AO GAICD, former NSW Minister for Climate Change and the Environment and Minister for Planning. He says that at the outset of a privatisation process directors need to be clear about the parameters of the transaction.“The government and the directors need to agree on the objectives and the constraints of the deal before they proceed,” he argues.

    This is important, given that the directors have an obligation not just to maximise the sale price of the asset, but also to ensure the deal meets the expectations of the community. Therefore, the duties of directors of public companies are substantially different to those of private sector businesses.

    Steven Bowman FAICD, managing director of Conscious Governance, which provides advice to boards and directors, says while directors always have the same duties – care, loyalty and obedience – there are also other considerations they must make.“These duties have to be overlaid against the need to make the organisation attractive to potential buyers through having sound financials, strong leadership from the board and senior executives, a sound strategic overview and a clear vision for the future.”

    Professional non-executive director Julie Garland McLellan FAICD, uses the Pacific Power privatisation in 2008 as an example of the conflicted demands on public sector directors.

    “The CEO wanted to split the company up [to maximise the sale value] but if you take the view that directors must safeguard the company, splitting up the company so it loses its monopoly status is not good because when you privatise something, selling a monopoly won’t deliver community outcomes. In this situation both are right, so it’s a question of balancing interests.” Garland McLellan says good governments flag the potential sale of an asset early to give the board time to prepare.

    According to McGrathNicol partner Jamie Irving GAICD, often in a privatisation process the businesses and assets are being carved out of a wider group. This poses complex issues in identifying the revenues, expenses, assets and liabilities of the business being sold. “The directors will want to be comfortable that there has been a robust process in defining the perimeter of the business being sold, as well as the process for preparing the financial information.”

    Engaged workforce

    It is important for the workforce to remain engaged during any privatisation process and it’s the directors’ responsibility to ensure management is focused on the workforce. Bowman says directors also have a cultural responsibility. They must support the CEO to create a privatisation-ready culture as well as ready the senior leadership and staff for the transition to the new owners. “This requires a laser focus on the vision and mission of the enterprise, which will be enhanced by the transition.”

    However, as Garland McLellan notes, boards don’t have a legal duty to keep the workforce engaged. Nevertheless, they need the support of the employees through the sale process, even if redundancies are planned prior to the transaction.

    “It’s a strategic choice of the board about whether they want to rationalise the workforce to make the business look like a private business to get the best price or sell it with rules around employment constraints so there’s not a massive disruption to the local economy,” she adds.

    Says Irving: “Directors should ask the management team to keep them informed of the communication strategy to ensure that uncertainty does not create issues within the workforce. The issues can be heightened with a public sector workforce, often with a longer tenure, unfamiliar with the ways of the private sector and who naturally will be anxious during the transition.”

    Of course, maintaining workforce productivity is just one in a long line of challenges boards of government businesses face. These are rarely simple deals, and straight commercial goals are not always the main focus.

    Garland McLellan notes one of the key hurdles is being clear about what parts of the business remain with the government, what parts of the business are not continuing at all and what is going to the new entity.

    “These are huge deals and managing your time and energy as a director, and adding value to the deal, is critical,” she explains, adding that directors also face reputational risks in these deals that are important to manage. The government will have its advisers and the directors involved in privatisation need them as well. “Good advice is cheap in the context of what the deal could potentially cost a director if the transaction attracts negative media or fails. So have a group of director friends you can talk to, taking into account your duties to maintain confidentiality,” she says.

    Her other advice is to ensure the chair has a good rapport with the minister. “Make sure there is good communication between all parties because the more you can keep all stakeholders aware about what’s going on without breaching confidentiality, the more likely the deal will be a success. There’s nothing worse than seeing a board talk to the minister through the press.”

    Other challenges, says Bowman, include staying focused on the future. Directors also have a duty not to damage the business. “Ensuring business processes and culture are geared to creating a contribution to society, while also delivering superior financial results and long-term economic value, is key.”

    Top tips for governing a smooth privatisation process

    • Don’t underestimate the time and effort required to be ready for the change. Getting IPO-ready will take more than 50 per cent of your senior executive’s time
    • Reporting and communication will need to improve. Upgrade your financial reporting, formalise documentation and be sure your finance department is adequately resourced.
    • Acknowledge the challenge of due diligence, disclosure, transparency and robust corporate governance.
    • Is the price right? Leaving some upside for investors, have you maximised the return to the entity?
    • Don’t underestimate the communication challenge: stakeholders can and do expect transparency and a deep understanding of the deal.

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