Improving performance at Namibia state-owned enterprises

Public-sector companies can match the performance of their private-sector counterparts and even become world-class players.

These companies, controlled by a government or a government agency, struggle to meet the private sector’s performance levels, and potential profits remain unrealized. During the current downturn, some state-owned enterprises—even as they face increased pressure to become more efficient—have been called on to support government stimulus plans through higher spending and job retention. Nonetheless, our research and experience show that notwithstanding the constraints of the public-sector model and the tough economic times, these enterprises can significantly improve their performance.

 State enterprises often juggle multiple, unclear, or conflicting financial and social objectives, such as providing blanket, low-cost telephone service. Political interference can prompt decisions that threaten a company’s financial goals.

Governments play a big role in creating the right environment for state-owned enterprises to excel, but their chief executives can implement such moves without waiting for other officials to act. While other better-performing companies draw from well-known best practices in the private sector, they also concentrate on three areas of specific importance in the public sector:

1.) Clarify objectives and secure an explicit mandate

Too often, state-owned enterprises operate behind a curtain, revealing little information beyond their general mandate. One reason may be that their objectives are unclear or conflicting, but the lack of transparency can also be traced to political expediency, a desire to avoid comparisons with the private sector, or inexperience with clear, concise corporate communications. Leading state-owned enterprises can openly proclaim their objectives and clarify the trade-offs between their financial and social goals when they negotiate a transparent mandate with the government and other stakeholders.

In practice, that kind of transparency involves explicitly establishing financial objectives as the primary goal and setting both aspirational targets and minimum expectations, such as covering the cost of capital.

An agreement between the leadership and government officials (normally including the prime minister or president) on the scope for action might be needed.As a CEO position, one need to be given a chance of “freedom to act” in order to make the company profitable within the targeted years. They must be granted freedom in the areas most relevant to fixing the business, including adjusting performance schedules, eliminating loss-makings.

Once everything is in place, communicating the new financial targets and the moves that will be used to achieve them offers three significant benefits. 1,) transparency helps to create accountability, which can force government officials to keep their commitments, particularly if problems arise. 2), it can boost public support for the changes, which is especially important if political support is tenuous.In addition 3), state enterprises must not only focus their portfolios of social, nonfinancial initiatives in order to deliver meaningful results to key stakeholders but also communicate those results. Unless CEOs of state-owned enterprises meet the core needs of the public and other critical stakeholders, they risk a political backlash that could undermine their efforts and the powers they have won. These companies can’t ignore their portfolios of social initiatives, such as uniform national service, that aren’t directly linked to financial targets.

2.) Focus scarce resources for highest financial impact

Even with transparent agreements, state-owned enterprises tread on shaky ground. Public scrutiny—and therefore the pressure to deliver quick results and avoid missteps—is intense. Wholesale changes can upset workers and raise the level of political risk. Leadership talent is scarce, and few people have experience executing change programs. As a result, judicious state-owned enterprises tend to begin their change programs by concentrating on a few areas that promise to have the greatest financial impact rather than embarking on a broad agenda that could fail for lack of resources. This focus also limits the possibility that divergent, and possibly conflicting, stakeholder interests will distract a company’s leaders from their core tasks.

Executives must choose their targets carefully. To emphasize urgency and plow through the bureaucratic inertia that’s common in state enterprises, it will often be necessary to establish special, CEO-sponsored teams that can bypass unnecessary management layers. (The chief executive of the Indonesian state oil company Pertamina, for example, created breakthrough teams he monitored closely to speed up high-impact projects).

To help focus on high-priority areas, leaders at state companies must also examine noncore activities and assets and, wherever possible, terminate, franchise, outsource, or shed them. Divestment of public assets is politically sensitive and usually requires approval on many levels, but executives have found creative ways to expedite the effort.

3.) Redefining the talent proposition

State companies find it difficult to attract talented people and to motivate the high performers they already have because the environment is perceived as staid, hierarchical, and bureaucratic. Since career progression is often based on tenure rather than performance, employees with leadership skills may see little reason to shine. Redefining the talent proposition can influence these attitudes. State-owned enterprises must promote the unique opportunities they provide talented people, offer competitive compensation, and intensify their efforts to manage performance.

To bring in outside talent, state-owned companies should make their case stronger. After all, they offer exciting challenges in nation building, opportunities to work on projects with a much broader impact than those available in the private sector, and the possibility of pursuing careers in a vast network of public and private companies. When these largely ignored benefits are marketed, the impact can be astounding. To tip the balance in many decisions, state enterprises must bring compensation packages closer to private-sector standards.

Another critical element for developing and retaining talented leaders is to intensify performance management. Meaningful rewards and consequences must be based on merit, not tenure. Many state companies have only a superficial performance culture—formal evaluation processes, for instance.

State enterprises must also be more open to hiring talented foreigners, who can bring needed skills, especially in areas (such as finance and marketing) that have taken a back seat to technical skills. Since many state enterprises are prohibited from hiring foreigners, especially for senior positions, their leaders should work to ease such restrictions in areas in which they are significantly behind the private sector. 

There is always space for improvement, no matter how long you've been in the business.