Fortune News | Oct 25, 2024
Ethiopian Investment Holdings (EIH) has introduced a performance-linked remuneration framework for the board members of state-owned enterprises (SOEs), tying annual cash payouts directly to governance efficacy and corporate financial health starting this year. The directive replaces static compensation with a formulaic system designed to incentivise long-term value creation and a commercial mindset across federal assets.
The directive has introduced a performance-linked remuneration framework that ties annual cash payouts for state-owned enterprise (SOE) boards to financial profitability and governance efficacy, effectively eliminating compensation for directors of loss-making entities.
"This excludes the legacy loss-making companies," Eyob Negash, the financial portfolio director at EIH, told Fortune.
The new framework establishes three mandatory prerequisites for remuneration eligibility: a profitable financial result, an unqualified external audit opinion, and the timely settlement of all due dividends. Under these rules, boards overseeing enterprises in financial distress or those failing to meet governance standards will see their annual payouts suspended.
Remuneration is determined through a weighted calculation that integrates an SOE’s institutional health rating, coded green, yellow, or red, with the board's collective performance and individual director scores. While chairpersons receive a 15pc higher rate than the directors to account for additional risk and responsibility, the framework strictly prohibits in-kind benefits, equity, or the personal use of corporate assets, such as vehicles.
This meritocratic shift aims to bridge "performance gaps" by transitioning SOE boards from ceremonial oversight bodies into accountable drivers of long-term value creation. By aligning executive rewards with the bottom line, the directive signals a more disciplined regulatory environment intended to enhance the institutional capacity and financial transparency of Ethiopia’s public investment portfolio.
Under the new guidelines, the determination of board pay is bifurcated: 60pc of the performance assessment is conducted at the subsidiary level, while EIH evaluates the remaining 40pc. This dual-layer audit scores boards on a four-tier scale, ranging from Very High to Low. Boards falling into the lowest bracket receive a zero-weighting factor, effectively disqualifying members from annual remuneration for that fiscal year.
The sovereign wealth companies, which have reached 41, have approximately 400 board members, while some of them have as few as five board members, and others have up to 11.
The framework establishes rigorous eligibility criteria, stipulating that SOEs must secure an unqualified external audit opinion and demonstrate profitable financial performance before any board payments are processed. Furthermore, subsidiaries must settle all due dividends on time.
To instil professional discipline, individual directors are measured against 12 key performance indicators (KPIs), including a minimum of 21 hours of training per year and active participation in boardroom discussions.
This shift toward meritocratic compensation marks a significant tightening of federal oversight on the governance structures managing the country's public investments. By leveraging these evaluation outcomes to identify "performance gaps," EIH seeks to transform SOE boards from ceremonial oversight bodies into accountable drivers of institutional capacity. The framework signals a transition toward a more disciplined regulatory environment where executive rewards are inextricably linked to measurable strategic and financial outcomes.
Eyob noted that this is a sweeping overhaul of board governance, transitioning from what he characterises as a "for show" system to one anchored in verifiable performance and digital accountability. He noted that the previous evaluation system was fundamentally subjective, with KPIs that were often ignored or used merely as a "tick-box" exercise for international appearances rather than driving actual company performance.
Eyob stated that the primary objective of the new framework is to increase board effectiveness by making performance metrics verifiable through brief. Under this new governance structure, boards will no longer be 100pc autonomous in their self-evaluation; instead, EIH will conduct up to 40pc of the evaluation to ensure external oversight.
Eyob noted that a strict new policy limits board members to a maximum of two concurrent positions. He highlights that previously, some individuals held four or five seats, a practice he argues made it impossible for them to function effectively or contribute to company growth. This realignment is driven by the principle that company performance is a direct derivative of board performance.
Conflict of Interest and Regulatory Separation Eyob noted that it is a critical analysis of past "logic" where regulators also served as directors of the state-owned enterprises they were meant to oversee.
He argues that these roles must have separate missions. While an institution has a regulatory mandate, the enterprise must focus on its own objectives, such as profitability. Consequently, he mandates the digital declaration of conflicts of interest. If a conflict is identified, the member must recuse themselves from the agenda or, in long-term cases, EIH should be notified.
He noted a uniform approach across subsidiary boards where remuneration is tied to a tripartite assessment of company, board, and individual performance. He explains that while payments are generally restricted for loss-making entities, the new system accounts for "red" status caused by legacy problems, such as audit reports that have been pending for three to four years. In cases where a board is making significant efforts to resolve these historical backlogs, the framework allows for continued remuneration.
Eyob noted that boards must move away from operational meddling and toward strategic oversight, and this guideline is the way to move forward. He critiques the current culture where management sets the board’s agenda and instead insists that boards must actively set strategic directions and define their own KPIs.
A core component of this shift is succession planning, which he defines as a mandatory board responsibility to identify and prepare future leadership for key technical and executive roles, including the CEO.
He added that the framework also redefines the board secretary from a mere minutes-taker to a quality advisor on conflicts and governance, representing a "very big" change in institutional capacity.
Worku Lemma, a financial expert, noted that the new framework was highly comprehensive. He had noted that the directive had adequately accommodated long-term sustainability and strict compliance parameters. Specifically, he had noted that the directive had established a critical minimum threshold, requiring that only institutions with an unqualified audit report could qualify.
He had observed that the framework had successfully integrated performance metrics across three distinct layers, which had included the full board, individual members, and overall company ratings.
Worku had asserted that the core purpose of a board of directors had always been to provide strategic direction and define the policy path for an organisation. He had firmly argued that management teams had never possessed the mandate to formulate strategy or decide policy issues, as these responsibilities had strictly remained the core functions of the board across all institutions, including banks.
He had noted that initial selection processes had technically taken educational competence and work experience into account. He had pointed out that any existing gaps in expertise had been addressed by a newly instituted 21-hour training requirement.
Worku recommended that while high-level government officials like ministers and commissioners had heavily dominated state boards, a mix of independent professionals had already entered certain entities, such as the Ethiopian Postal Service and the Commercial Bank of Ethiopia (CBE). However, he had agreed that independent professional representation had remained insufficient across the broader spectrum of state-owned enterprises. He had ultimately reasoned that while completely removing government representatives had been unrealistic given that the state had remained the primary owner, the government had stood to benefit significantly if it had minimised the role of political appointees and had systematically increased the participation of independent, private sector professionals.
Tasked with overseeing more than 40 state-owned enterprises and managing 36 active projects valued collectively at five billion dollars, EIH under Brook Taye(PhD) is taking on an increasingly high-profile role in the administration's economic plans. Brook recently announced that the holding company had recorded asset of 8.2 trillion Br, a sum representing 12pc of the country’s GDP, with combined revenues over the past four years reaching 6.1 trillion Br.
Tax contributions from the 41 enterprises under the Holding amounted to 644 billion Br across the same period, with the most recent year alone accounting for 40pc of the four-year total. EIH also reported robust growth in annual revenue, which climbed 41pc from 201 billion Br to 2.1 trillion Br, while net profit increased by 50pc. Dividends remitted to the government increased by nine percent, reaching 32.9 billion Br.
EIH is targeting five trillion birr in annual income and hopes to see dividends paid to the government climb to 100 billion Br. Industry experts estimate that three major firms, Ethio telecom, Ethiopian Airlines, and Commercial Bank of Ethiopia (CBE), account for more than half of EIH’s total assets, uncovering a high level of concentration among the Holding’s portfolio companies.
PUBLISHED ON
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