The cornerstone of the port reorganization – the implementation of good corporate governance principles


Approximately a year ago, thanks to the active work of foreign organisations, discussions about the ports in Latvia, their importance in our national economy and the need to improve the existing port governance model, resumed in our society. In my practice, I have analysed more than 70 ports and their governance models around the world, but the legal solution adopted in Latvia is somehow unique- a derived public entity, in fact non-profit organisation, which is inconsistent with basic market economy principles.

It cannot be unequivocally called good or bad, but the fact is that the current governance model is politically controlled. The port governance models have significantly changed over the last thirty years, from traditional bureaucratic structures to the business-oriented companies, who are independent in decision making process and open for business and foreign investment.

In Baltics, Tallinn port authority, which manages five harbours around Estonia is a joint-stock company, whose shares are owned by the state of Estonia (67%), 33% by pension and investment funds and private shareholders, and which operates under the same business laws as any other private company in Estonia. The company is managed by three members of the board and eight supervisory board members, the CEO is also a board member of the entity and therefore legally responsible for the decisions made. The port authority CEO in Riga and Ventspils only implements the decisions taken by the board of the corresponding port authority, the port authority board consists of eight members: four officials from the local government and four representing various ministries. The board members of these port authorities are nominated directly from the represented municipalities and relevant ministries, the municipality board members are approved by the city major or his deputy, and the government representatives are approved by the Cabinet of Ministers vote.

In Lithuania, the Klaipeda State Seaport is managed as a limited liability company (LLC), which is fully owned by the State of Lithuania, and members of the board are bearing full responsibility in accordance with the Commercial Law. Klaipeda Port members of the board are the representatives of the Ministry of Transport, Klaipeda City Council, Klaipeda County Administration, it also includes the member nominated by the board of the port, the users of the port and the users’ associations and institutions. The primary task of the board is dealing with the operation and development of the port, while the task of the supervisory board is to manage the port economically responsibly in society’s best interest.

What Latvia should do to shift from existing port governance model to the one which supports transparency, independency and international investors?

First, each port (Ventspils and Riga) should be formed as a separate company, and it is recommended to include the state and local government in the distribution of capital shares, as well as to reflect the distribution of their interests. For example, 70% of the Port of Rotterdam authority shares belong to the municipality and 30% to the state, 100% of the shares of the Port of Antwerp authority belong to the municipality, Port of Gdansk authority has a mix of state treasury, the municipality and the employees, 100% of the shares of Klaipeda State Seaport authority are state-owned and 67% of shares of the Port of Tallinn belong to the state and 33% to the investors.

It is important that the port authorities are transformed from non-profit organizations into joint stock companies with full liability for their board members stipulated in the commercial law. The change of the legal status besides better aligning with operations of a corporation would also change the incentive structures for board and management members, as well as bring ports’ management and governance practices under the discipline of corporate law. It is strongly recommended to establish a supervision function to hold the boards of Latvian ports accountable and to carry out an annual evaluation of their performance.

Clear qualification criteria should be implemented for port authority board members and, if established, supervisory board members, which should encourage the authorities to ensure that selected members have adequate experience and skills to fulfil their mandate. The criteria should provide a board member’s profile including general attributes as independence, accountability, integrity, leadership and specific professional qualifications for some of the board members, like port economics or port management for port CEO role. The term limits for board and supervisory board members, which should include a standard period of tenure, as well as a maximum number of terms, as well as KPI indicators, should be implemented.

I believe that port authorities in Latvia have to be developed into entities which follow very simple but clear business rules. There are number of examples in the world how a port authority can be developed into a successful business oriented company that operates complex businesses in the logistics chain. For example, port of Rotterdam authority is not a single port management company. This state and municipality owned company manages also the Port of Sohar in Oman, the Port of Pecem in Brazil, and has established offices in virtually all strategic locations worldwide to facilitate the flow of goods through their own assets. There are other port authorities that follow a similar business model and have successfully developed themselves from old fashioned national level bureaucratic institutions to transatlantic businesses.

Port authorities governed according to good corporate governance guidelines perform financially better than their competitors who are not following the same principles and deliver higher port performance results, therefore it is of paramount importance for the society and businesses in ports to strengthen port authorities towards independent decision making and entrepreneurial competence.

Valters Bolēvics