OBSERVER: I read with great interest the recent article by Greg Sparks dealing with the challenges facing State-owned companies in the Republic (Semi-states need new dynamism not crisis control, February 1st, 2002). I agree with Mr Sparks's comments in two respects.

Firstly, he is correct in his suggestion that the semi-state sector needs dynamism rather than crisis control. I also agree with his assertion that governance and return on capital issues are central to the success of publicly owned companies.

Closer examination of his proposal, however, reveals some weaknesses. The success of State companies is assessed in terms of the value they provide to the State, either by way of profitability or through the provision of public services.

Achievement of value must be in the context of a transparent and effective governance structure. The two elements go hand in hand - good governance fosters goal achievement, and making targets is an indicator that the governance system is functioning.

The current system of managing semi-state companies delivers neither significant value nor accountability. The holding company proposal, focusing as it does on making State companies more commercial, does not deal with either issue and, therefore, runs the risk of simply adding another layer to a mired system.

A good governance system is dependent on three things: a clear objective, a clearly identifiable stakeholder and accountable stewards.

What is the objective of our State companies? Is it to provide public services to those who need them or is it to wring value from State assets by driving hard commercial deals? Throw in a history of under-funding and, more recently, difficulty attracting staff, and it is no wonder that the average board member might privately bemoan what the company is trying to achieve, and whether it is possible in any event.

The holding company model, which proposes to free the State company by giving it access to private funding, is more likely to mean that activity would become centred only on those areas that are commercially viable, to the detriment of public service objectives.

The holding company model also fails to address the apparent confusion about the roles of the minister, department and other oversight bodies, such as Oireachtas committees. State company boards seem to view each of these as stakeholders, and there is some evidence that they are not alone in this view. In reality, each of these groups is, together with the boards, a link in a chain of stewardship required to act on behalf of the stakeholder - "the people of Ireland".

Adding a holding company serves only to introduce yet another group of stewards, without the contact to affect governance within a particular company, yet held to account for the actions of subsidiary boards.

In fact, as the amount of private sector investment increases, the likelihood is that the holding company board would come under significant pressure to act in the interests of commercial stakeholders first.

An effective governance model recognises this fact and attributes defined responsibilities to each group of stewards, equal to the powers of each.

The key responsibilities lie with the board of directors. These responsibilities can only be met if the board is allowed the freedom to exercise authority in a meaningful way.

As an incentive to more dynamic management, this authority should include the power to obtain outside debt and equity financing for activities identified as commercial opportunities.

In the spirit of not knocking something without offering an alternative, I would propose that the way forward for the State sector is to promote dynamism by:

assessing State companies and identifying those activities that are public service and those that lend themselves to commercial exploitation;

clearly defining objectives for each activity area and restructuring companies to facilitate the management of each objective;

making boards solely responsible for the companies and allowing the boards freedom to operate. This would, of necessity, mean confining departments to sectoral policy and ministers to the role of shareholder representative, with the rights that attach to a dominant shareholder in the corporate world;

defining reporting structures appropriate to each of the companies, encompassing reports to the minister and to the relevant Oireachtas committee; and

where commercial activities are engaged in, free the board to act like any commercial board - with the understanding that they are ultimately accountable to the stakeholder for results.

Of course, implementing such change would be very difficult. There are many cultural and organisational issues that need to be addressed in tandem with an implementation programme.

Many of the advantages of the holding company model - access to capital, taking advantage of public-private partnership opportunities, effective oversight - are possible in the existing framework. Without, however, a real attempt to define the objectives of our State companies, and to define stewardship responsibilities, the holding company model only serves to add another management tier to an already unbalanced structure.

Mark Kennedy is director of forensic services at Chapman Flood Mazars