Guidelines on Corporate Governance of SOEs

In many emerging economies the electricity sector remains characterized by integrated monopolies, that are state owned. These state-owned-enterprises (SOEs) frequently own and operate all aspects of the generation, transmission, and distribution of electricity. (An SOE is a corporate entity, recognized by national law, in which the state exercises full or partial ownership.) Aside from the power sector, SOEs are often a government’s preferred structure for other utilities and infrastructure industries such as water, transport, telecommunication, and sometimes finance. Frequently, SOEs play a substantial role in the GDP and employment of national economies.
 
Good governance of SOEs is therefore vital to ensuring that their contributions to economic efficiency and competitiveness remain positive. In this vein, the OECD has developed their Guidelines on Corporate Governance of State-Owned Enterprises.[1] The Guidelines represent current global best practice for the oversight and management of SOE. This two-month series is devoted to a summary of the seven guidelines and why they are so important. Three are summarized this month and the remaining four next month. Many of the practices discussed below have been foundational in reform efforts undertaken by projects on which I have recently worked, including Uzbekistan, Georgia, Palau, Eswatini and Lesotho.

1. Develop a Clear Ownership Policy. The purpose of government ownership is to maximize the value of a service across the entire society by efficiently allocating resources.
   

​Many SOEs fall into the category of natural monopolies since multiple infrastructures would be redundant. Under these conditions, maximizing value takes on an outsized importance, especially since the SOE is delivering a public good. To maximize efficiency, the government should develop a clear ownership policy that specifically outlines the rationales for state ownership, the state’s role in governance, and how the state will implement its policy. This policy should be subject to political accountability and reviewed and disclosed regularly.
 
Act as Professional Owner. Governance of the SOE should be carried out professionally, efficiently, and transparently. The state should act in a professional manner, as an informed and active owner. Governments should create and maintain simple and standardize the legal forms under which SOEs may operate, allowing them full autonomy to pursue their defined objectives. Rather than take a heavy-handed approach as manager, the state should position itself at arms-length, acting as a shareholder instead. This means respecting the independence of managerial boards and allowing them to exercise their responsibilities in the best interest of the enterprise. Ownership should be centralized in a single administrative unit (a ministry or agency), and ownership rights should be clearly identified. The state’s responsibilities will include attending shareholder meetings, exercising voter rights, and establishing a structured, transparent, and merit-based board nomination processes. Further, the state should monitor both board and corporate success by establishing and overseeing a reporting structure that can monitor, audit, and assess corporate performance. Public accountability should be enforced through the development of a disclosure policy for SOEs, that (i) identifies information to be publicly 

1. disclosed, (ii) creates channels for disclosure, and (iii) ensures the quality of information. The state can also maintain an ongoing dialogue with external auditors (when appropriate and permitted by the state’s legal system) to ensure that updated standards are anticipated and communicated to the SOE. Finally, the state should establish a clear renumeration policy for board members that fosters the long- and medium-term interest of the enterprise. These ownership roles help the state oversight body align closely with private sector governance standards.

 

1. Maintain a Fair Marketplace. The legal and regulatory framework, created by the government, should ensure a level playing field for all economic activities undertaken by SOEs. There should be a clear separation between the state’s ownership activities and other actions that could be taken by the state to influence market outcomes (i.e. market regulation). Furthermore, in cases where stakeholders and other interested parties feel that their rights have been violated, they should have full access to legal redress through an independent court or arbitration. To maintain public accountability and transparency both the cost and revenue structures of SOEs should be regularly disclosed, especially in instances of government support. SOEs should not be exempt from following all laws, tax codes, and regulations; and legal frameworks should be consistently written and applied to all participants. SOEs’ should face the same access to debt and equity finance as other participants; access should be based purely on commercial grounds. SOEs should not benefit from any indirect financial support that confers an advantage over private competitors, and they should be required to earn rates of return that are consistent with those obtained by private competitors who operate in the same market. These practices should garner special attention to avoid undue advantages (or disadvantages) for SOEs. While there is general agreement that a level playing field is critical, there is less about how to achieve it.

 
To be continued next month

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[1] OECD. 2015. Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition. Paris.