To assist governments in the oversight of their state-owned enterprises (SOEs), the OECD has developed Guidelines on Corporate Governance of State-Owned Enterprises (OECD 2015). The Guidelines represent current global best practice for the oversight and management of SOE. This is the second in a two-month series devoted to a summary of the seven guidelines and why they are so important. Last month’s post summarized the first three Guidelines (and can be seen here), while this post summarizes the remaining four. Many of the practices have been foundational in reform efforts undertaken by ADB in Uzbekistan, Georgia and most recently, Palau.
4.Treat Shareholders and Other Investors Equitably. When SOEs include non-state investors among their owners, the state and enterprises should recognize and promote the rights of all shareholders. The state should strive toward full implementation of all relevant sections of the OECD Principles of Corporate Governance whether or not it is the sole owner of the SOE. Shareholder protection includes ensuring all shareholders are treated equitably; observing a high degree of transparency; developing an active policy of communication and consultation with shareholders; facilitating participation of minority shareholders in meetings; finally, transactions between the state and SOEs should happen on market-consistent terms. National corporate governance codes should be adhered to by all listed SOEs and, where practical, unlisted SOEs. Adequate information should be available to non-state shareholders at all times. When SOEs engage in joint projects, the contracting party should ensure that contractual agreements are upheld, and disputes are addressed in a fair and timely manner. This rule exists to encourage states to be fully observant of the way they treat their shareholders. The state’s reputation in this aspect is integral to the ability of the SOE’ to attract outside funding and maintain an efficient, low-cost enterprise.
5. Protect Stakeholder Rights, Foster Relations and Maintain High Ethical Standards. The state ownership policy should fully recognize and clarify SOEs’ responsibilities towards stakeholders, including employees, customers, investors, etc. Further, SOEs should be required to report on stakeholder relationships. Stakeholder relations are particularly important for SOEs with public service obligations, such as utilities; therefore, governments, state-ownership entities, and SOEs should recognize, respect and work to protect stakeholders’ established rights. Stakeholders should have access to redress if they feel their rights are violated. SOEs should also observe high standards of ethics and responsible business conduct. Boards should take responsibility to develop, implement, monitor, and communicate a strong system of internal controls, ethics, and compliance programs, when it comes to issues sch as officer’s conduct, procurement, and employee engagement. Finally, SOEs should not finance political activities, nor make political campaign contributions, through any means. Best practices in this area are in the long term interest of any enterprise, making it credible and trustworthy in both day-to-day operations and long term commitments.
6. Observe High Standards of Transparency and Disclosure. SOEs should observe high standards of transparency and be subject to the same high-quality accounting, disclosure, compliance, and auditing standards as listed companies. This includes publishing material finance and non-financial information on the enterprise in line with internationally recognized standards of corporate disclosure. Some examples include: a clear statement to the public of enterprise objectives and their fulfillment; enterprise financial and operating results; the governance, ownership, and voting structure of the enterprise; the renumeration of board members and key executives; board member qualifications and selection processes with respect to board diversity policies; any material and foreseeable risk factors and measures taken to mitigate them; any financial assistance and guarantees received from the state and commitments made on behalf of the SOE; any material transactions with the state and other related entities; and any relevant issues relating to employees and other stakeholders. Finally, annual financial statements should receive an independent external audit and be make publicly available. Transparency strengthens the accountability of SOE boards and management, and enables the state to act as an informed owner.
7. Build and Maintain Sound and Competent Boards. Corporate boards should have the necessary authority, competency, and objectivity to carry out their functions of strategic guidance and monitoring of management. Boards should have a clear mandate and bear the ultimate responsibility for the enterprise’s performance. In addition, SOE board composition should allow the exercise of objective and independent judgment; all members should be nominated based on merit and have equivalent legal responsibilities. Independent board members, where applicable, should be free of any material interests that could jeopardize their objective judgment, and mechanisms should be implemented to avoid conflicts of interest. The Chair should assume responsibility of boardroom efficiency act as the liaison for communications with the state-ownership entity. The CEO and Chair should be separate positions. If employee representation on the board is mandated, mechanisms should be implemented to guarantee the effectiveness and contribution of that representation. Boards should establish special committees, of independent and qualified members, to support the full board in performing its legislated duties, and carry out an annual evaluation to appraise performance and efficiency. To accomplish this, SOEs should develop internal audit procedures and functions. This rule’s specific focus on empowering and improving boards is a fundamental step towards ensuring a high-quality corporate governance of SOEs. Quality boards are able to act in the interest of the enterprise and its owners, effectively monitor management, and prevent interference in day-to-day operations of the SOE.
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.