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State-Owned Enterprises: Corporate Governance

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Practice Advice on Strategy and Structure

State-Owned Enterprises: Corporate Governance (OECD)

Summary Advice: The OECD intends to provide general advice that will assist governments in improving the performance of State-Owned Enterprises (SOEs), the decision to apply the followingto the governance of particular SOEs should be made on a pragmatic basis. The Guidelines on Corporate Governance of State-Owned Enterprises are primarily oriented to state-owned enterprises using a distinct legal form (i.e., separate from the public administration) and having a commercial activity (i.e. with the bulk of their income coming from sales and fees), whether or not they pursue a public policy objective as well.

Main Points:

The legal and regulatory framework for state-owned enterprises should ensure a level-playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions. The framework should build on, and be fully compatible with, the OECD Principles of Corporate Governance (see Principles of Corporate Governance).

  • There should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for stateowned enterprises, particularly with regard to market regulation.
  • Governments should strive to simplify and streamline the operational practices and the legal form under which SOEs operate. Their legal form should allow creditors to press their claims and to initiate insolvency procedures.
  • Any obligations and responsibilities that an SOE is required to undertake in terms of public services beyond the generally accepted norm should be clearly mandated by laws or regulations. Such obligations and responsibilities should also be disclosed to the general public and related costs should be covered in a transparent manner.
  • SOEs should not be exempt from the application of general laws and regulations. Stakeholders, including competitors, should have access to efficient redress and an even-handed ruling when they consider that their rights have been violated.
  • The legal and regulatory framework should allow sufficient flexibility for adjustments in the capital structure of SOEs when this is necessary for achieving company objectives.
  • SOEs should face competitive conditions regarding access to finance. Their relations with state-owned banks, state-owned financial institutions and other state-owned companies should be based on purely commercial grounds.

The state should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness.

  • The government should develop and issue an ownership policy that defines the overall objectives of state ownership, the state’s role in the corporate governance of SOEs, and how it will implement its ownership policy.
  • The government should not be involved in the day-to-day management of SOEs and allow them full operational autonomy to achieve their defined objectives.
  • The state should let SOE boards exercise their responsibilities and respect their independence.
  • The exercise of ownership rights should be clearly identified within the state administration. This may be facilitated by setting up a co-ordinating entity or, more appropriately, by the centralisation of the ownership function.
  • The co-ordinating or ownership entity should be held accountable to representative bodies such as the Parliament and have clearly defined relationships with relevant public bodies, including the state supreme audit institutions.
  • The state as an active owner should exercise its ownership rights according to the legal structure of each company. Its prime responsibilities include:
    • Being represented at the general shareholders meetings and voting the state shares.
    • Establishing well structured and transparent board nomination processes in fully or majority owned SOEs, and actively participating in the nomination of all SOEs’ boards.
    • Setting up reporting systems allowing regular monitoring and assessment of SOE performance.
    • When permitted by the legal system and the state’s level of ownership, maintaining continuous dialogue with external auditors and specific state control organs.
    • Ensuring that remuneration schemes for SOE board members foster the long term interest of the company and can attract and motivate qualified professionals.

The state and state-owned enterprises should recognise the rights of all shareholders and in accordance with the OECD Principles of Corporate Governance ensure their equitable treatment and equal access to corporate information.

  • The co-ordinating or ownership entity and SOEs should ensure that all shareholders are treated equitably.
  • SOEs should observe a high degree of transparency towards all shareholders.
  • SOEs should develop an active policy of communication and consultation with all shareholders.
  • The participation of minority shareholders in shareholder meetings should be facilitated in order to allow them to take part in fundamental corporate decisions such as board election.

The state ownership policy should fully recognise the state-owned enterprises’ responsibilities towards stakeholders and request that they report on their relations with stakeholders.

  • Governments, the co-ordinating or ownership entity and SOEs themselves should recognise and respect stakeholders’ rights established by law or through mutual agreements, and refer to the OECD Principles of Corporate Governance in this regard.
  • Listed or large SOEs, as well as SOEs pursuing important public policy objectives, should report on stakeholder relations.
  • The board of SOEs should be required to develop, implement and communicate compliance programmes for internal codes of ethics. These codes of ethics should be based on country norms, in conformity with international commitments and apply to the company and its subsidiaries.

State-owned enterprises should observe high standards of transparency in accordance with the OECD Principles of Corporate Governance.

  • The co-ordinating or ownership entity should develop consistent and aggregate reporting on state-owned enterprises and publish annually an aggregate report on SOEs.
  • SOEs should develop efficient internal audit procedures and establish an internal audit function that is monitored by and reports directly to the board and to the audit committee or the equivalent company organ.
  • SOEs, especially large ones, should be subject to an annual independent external audit based on international standards. The existence of specific state control procedures does not substitute for an independent external audit.
  • SOEs should be subject to the same high quality accounting and auditing standards as listed companies. Large or listed SOEs should disclose financial and non-financial information according to high quality internationally recognised standards.
  • SOEs should disclose material information on all matters described in the OECD Principles of Corporate Governance and in addition focus on areas of significant concern for the state as an owner and the general public. Examples of such information include:
    • A clear statement to the public of the company objectives and their fulfilment.
    • The ownership and voting structure of the company.
    • Any material risk factors and measures taken to manage such risks.
    • Any financial assistance, including guarantees, received from the state and commitments made on behalf of the SOE.
    • Any material transactions with related entities.

The boards of state-owned enterprises should have the necessary authority, competencies and objectivity to carry out their function of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions.

  • The boards of SOEs should be assigned a clear mandate and ultimate responsibility for the company’s performance. The board should be fully accountable to the owners, act in the best interest of the company and treat all shareholders equitably.
  • SOE boards should carry out their functions of monitoring of management and strategic guidance, subject to the objectives set by the government and the ownership entity. They should have the power to appoint and remove the CEO.
  • The boards of SOEs should be composed so that they can exercise objective and independent judgement. Good practice calls for the Chair to be separate from the CEO.
  • If employee representation on the board is mandated, mechanisms should be developed to guarantee that this representation is exercised effectively and contributes to the enhancement of the board skills, information and independence.
  • When necessary, SOE boards should set up specialised committees to support the full board in performing its functions, particularly in respect to audit, risk management and remuneration.
  • SOE boards should carry out an annual evaluation to appraise their performance.

Source: OECD Guidelines on Corporate Governance of State-Owned Enterprises (2005) OECD at (accessed 05 March 2013).

Page Created By: Matthew Seddon on March 5, 2013. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.

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School of Public Policy and Governance