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State-Owned Enterprises: Stakeholder and Shareholder Relations

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Practice Advice on Civil Society and Advocacy

State-Owned Enterprises: Stakeholder and Shareholder Relations  (OECD)

Summary Advice: The OECD states that in order to be transparent as a shareholder, the state must ensure that appropriate information is disclosed at the SOE level.

Main Points:

Main steps or actions that can be taken to ensure equitable treatment of all shareholders in SOEs

Develop a clear policy of equitable treatment of all shareholders

  • The state as a significant shareholder should “tie its own hands” and develop a clear policy of equitable treatment of all shareholders.
  • This policy should provide all shareholders with a consistent menu of mechanisms usually adopted to prevent abuse of minority shareholders by boards, management and controlling shareholders. These mechanisms include pre-emptive rights, qualified majority for certain decisions, capacity for minority shareholders to call for a shareholder meeting and to be represented in boards, access to redress, etc.
  • This policy should include a reasonable balance of ex ante and ex post mechanisms taking due consideration of the legal characteristics of the country concerned. It should be at a minimum as protective as legal and regulatory provisions meant for protecting minority shareholders in listed companies.
  • All relevant elements of this policy should be integrated in any code of governance for SOEs as well as in the state ownership policy. They could also be integrated into the charters of individual SOEs.
  • A simple and effective option is to submit all SOEs to the general company law, listing requirements and corporate governance codes valid for private sector companies, especially when these are deemed to ensure effective fair treatment for minority shareholders. When this is not the case, the state could negotiate with other shareholders enhanced governance provisions in terms of minority shareholders’ protection, beyond those required for publicly traded companies.

Communicate actively on this policy

  • This policy should be actively communicated to all SOEs, the market and stakeholders. This is necessary to build trust in the state shareholder and ensure it is perceived as a fair and predictable owner.
  • Communication will be facilitated if significant elements of this policy are integrated in the state ownership policy and in SOE corporate governance codes.

Encourage minority shareholders’ representation in boards

  • The state should develop nomination processes that are favourable to minority shareholders representation in boards, such as cumulative voting. When possible, individual SOE charters could provide for such nomination processes.
  • Alternatively, the state could enter into shareholders’ contracts granting minority shareholders representation on boards. Minority shareholders could also be represented in the nomination committees for board nomination.

Clarify the duty of loyalty of SOE board members

  • The legal and regulatory framework for SOEs should strongly establish and clearly articulate the duty of loyalty of SOE board members towards the SOE itself and to all its shareholders, and not to the state in case they are nominated by the state.
  • This is an essential prerequisite for controlling abuse of minority shareholders and for allowing any ex post redress.

Encourage active participation of minority shareholders in general shareholder meetings

  • Active participation of minority shareholders in general shareholder meetings could be encouraged at the SOE level through mechanisms allowing voting in absentia and developing the use of electronic means to reduce the costs incurred.
  • This could also include mechanisms facilitating employee-shareholder participation through, for example, collection of proxy-voting.

Encourage SOEs to communicate actively with all shareholders

  • The ownership entity should require that partially owned SOEs identify their minority shareholders and keep them duly informed in a timely and systematic fashion of any material information, following the practice mandated for listed companies. One good practice in this regard is for SOEs to organise active consultation with minority shareholders for specific issues.

Avoid abuse of information by ownership entities

  • Specific mechanisms and procedures need to be developed regarding non-listed but partially owned SOEs to ensure that ownership entities not abuse the information they receive as a controlling or significant shareholders.

How to develop effective reporting mechanisms on SOE relations with stakeholders

Require SOEs to report on stakeholder relations

  • The ownership entity should clearly require SOEs to report on their stakeholder relations, either in their annual report or in a specific stakeholder report. This policy could be stated, for example, in the state ownership policy, any specific governance code or more focused guidelines on transparency.
  • The ownership entity should set a clear threshold and the criteria to determine which SOEs are concerned. These should include listed and large ones, as well as those pursuing important policy objectives.
  • The ownership entity should also indicate clearly what should be the main content of stakeholder reporting and choose a specific reference for doing so. This could be either an appropriate national standard or, preferably, international standards for SOEs having international operations. This should be done with due consideration of the costs incurred, the relevance of items covered, and the availability of specific guidance to facilitate implementation.

Ensure stakeholder reporting covers compliance with ethics code

  • Stakeholder reporting should include information on how effectively SOEs comply with their internal codes of ethics.
  • It should also indicate whether SOEs have put in place mechanisms protecting stakeholders reporting on illegal or unethical conduct by corporate officers, such as confidentialaccess to the board or an ombudsman.

Clarify boards’ responsibilities in stakeholder reporting

  • The ownership entity should ensure that SOE boards are well aware of their responsibilities regarding stakeholder issues and effectively oversee stakeholder reporting, more particularly board members nominated by the state.
  • SOE boards should be held responsible for the accuracy of the content of stakeholder reports. This responsibility includes at least an annual discussion on stakeholder issue, an effective discussion on the stakeholder report and its formal approval. This could be done through a specialised committee if deemed necessary, i.e. when stakeholder relations are considered as strategic, when they incur significant costs or risks.

Have stakeholder reports audited

  • The state as an owner could also require stakeholder reports to be audited by independent and possibly specialised auditors.
  • This could be done at the initiative of each SOE. Alternatively, the state shareholder could hire specialised auditors to audit all SOEs’ stakeholder reports. This could allow assessing the current practice and the development of specific guidance to improve the quality of stakeholder reporting.

Set good example by reporting at the aggregate level on stakeholder relations

  • The state as an owner should itself report at the aggregate level on its relations with stakeholders.
  • This could be done within the annual aggregate report published by the ownership entity. This aggregate report could expose what state policy is regarding stakeholder relations and provide information on current practice among SOEs in this regard.

Encourage SOEs to report adequately

  • The ownership entity could encourage SOEs to report on stakeholder relations adequately by a series of specific actions. It could first provide specific guidance on stakeholder reporting. It could also organise awards on stakeholder reporting or encourage SOEs to compete in specific relevant awards.

Adopt an active communication policy

  • The ownership entity could develop an active communication policy regarding stakeholder issues, informing the media on related policies and SOE practices and inviting them to follow up on SOE effective behaviour in this regard.

Framework to deal with related-party transactions

Define related-party transactions

  • The state should define clearly what should be considered as a relatedparty transaction by SOEs. It should be based on the International Accounting Standard (IAS 24), taking into consideration specific exemptions provided for in case of state control.
  • The ownership entity should be aware in particular that in case it gives a direction to act in a certain way or if transactions between two statecontrolled entities are carried out at non-market price, the concerned transactions will be deemed to be related. This will also be the case if two SOEs entering into a specific transaction have common board members.

Develop a clear policy for dealing with related-party transactions

  • This policy should mandate adequate decision processes for approval of these transactions. This includes the requirement that board members and key executives disclose whether they, directly or indirectly, or on behalf of a third party, have a material interest in a transaction. In the case of a related-party transaction between two SOEs, state representatives in boards will be considered as having a material interest. These persons should then not be involved in making any decision related to this transaction. An option is to require a majority of the minority shareholders to approve related-party transactions.
  • The policy should also require SOEs to follow appropriate standards regarding disclosure of related-party transactions, referring to and compatible with amended IAS 24. Such standards should mandate that the SOE reports in its financial statements all material relatedparty transactions. The policy could prohibit outright certain types of related transactions, such as personal loans and guarantees to company directors, senior officers and other insiders, based on an adequate estimation of costs and benefits.

Provide specific guidance to SOEs to ensure appropriate implementation

  • Specific guidance could be provided to SOEs regarding the identification of relevant related parties and related transactions. This could include some threshold based on materiality of a transaction, keeping flexibility so that there is not an easy way to circumvent the requirement by breaking up major transactions into smaller ones.
  • Guidance could also be provided on how to deal with the approval of these transactions and their disclosure, underlining the central role of the audit committees in reviewing related-party transactions and in ensuring adequate disclosure
  • SOEs could be encouraged to develop a specific policy at company level on controlling related-party transactions so that all players understand their respective roles and obligations.

Encourage gatekeepers and the media to be vigilant

  • The ownership entity could encourage external auditors to be vigilant regarding the disclosure of related parties by SOEs. Non-compliance with the policy regarding related-party transactions, and particularly the lack of adequate disclosure, should lead to a “qualified” opinion on the financial statements.
  • The role of the media in exposing abusive related transactions might also be important. Appropriate training and information could be provided to encourage professional coverage.

Source: OECD (2010). OECD, “Accountability and Transparency: A Guide for State Ownership” Corporate Governance, OECD Publishing at (accessed 22 February 2013).

Page Created By: Matthew Seddon. 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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