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State-Owned Enterprises: Setting Objectives and Performance Indicators

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Practice Advice on Strategy and Structure

State-Owned Enterprises: Setting Objectives and Performance Indicators (OECD)

Summary AdviceAccountability requires benchmarking of performance against clearly defined objectives. Since state ownership is often characterised by vague, complex or contradictory objectives, improvement in this area is typically the very first step towards better accountability. The OECD provides guidance on how to formulate and communicate clear objectives at all relevant levels. It also gives suggestions on how to build up useful performance indicators for benchmarking performance against these objectives.

Main Points:

Main steps in setting specific targets for the ownership entity

Identifying potential targets

  • A useful step for the ownership entity is to identify a large series of potential targets which could reflect/correspond to the overall objectives of the ownership entity in exercising the state’s ownership rights, as described in the ownership policy.
  • If such objective is value creation, one obvious target is the increase in the value of the state portfolio, or a series of specific increases in the values of each or the main SOEs. Other potential targets at the aggregate portfolio level are usual financial indicators such as profitability, indebtedness, dividend distribution, etc.
  • More qualitative targets could also be considered, based for example on the processes that the ownership entity puts in place to exercise efficiently its ownership rights. Targets could cover how effectively the recommended processes are implemented. The overall set of targets should, of course, remain outcome-oriented and not too heavily process-based.
  • Besides reflecting the overall objectives as described by the ownership entity, targets must reflect as far as possible the performance of the ownership entity itself in exercising the state’s ownership rights. Obviously, a number of overall targets will also reflect other conditions, such as the performance of SOE management, the overall or sector specific economic or market environment, etc. In this case, targets should take into account the overall market, business and general economic environment and conditions.

Checking target’s characteristics

  • Selecting meaningful targets to reflect the global performance of the ownership entity is complex, involving multiple challenges.
  • In addition to reflecting the performance of the ownership entity, targets should have the following characteristics:
    • Be specific enough and time bound.
    • Be measurable, possibly at the portfolio level. This will in many cases entail some significant aggregation difficulties (see below).
    • Be at the same time realistic and challenging, in order to play a positive incentive/motivational role.
  •  Having looked at all the potential targets under these different perspectives, the ownership entity might select a number of appropriate targets.

Select an appropriate mix

  • There is a trade-off to be made regarding the number of targets. In addition to the usual difficulties encountered in specifying targets for a complex organisation such as a business corporation, SOEs could have a more complex set of objectives, involving commercial as well as policy ones, including public services and other special obligations. Moreover, the state as an owner may have another complex set of objectives, and setting targets at the portfolio level might entail specific size/aggregation effects.
  • Having multiple targets might give a more complete perspective on the performance of the state as an owner. However, having a limited number of well-selected overall targets will make it easier to communicate and report on them and may be useful in enhancing strategic focus. There is a balance to be found between completeness and focus.

Consider aggregation challenges

  • Besides the difficulties in selecting meaningful indicators, there are also a number of more technical difficulties in computing aggregate indicators for the overall state portfolio, which tends to be well diversified.
  • Attention should also be brought to the weight that one or several large SOEs’ results might have on the overall performance of the state portfolio.

Test targets on past performance

  • Before agreeing on a final set of targets, it could be useful to test them on past performance and check if their achievement would have appropriately reflected performance based on similar objectives.

Discuss targets internally and externally

  • To be effective in terms of motivation, targets have to be adhered to, thus considered to be relevant and fair. It could therefore be useful to discuss widely the set of targets internally to the ownership entity in order to figure out more realistically the impacts they might have on the individual civil servants’ motivation and behavior.
  • In the same vein, it could be useful to discuss potential targets for the ownership entity with SOEs’ boards and management, to figure more clearly the impact they might also have at SOE level.

Agree on targets with government and other relevant institutions

  • It is also necessary to agree on the ownership entity’s targets with all the institutions to which the ownership reports or which will be involved one way or the other in assessing its performance. This might include supervising ministries, the government, the relevant Parliamentary committees and the state audit institution.
  • This agreement on targets might be instrumental in ensuring that targets do cover all the important dimensions of the ownership entity’s performance, and are set at an appropriate level. This ex ante dialogue will also ensure a smoother review of performance ex post and align expectations regarding the ownership entity’s performance.
  • Final targets should be clearly and formally agreed between the ownership entity and the government. It might also be advisable that relevant Parliamentary commissions clearly adhere to the agreed upon set of targets for the ownership entity.

Disclose overall targets

  • The overall targets of the ownership entities, as agreed with the government, should be clearly disclosed. This will include a clear indication on the ownership website, a reference to the initial targets in the aggregate reports and regular communication during the year by the ownership entity.

The main steps in developing objectives documents

Communication of highlevel expectations

  • To clarify the relationship between the corporation and the responsible minister, it could be useful for the government to communicate on broad strategic direction and expectations for the year.
  • This could be under the form of an annual “letter of expectations”, to be signed by the board’s chair and made public.

Interpretation of highlevel expectations into main objectives

  • The draft objective document is developed by the SOE board (with senior management) based on high-level objectives defined in the SOE mandate and communicated by the ownership entity.
  • The ownership entity will define priorities and interpret policy priorities. SOE boards will have to seek clarification and question the ownership entity if needed.
  • The SOE board should determine the main and specific objectives allowing the fulfillment of the SOE mandate as well as government policy priorities and high-level expectations.

Put in place appropriate information systems

  • Appropriate information systems should be put in place to collect accurate and reliable data necessary for calculating the indicators. Automatic extraction from existing management applications is a useful way of cutting the costs while increasing reliability.

Develop a draft objective documents

  • SOE boards will develop a draft objective document describing main objectives for the SOE, key performance indicators and specific, often yearly, targets.
  • It is useful that the stated objectives be accompanied by comments allowing to:
    • justify the choice of indicators associated with it;
    • comment on previous results;
    • explain the choice of a target;
    • mention the main levers of action to achieve the objectives.
  • The first draft is submitted to the ownership entity.

Informal negotiation of the draft

  • Boards are expected to enter into a process of dialogue with the ownership entity to arrive at an appropriate understanding of the company’s objectives based on the government’s policy priorities. This specific dialogue between SOE boards and the state shareowner is not possible or strictly regulated in case of partially owned SOEs, as this would breach the principle of equitable treatment of shareholders.
  • This informal negotiation could be done at different stages of the draft development. The process will be mostly informal and cannot be defined precisely, but it necessarily involves intensive contacts and information sharing between the ownership entities and SOE boards. There could be a round of discussion and negotiation through one or more meetings to discuss high-level summaries and more developed detailed documents with the ownership entity.
  • This informal negotiation is key to building consensus and ensuring clarity about the SOE mission. The boards are driving this process on the SOE side. It is their responsibility to seek clarification from the ownership entity and/or play a challenging function. Both the ownership entity and the SOE need to ensure that statements of objectives are specific enough and provide clear and relevant targets to be achieved.
  • A second draft is then agreed both by the SOE concerned and the ownership entity.

Formal comments

  • It is important that the ownership entity provides relevant comments on the draft objectives document received from the SOE. This should be done either directly by the ownership entity or by the minister, who would have been informed on key aspects of the plan by the ownership entity. This could allow the minister adjusting the document to better reflect government policies and priorities.
  • SOEs should receive formal feedback on their draft objective documents within a defined time limit. However, this obligation for the ownership entity to provide formal feedback should not lead to focusing on minor issues which would derail the attention from the main aspects and most strategic questions.
  • The absence of comments might send an unclear message. Either the ownership entity effectively understands and agrees with the draft document, or it is unable or unwilling to comment on it. Reasons for weak feedback from the ownership entity may include the lack of knowledge about the commercial dimension of SOEs, a lack of understanding of their competitive environment, lack of time and resources to develop informed comments, or even incapacity to read and interpret properly financial documents.

Official approval

  • Once agreed between the SOE and the ownership entity informally, the objective document might be approved formally on both sides:
    • on the SOE side, the objective document will have to be duly approved by the general shareholder meeting;
    • on the state side, the objective document might either be approved at official level or by the minister in charge.
  • The shareholder minister should also ensure that the objective document is consistent with the government’s policy and might have the final say on approving it.
  • In some cases other ministries, and primarily the Ministry of Finance, might also have to approve the objective document or parts of it. This could be the case, for example, when the levels of dividends or borrowing plans might impact the state budget.

Clear endorsement

  • In addition to being approved by the general shareholders meeting (if it exists), and in order to give it more weight, the objective document could also be formally endorsed by the board and senior management.

Tabling in Parliament

  • According to different legal and administrative frameworks, objective documents might also have to be tabled in Parliaments within a specific timeframe.
  • Objective documents might be tabled in Parliaments as such when they are simple and relatively short documents. When they are full-fledged corporate plans, only summaries might be submitted for confidentiality concerns. In this case, there is a trade-off to be made between ex ante accountability and competitive concerns.

Public disclosure

  • Objective documents could be disclosed on the SOE websites as well as on the ownership entities’ websites.

The main steps in developing relevant performance indicators and setting appropriate targets

Identify relevant indicators

  • Performance indicators should be clearly linked to the SOE strategy and reflect truly the achievements of the objectives agreed upon, thus:
    • have a strong logical link with these objectives;
    • relate to a material aspect of the expected result;
    • address all their relevant aspects.
  • To ensure this, it is necessary firstly to identify (a limited number of) broad dimensions of performance that are important, and then identify for each of these dimensions which specific measures or indicators might reflect performance.
  • The quality of the overall performance assessment will depend on the completeness and comprehensiveness of the set of indicators. The combination of all indicators should reflect the overall priorities in objectives. In other words, they should be “balanced and holistic”.
  • Performance indicators should also provide a reasonable basis for elaborating a judgment on performance and assessing its improvement. Practically, they should thus be “computable” at regular intervals, be easily comprehensible and be produced with appropriate disaggregation or adjustment for context, and timeliness to support performance assessment.
  • Performance indicators should be prone to comparisons over time, space and between comparable companies.
  • They should not induce bias, or do so only to a limited extent.
  • Composite and complex indicators, based for example on a series of weighted variables with assumptions not easily understandable by nonspecialists should also be avoided when possible.

Set up appropriate target levels

  • It is critical to set smart targets that are challenging but achievable.
  • Main sources to decide on appropriate targets are historical performances, benchmarking against peers and assessment of effective capabilities. This allows putting performance indictors in perspective, providing past values and target values:
  • Absolute value indicators must be dealt with cautiously, as they might depend on external factors or be given with a range of values.
  • Scattered indicators should be preferred above average values.
  • There are always assumptions behind the set-up targets, regarding the economic environment, market evolution, etc. These assumptions must be made explicit. This will allow appropriate revision of targets when these assumptions are significantly changed due to factors outside the control of management.

Put appropriate information systems and structures in place

  • Performance indicators should not be dictated by the available information provided by the enterprise information systems. It should rather be the other way around.
  • Once relevant performance indicators have been developed, it is necessary that appropriate systems be put in place to collect accurate and reliable data necessary for calculating the indicators. The data measured should be rigorously quantified. The measurement system should be reliable.
  • As far as possible, indicator measurements should be extracted directly from the information system without any additional manual manipulations. Automatic extraction of the data needed to measure indicators will help limit the cost of drawing them up, while increasing their reliability.
  • It is also important that indicators be durable and not affected excessively by organisational changes. The existence of a specific unit relying on information systems to process performance information can be instrumental in ensuring this consistency.
  • This data could come mainly from internal information sources, from the SOE’s own staff and information systems. But external or indirect sources of information, such as client surveys, might also be used in many cases. In case indicators are based on surveys, these should be carried out by specialists and comply with appropriate rules, regarding, for example, the type of questions asked, the sample characteristics, etc.

Document actual results

  • When presenting the selected performance indicators, these should be accompanied by a table showing results for previous years and targets, as well as data sources and methodological information, when relevant.
  • Performance indicators should also be accompanied by measures of uncertainty.
  • Performance indicators should be sufficiently documented to allow their users to verify their relevance and quality of information (ministries and other government agencies, MPs, State Audit Institutions, etc.). However, performance indicators should not be disclosed in most cases, either ex ante or ex post, as it is commercially sensitive information that a private sector enterprise would typically not disclose.

Audit

  • Performance indicators should be audited, either by external or state auditors.
  • This auditing assures the state owner, stakeholders and the public of thequality and accuracy of the information provided by SOEs concerning the achievement of targets.
  • Without proper independent audit of performance information, poor quality data, weak analysis or political pressure to look good might lead to a distorted picture of performance.

Review

  • In addition to auditing performance information, it is necessary to review regularly the relevance of performance indicators, and to do so independently of the SOEs concerned.
  • Regular review of performance indicators ensures sufficient responsiveness, particularly with regards to changing economic circumstances and commercial conditions.
  • Reviews must also consider side-effects that have manifested themselves.
  • Including the views of stakeholders in reviewing performance indicators might bring relevant perspective and additional information on the quality of existing indicators as well as on their potential unintended effects.

Source: OECD (2010). OECD, “Accountability and Transparency: A Guide for State Ownership" Corporate Governance, OECD Publishing at http://www.oecd.org/daf/ca/corporategovernanceofstate-ownedenterprises/accountabilityandtransparencyaguideforstateownership.htm (accessed 17 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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