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State-Owned Enterprises: Reviewing Performance

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Practice Advice in Evaluation and Performance Measurement

State-Owned Enterprises: Reviewing Performance (OECD)

Summary AdviceThe State’s obligation to review the performance of portfolio companies is central to the OECD Guidelines: “Its prime responsibilities include setting up reporting systems allowing regular monitoring and assessment of SOE performance” (Guideline II.F.3). The OCED reccomends that the ownership entity should therefore monitor the performance of portfolio companies both on an ongoing and annual basis.

Main Points:

The main steps and processes to ensure effective ongoing monitoring of SOE performance by the ownership entity.

Regular information on performance by SOE boards

  • SOE boards should advise the ownership entity on a regular (monthly or quarterly) basis about where they stand in regards to the achievement of their objectives. They should provide precise data on the realisation of specific targets.
  • To this end, it is advisable that the board meet regularly to conduct a detailed review of the SOE’s performance.
  • If there are state representatives on boards, information of the ownership entity might be done “naturally”. Ongoing monitoring is part of their function on SOE boards.
  • If there are no state representatives on boards, a specific and formal system might be developed to provide the ownership entity on a regular basis with performance updates.
  • Such progress reports or performance updates could typically include a comparison of actual performance with targets, as well as a qualitative explanation for the current performance. They should also provide main elements of an action plan to address the discrepancies between targets and effective performance. In case of serious underperformance, specific action might be required.
  • Progress reports could also provide information on the human resources including key competencies and the turnover of senior staff members.
  • These progress reports will be provided to the ownership entity on a confidential basis. However, in case SOEs’ capital structure is open to other shareholders, the information provided to the state shareholder should not differ from the information provided to all other shareholders.

Put in place systematic information processes

  • Systematic processes might be developed to monitor more closely and frequently SOEs’ performance. Such systems could allow collecting directly from the SOEs’ own information systems the relevant data to monitor their performance and automatically comparing it to budget data.

Develop specific “continuous information”’ and/or “no surprise” policy

  • The ownership entity might develop specific “continuous information” or “no surprise” policies. These will be similar to the requirement for continuous disclosure of market-sensitive information under the usual listing rules, but will have a broader coverage. These policies require SOE boards to keep the ownership entity timely informed about any material or significant events, developments or otherwise that can not only have a significant impact on the SOE’s performance and value, but also impact on the sector ministries, the ownership entity or the government either by being contentious and politically sensitive or by attracting public attention in any way.
  • Appropriate implementation of such “no surprise” policy requires SOE boards to understand and be sensitive to the wider policy concerns of the government and be aware of the potential impacts of specific SOE issues on the wider political agenda.
  • The implementation of a “no surprise” policy should not, however, detract SOE boards form their usual obligations nor be an avenue for undue political interference.

Complementary information channels

  • The ownership entities could develop additional mechanisms to facilitate the flow of performance information to the ownership entity:
    • These could include nomination within the senior management team of “correspondents” as contact points for the ownership entity officials.
    • They could also include establishing an active dialogue with the external auditors, and even establishing systematic and extensive reporting from the auditors on a regular basis
    • Specific “state controllers” might also be positioned within the SOEs in order to have access to information which is not easily accessible by the state as a shareholder.

Use external information available

  • External information might also be useful for the ownership entity to complement its own sources. Banks, rating agencies, industry analysts and lawyers could provide the ownership entity with specific ideas on the SOE’s strategy, different perceptions of risks and another analysis of performance.

Performance check-up by the ownership entity

  • The ownership entity might also develop its own evaluation system for a regular performance check-up.
  • This evaluation could be based on performance information provided by the SOE itself. In addition to the evaluation of financial performance, it might also include the ownership entity’s own evaluation of key and more qualitative dimensions, such as the quality of the shareholder relationship, the quality of the board and management, and the quality of strategy.
  • These internal reviews might be kept for the ownership entity information only and not shared with the SOE concerned.
  • Such evaluation requires adequate capacity within the ownership entity to collect and analyze the information.

Regular (quarterly) meetings between boards and ownership entities

  • Besides information collection, the key mechanism for ongoing monitoring of performance might be, if permitted by company law and capital market laws, regular (usually quarterly) meetings between the ownership entities and SOE chairmen (possibly with senior executives).
  • These meetings allow discussion about target achievements with a forward-looking perspective. They are an opportunity to exchange and interact more informally on current issues and emerging trends. However, these meetings should be subject to strict rules and transparent for all board members.
  • Besides identifying issues in target achievement, these meetings could also allow discussing and recommending remedial action.

Feedback by the ownership entity on current performance

  • The ownership entity or its minister in charge might provide the SOE with written comments and recommendations when appropriate on current performance and target achievement.
  • These comments and recommendations are based on the information collected on current performance and on discussion which has taken place in informal meetings. The SOE might in turn respond in writing to comments received on its performance.

Revision of targets

  • Targets could be revised when the external environment has significantly changed, affecting the relevance of hypotheses made to back up the initial targets.
  • This target revision should however remain selective, and requires appropriate discussion between the ownership entity and the board.

Ad hoc meetings

  • Some specific meetings might be called whenever specific issues arise or significant events occur, having potential impact on the achievement of performance targets.
  • A typical case when there should be a smooth and typically intense exchange between the ownership entities and SOE boards is the case of exceptional transactions such as acquisitions or sales and transfers of material assets.

Take actions in case of serious underperformance

  • In case of significant shortfalls in performance, boards are expected to provide clear notification to the ownership entity, propose remedial action and keep it informed of the progress on a timely basis.
  • The ownership entity is advised to seek additional information and to work actively with the board to decide on remedial actions. It can eventually review the board composition and appoint special advisors.

The main steps in carrying out the annual review of SOE performance

Information provided by the board

  • The board should provide all elements necessary to evaluate the SOE performance as regards the agreed upon targets. This includes firstly the audited performance indicators along with an explanation of why the targets have been achieved or not. These comments qualifying the effective performance regarding the targets is the most value-adding part of the information and will be at the core of discussion between the board and the ownership entity.
  • The ownership entity will also receive all the elements publicly available such as annual (and quarterly) reports.
  • Some formal systems might be developed requiring SOEs to submit specific reviews or reports to the ownership entity as a basis for the annual review. These could be extensive and specific reports commenting on a number of performance indicators and providing significantly more information to the state as an owner than what a usual private sector company would be required to do. Careful consideration should be given to costs and benefits of these additional information requirements.

Gathering additional elements

  • In addition to the elements provided by the SOE itself, the ownership entity might gather additional elements, discuss and evaluate specific issues and make judgments on important topics which might complement the assessment and put it in perspective.
  • This could be done, among other things, through complementary information channels, particularly the auditors, both external and state ones, as well as industry analysts, rating agencies, etc.

Discussion with the board

  • Annual reviews might be discussed with the boards of the SOEs concerned.
  • Discussion will allow qualifying the performance and will provide more background to the ownership entity to understand the factors explaining such performance.
  • This formal or informal discussion with the SOE board is the central stage of reviewing performance by the ownership entity. It allows the ownership entity to develop and confront its own judgment about the SOE’s performance.

In-depth internal discussion

  • Some specific mechanisms might be developed within the ownership entity to discuss in-depth annual reviews. As an example, internal panels including senior management of the ownership entity, in addition to the officer usually in charge of following a specific entity, would allow developing a broader perspective and fresh views on the evolution of performance of the SOE concerned.

Summary of the performance review

  • A summary document should be developed by the ownership entity underlying the most important elements of annual performance. This document should provide an overall qualitative evaluation of the performance, together with main performance indicators as regards original targets.
  • This summary performance document could be shared with the SOE concerned. This would be useful as the summary document will also constitute a good basis for the development of the following year’s performance targets.

Publication of synthesis document

  • It might be useful for the general public and the media to have access to a synthesis document providing the list of main performance indicators or outcomes against targets for each SOE.
  • This synthesis table would at least provide outcomes against main financial targets, including profitability, capital structure and dividend. It could also mention the existence or not of special or policy-oriented targets.

The main steps in benchmarking SOE performance

Identify relevant peers

  • It is critical and challenging to identify relevant peers with which performance of a specific SOE could be compared meaningfully. In many cases it will be difficult to find perfect peers as SOEs are often active in newly liberalised industries, with few or still smaller private sector competitors, etc. To do so, the ownership entity could look into the same industry, both in the private and the public sector, as well as abroad. Foreign peers might be useful in many cases to compensate for real domestic peers.
  • When choosing peers for benchmarking, it is also necessary to identify and keep in mind the most significant differences with the SOE concerned. This could be in terms of size, specific business lines, status, regulatory environment, market presence, etc., to the extent that these dimensions might have an impact on objectives and performance.
  • It might be useful to discuss the choice of relevant peers between the ownership entity and the SOE board and management. They might have more in-depth market knowledge and thus provide useful elements to identify main commonalities and differences, as discussed above.

Develop relevant industry research

  • It is useful for the ownership entity to develop relevant industry knowledge, or to have an easy access to such knowledge, at least for its largest SOEs. The ownership entity should thus collect series of relevant industry-specific indicators, both financial and non-financial.

Collect performance information for peers and compare it with actual performance

  • The ownership entity and the SOE itself should strive to collect performance information for the identified peers.
  • Synthesis tables of performance indicators could be built up showing the performance of the SOE in a comparative perspective as regards its peers.

Interpret comparisons

  • Careful interpretation of performance comparison should be developed in order to identify performance gaps and derive areas of potential improvement.
  • Appropriate consideration should be given to the differences among targeted peers, including those concerning the regulatory environment.

Source: OECD (2010). OECD, “Accountability and Transparency: A Guide for State Ownership” Corporate Governance, OECD Publishing at (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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© University of Toronto 2008
School of Public Policy and Governance