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Home arrow Economics arrow Boards of directors of state-owned enterprises : an overview of national practices.

Introduction

The importance of boards of directors is well documented in corporate governance theory and practice. Boards of directors play a fundamental role in company stewardship and performance, in determining corporate strategies and monitoring managerial performance. They are subject to duties of loyalty and care and expected to act in the best interest of all shareholders as well as, dependent on national law, the company.1 OECD governments, acting as owners, have increasingly looked at the role of boards with the aim of improving the governance and performance of their state-owned enterprises (SOEs), while also strengthening the State's responsibility to exercise its ownership functions.

The widespread “commercialisation” of SOEs in recent decades has induced governments to take action to professionalise boards of directors and give them greater powers and autonomy. This includes shielding boards from ad hoc political or politicised intervention and ensuring independence in decision-making. Another important step has been to pay closer attention to the composition of the board to ensure the right mix of skill and experience to achieve company goals. These approaches have apparently worked. Countries which pursue these strategies report a better quality of board discourse, more professional boards, and ultimately improved SOE performance. Furthermore, better boards seem to protect governments from operational missteps, political fallout, and allow them to better gauge and manage the risks of operating an enterprise in a commercial environment.

Yet, even where governance reforms have shown good results, expectations of SOE boards continue to grow. These expectations emanate from governments, public and financial markets and the SOEs themselves. Even in countries that have long operated under the core expectation that SOEs will act commercially, the demand for better performance persists. One of the key differences between the function of a board for a state-owned and other enterprise is the fact that the State is usually different to other types of shareholders. Its priorities may be other than a return on shares, including delivering on public policy objectives (OECD, 2011). As such in order to help the board work effectively, the State's policies should be explicitly acknowledged in the boardroom, along with the obligation of directors to meet those policy objectives, especially where policy objectives are not consistent with profitability.

This report seeks to shed light on good practices in SOE boards drawing on the OECD Guidelines on Corporate Governance of State-Owned Enterprises (the “SOE Guidelines", OECD, 2005) and national practices. For this reason, each chapter is organised around relevant guidance and corresponding annotations to the Guidelines (mostly Chapter 6, which deals with SOE boards) which are indicated in shaded boxes throughout the text. It is further supported by examples of national practices which are indicated in transparent boxes throughout the text. The report is organised around seven chapters, examining: i) the role of boards of directors in a SOE; ii) board nomination framework and practices; iii) constraints and guidelines in the composition of boards; iv) board training and induction; v) board remuneration; vi) boardroom efficiency; and vii) board evaluations.

The analysis in this report is limited to practices related to non-executive directors. For jurisdictions with a two-tier board structure, the focus is on supervisory board members. The report seeks to interpret non-executive director widely and include any ex-officio directors, and directors for the State, but it does not concentrate specifically on these issues. The focus is on fully incorporated SOEs (joint stock or limited liability companies) that are not listed on stock exchanges. Listed companies are not considered in detail, on the basis that their board practices will mostly be consistent with listed private sector companies.2

The report is relevant for all institutions and individuals that are involved in SOE governance, ranging from the government a whole, the ownership Ministries or ownership function, and the SOE management function. It can also serve as a useful reference point for board members themselves. The report is based on earlier research by OECD supplemented by a questionnaire- based gathering of evidence which took place in the first half of 2012.3 The respondents included delegates and observers to the OECD Working Party on State Ownership and Privatisation Practices, as well as participants in the Asia Network on Corporate Governance of State-Owned Enterprises. Responses were received from the following 31 countries: Australia, Austria, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Israel, Italy, Korea, Latvia, Lithuania, Malaysia, Mexico, New Zealand, Norway, Pakistan, Poland, Portugal, Slovenia, Sweden, Switzerland, Turkey and United Kingdom.4The findings, by country and topic, are summarised in a collection of overview Tables in Annex A.

Readers need to keep in mind that board practices are significantly influenced by the ownership and legal structure of the national SOE economies. The underlying assumption in many jurisdictions is that incorporating SOEs accordingly to ordinary company law and the further listing of SOEs can lead to more transparent board practices. Nevertheless, good practices cited in this report depend, inter alia, on legal traditions, administrative capabilities and board structures, that all vary across jurisdictions and over time. As noted by the SOE Guidelines, what matters for outcomes is the consistency of the overall framework, with many different constellations of good policy “choices” being functionally equivalent. What appears to be a “good” practice must be seen in the overall context. To help the reader, such practical guidance in the form of “Good Practices” is suggested (highlighted in bold) throughout the text.

Notes

  • 1. Some corporate legislation stipulates a board fiduciary duty solely toward the owners, whereas other extends this duty to the company as well. The OECD Principles of Corporate Governance recommends the latter approach (Principle VI.A).
  • 2. Board practices in listed companies are the subject of a number of recent OECD reports; see OECD (2011) and OECD (2012).
  • 3. The national practices cited in this report are in large part based on an initial stocktaking report drafted by Mr. Jim Colvin acting as external consultant to the OECD.
  • 4. Australia submitted a partial response. Some aspects of SOE boards in Russia are covered in a forthcoming OECD Working Paper, see Kostyleva and Lehuede (2012).

Bibliography

Christiansen, H. (2013), “Balancing Commercial and Non-Commercial Priorities of State-Owned Enterprises”, OECD Corporate Governance Working Papers, No. 6, OECD Publishing, http://dx.doi.org/10.1787/5k4dkhztkp9r-en.

Kostyleva, V. and H. Lehuede (2012), “Board Formation: Nomination and Election in OECD Countries and Russia”, OECD Working Paper, September, OECD Publishing, Paris, www.oecd.org/daf/corporateaffairs/Board%20ENG.pdf.

OECD (2005), OECD Guidelines on Corporate Governance of State-Owned Enterprises, OECD Publishing, Paris, www.oecd.org/daf/ca/corporategovernanceofstate-ownedenterprises/ 34803211.pdf.

OECD (2011), Board Practices: Incentives and Governing Risks, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264113534-en.

OECD (2012), Board Member Nomination and Election, OECD Publishing, Paris, http:// dx.doi.org/10.1787/9789264179356-en.

Boards of Directors of State-Owned Enterprises: An Overview of National Practices © OECD 2013

 
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