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

Defining roles and responsibilities

The overall directions of SOE Guidelines imply that the board plays a specific function in a governance structure essentially involving three layers, each with a distinct role. As demonstrated in Figure 1.1, the State ownership function is responsible for defining and communicating an ownership policy, overall “expectations” and company-specific objectives to the SOEs it oversees.1 The board of directors is charged by the State with overseeing the development of a strategy to achieve the objectives, and to monitor progress. It is ultimately responsible for the company's performance toward State and non-State stake- and shareholders. The executive management in most cases propose a corporate strategy for the board's approval, though in a minority of cases strategies may be imposed top-down. In any case, the executive management is accountable to the board for implementing the strategy.

Under this ideal schema, the board plays the central function in the governance of the SOE. It carries the ultimate responsibility, including through its fiduciary duty, for SOE performance.2 For this, it needs the authority, autonomy, and independence to make decisions that determine performance. It acts essentially as the intermediary between the State, as the Shareholder, and the executive management/company. According to OECD recommendations it has a duty to act in the best interest of both.

In the case of wholly-owned SOEs, the owner and shareholders are essentially the same, but the board still has a duty to act in a way that represents both the “owner's” interests, (i.e. the ownership function) and the

Figure 1.1. The role of the board in a three-layer governance structure

shareholders interest (i.e. the general public - assumed to be represented by government/parliament). Board members must act in a way that does not compromise their duty of loyalty to both interests. In the case of listed companies it may also apply to other shareholders that hold a stake in the company, including minority shareholders.

Good practice: The board plays a central function in SOE governance and should act as an intermediary between the ownership function and the SOE’s executive management.

A number of countries have implemented this model to good effect, including those which have corporatised their SOEs along the lines suggested by the SOE Guidelines (i.e. fully consistent with general corporate law3) and subjected them to a competitive environment. For SOEs that operate on a fully commercial basis best practices for boards are arguably quite indistinguishable from those applied to private companies.4

The role of the boards according to the SOE Guidelines

The role of an SOE’s board of directors according to the SOE Guidelines follows as much from concerning the State’s role as an owner as from concerning the role of the board. The fundamental recommendation concerning the role of the board uis-a-uis the ownership entity is to ensure its independence, autonomy and authority.

Guideline II.C: The state should let SOE boards exercise their responsibilities and respect their independence.

In most countries many of the functions and responsibilities of boards are defined by company law requirements. The extent of these responsibilities vary from country-to-country but can include strategic monitoring of the company, development and reviewing the organisational strategy, negotiation with shareholder ministries of the business plan and objectives, monitoring executive management performance and sometimes compliance-checking.

Good practice: The role of the board should be clearly defined and founded in legislation, preferably according to general company law.

However, in a considerable number of countries the respective roles of the Board and the ownership function remains a bit blurred. In some jurisdiction the ownership function may be more or less involved in aspects of strategic management, as well as in the appointment of the CEO and succession planning and executive remuneration and incentive schemes. Good practice suggests that most if not all of these responsibilities should fall within the competency of the board.

It is important to have clearly defined roles for the board, especially vis-avis the ownership function, to ensure the most efficient use of resources, effective allocation of responsibilities and accountability in the performance of the enterprise. In addition, it ensures that the competency of the board is put to full use.

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