Corporate Governance

2077-6535 (online)
2077-6527 (print)
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This series of books addresses issues related to corporate governance including such issues as board composition and nomination, the role of institutional investors, board incentives, risk management and  supervision and enforcement.

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Boards of Directors of State-Owned Enterprises

Boards of Directors of State-Owned Enterprises

An Overview of National Practices You do not have access to this content

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30 May 2013
9789264200425 (PDF) ;9789264187238(print)

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Boards of directors of state-owned enterprises (SOEs) play a fundamental role in corporate stewardship and performance. Over the last decade, OECD  governments have sought to professionalise SOE boards, ensure their independence and shield them from ad hoc political intervention. In general these approaches have worked; yet, more remains to be done to meet the aspirational standards of established by the OECD Guidelines on Corporate Governance of State-Owned Enterprises. This report seeks to shed slight on good practices drawing on national practices from over 30 economies.

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  • Foreword

    This report provides practical guidance on board practices for directors of state-owned enterprises and identifies a number of good practices based on national experiences of a large number of participating countries. It extends the guidance provided by Chapter VI of the OECD Guidelines on the Corporate Governance of State-Owned Enterprises on the Responsibilities of Boards of State-Owned Enterprises. The report draws information from a questionnaire-based exercise as well as previous publications and background papers commissioned by the OECD.

  • Preface

    State-owned enterprises (SOEs) are an essential element in the international economic architecture. Across the OECD area and in emerging economies, they continue to dominate certain segments of the economy that matter greatly for the downstream competitiveness (notably in the utilities sector). In the face of growing expectations for improved performance, policy makers have focused their attention on the role of boards of directors.

  • Acronyms and abbreviations
  • Executive summary

    This report summarises the practices of governments in OECD and other countries in dealing with the boards of directors of state-owned enterprises (SOEs). Focusing on non-executive directors (or supervisory boards), it draws from relevant OECD publications since 2005 and a recent questionnaire-based exercise answered by delegates and observers to the OECD Working Party on State Ownership and Privatisation Practices. The report is organised in seven chapters summarised as follows. Each chapter identifies a number of Good Practices drawing on national experiences and annotations to the OECD Guidelines on Corporate Governance of State-Owned Enterprises (the SOE Guidelines). To assist the reader, these practices are highlighted in the box below.

  • 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.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). 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 role of boards of directors

    The overall directions of SOE Guidelines imply that boards play a central function in the governance of SOEs. The board carries ultimate responsibility, including through its fiduciary duty, for SOE performance. In this capacity it acts essentially as an intermediary between the state as a shareholder, and the company and its executive management. This three-layered approach, which is consistent with general company laws of most countries, has been implemented by a number of governments to good effect. SOE boards shifted from their historic role as oversight bodies, entrusted with ensuring compliance toward driving performance, to setting strategies and co-operating with management towards their implementation. However, in a minority of countries, SOE boards are not adequately empowered by their governments to assume such a strategic role, circumvented for instance by direct ministerial appointments of corporate executive management and/or informal channels of communication and instructions. This may detract from the value-adding of boards.

  • Board nomination frameworks and practices

    The nomination of SOE directors is one of the primary responsibilities of the state as an active owner. According to ownership structures (centralised, widely dispersed or dual structures involving two ministries) this may remain with individual ministers or involve the entire cabinet and/or executive powers. In exercising these powers, ministers need to be mindful of the fact that they are custodians of the public interest rather than the owners of companies. The process should be rules-based and overseen by a governmental ownership function. Insofar as the ownership function has discretionary powers, it is well-advised to exercise them along similar lines and private sector good practices. This could include relying on external recruitment consultants, building databases with pools of directors and engaging the active involvement of the incumbent boards of directors. Where SOEs have private sector minority investors, processes are usually in place to safeguard the minority representation.

  • Board composition: Constraints and guidelines

    A central recommendation of the SOE Guidelines is that boards should be composed to exercise independent and objective judgment. In most countries SOE boards are composed of a mix of civil servants, other individuals tasked with pursuing the public interest and independent directors. The trend, fuelled by a growing commercialisation of SOEs, is toward a greater reliance on independent board members – or persons with relevant commercial experience. Ensuring the recruitment of suitable board members can be based on formal eligibility rules, processes to advice or vet ministerial candidates for board appointment or actual or de facto nomination committees proposing candidates of the ultimate decision of ministers. Board composition can be further influenced by limitations on the number of board positions and/or affirmative action targeting gender and minority groups. Employee representation on boards generally follows private sector practices, but can differ for some SOEs (especially in the context of privatisation).

  • Board training and induction

    The SOE Guidelines recommend engaging in human capital building among SOE board members to inform them of their responsibilities and liabilities. How much and what kind depends on the company and context. In all countries board induction is provided to new directors, in some cases mandated (and even arranged) by the ownership function, in other cases organised informally by the SOEs. Education and continuous training of board members is considered good practice in countries whose SOE boards contain mostly public officials. Countries that have commercialised SOEs and professionalised their boards mostly nominate directors who are in little need of further training. Where training is offered it is mostly provided off the shelf by professional bodies such as institutes of directors and often not materially different from what is found in private enterprises.

  • Board remuneration

    The SOE Guidelines recommend that remuneration schemes for SOE boards foster the long term interest of the company and attract qualified professionals. In most countries, the remuneration of board members falls below market levels. Remuneration and incentives are often regulated and limited for both executives and board members. Some countries have policies to align pay with market rates, but not be market leading; others are considerably more restrictive. The models most commonly used are i) limiting remuneration to an attendance fee per board meeting; ii) capping directors’ remuneration at a multiple of average salaries in the SOE or the national economy; and iii) developing a fee policy taking into account factors such as the size of SOEs, time requirements and director qualifications. Attracting talent may be a challenge due to low remuneration; but other non-pecuniary benefits such as prestige, opportunities to build experience and networking attract talent to boards.

  • Boardroom efficiency

    As SOE boards become more professional, the issue of boardroom efficiency moves to the forefront. A well-functioning board takes responsibility for setting strategy and creating value, acting as a collegial entity with a shared responsibility. One implication is that it has become more important to identify directors that answer concrete demands for skills and competencies in individual boards. In the course of the process of professionalisation, therefore, the size of boards has generally shrunk to more manageable size, the role of directors as team players has grown and, partly related to the previous point, the role of the Chair as a convener and co-ordinator has been strengthened, so too has the role of board committees. However, it has also led to an increase in the workload and time commitment of directors, which has in some cases created problems for board recruitment and potential remuneration.

  • Board evaluations

    The systematic evaluation of SOE board increases professionalism and is commonly considered good practice. They serve directors (not least the Chair) as a vehicle for assessing and improving the board’s modus operandi, and they provide the ownership function with valuable information concerning possible changes to board composition. Administrations that run their SOEs relatively close to general government tend to rely on top-down approaches through which the ownership function evaluates the board in light of corporate objectives. In more commercial SOEs the trend is to rely largely on board self-evaluations. All such evaluations assess the workings of the board as a whole; some extend to an assessment of individuals. Self-evaluations are often assisted by external evaluators from private companies, or in some cases from within the general government sector. An evolving consensus is to create strong feedback links from the board (self) evaluations to the board nomination process.

  • National board practices comparative tables


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