3. Review against the core corporate governance principles

Ensuring a consistent regulatory framework that provides for the existence and effective enforcement of shareholder rights and the equitable treatment of shareholders, including minority and foreign shareholders.

As noted in the introduction, Costa Rica was reviewed against all of the recommendations of the G20/OECD Principles of Corporate Governance and the Guidelines on Corporate Governance of State-Owned Enterprises. This report integrates the elements most relevant to assessing each of the core corporate governance accession principles, following the Concept Paper of the Corporate Governance Committee. This section is therefore divided into five sub-sections: 1) shareholder rights and equitable treatment, including treatment of the market for corporate control (Principles II.C, D, E, G, and H); 2) related party transactions and conflicts of interest (Principle II.F 1 and 2); 3) institutional investor disclosure, corporate governance policies, conflicts of interest and voting (Principles III.A and C); and 4) insider trading and abusive self-dealing (Principle III.E). The fifth and final section of the chapter deals with equitable treatment of shareholders among state-owned enterprises (Guidelines IV.A and IV.C).

Principle II.C states that shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures that govern general shareholder meetings. This includes consideration of six sub-topics dealing with: 1) provision of sufficient and timely information regarding general meetings; 2) processes allowing for the equitable treatment of shareholders including procedures that do not make it unduly difficult or expensive to vote; 3) asking questions to the board and placing items on the general meeting agenda; 4) facilitation of effective participation in key corporate governance decisions such as nomination and election of board members and remuneration; 5) voting in person or in absentia; and 6) eliminating impediments to cross-border voting.

Costa Rica’s governance framework is substantially consistent with the recommendations of Principle II.C whose detailed recommendations are described below.

Costa Rica’s legal requirements clearly specify the provision of sufficient and timely information regarding general meetings. Article 163 of the Code of Commerce provides that the agenda of general meetings contain a description of the matters to be submitted for discussion and approval at the meeting. An ordinary meeting must be held at least once a year, within the three months following the end of the fiscal year, which must address the following matters, in addition to any other items included in the agenda:

  • Discussion, approval or rejection of the financial statements presented by management and any measures considered appropriate;

  • Agreement on the distribution of profits, if any, as provided in the corporate bylaws;

  • Appointment or revocation of managers and board members; and

  • Any other ordinary matters provided in the corporate bylaws.

Regarding meeting notice, Article 164 of the Commercial Code specifies that the meeting be convened with the notice as established in the articles of incorporation or, by default, 15 working days prior to the date of the meeting, during which time, the books and documents related to the purpose of the meeting must be made available to shareholders in the offices of the company. During the meeting, shareholders may request all reports and clarifications they deem necessary regarding the items on the agenda.

The CONASSIF Governance Regulation reinforces the articles in the Code of Commerce by requiring easy access to information in advance about the date, venue and agenda of shareholder meetings, as well as complete and specific information regarding the matters to be decided in said meetings. In addition, the CONASSIF Governance Regulation requires the provision of relevant and substantive periodic information about the company, and with mechanisms to address questions, claims and complaints.

Observational evidence suggests that companies comply with these legal requirements in practice. There have been cases where the level of information provided was contested by minority shareholders. However, such shareholder complaints are infrequent. In recent years there has only been one case of an investor claiming lack of information.

Both the Commercial Code and the CONASSIF Governance Regulation require the provision of sufficient information to make it possible for shareholders to participate in the governance of the enterprise. The procedures for participation comply with standard OECD practice and are neither expensive nor unduly onerous. One area where there may be room for improvement is in the procedures to prove share ownership before a general meeting. Some companies require the advance deposit of shares before a shareholder meeting in their articles or bylaws. In the event that the articles of incorporation require such a deposit in order to participate, the Commercial Code demands that the meeting be convened sufficiently in advance to allow shareholders to make the required deposit. Such procedures under the Commercial Code may be time consuming and could be streamlined by a simpler process of shareholder identification.

The Commercial Code specifies that during a general meeting, shareholders may request all reports and clarifications they deem necessary regarding any agenda item. Shareholders holding 25% of the share capital may request that issues be placed on the agenda. It is also possible for the owner of a single share to place items on the agenda when no meeting has been held for two consecutive financial years and when the meetings held at that time did not deal with ordinary matters such as the discussion and approval of the financial reports or the distribution of profits, among others. The right to information enshrined in the Commercial Code has been upheld by the courts. The First Chamber of the Supreme Court of Justice indicated in Sentence 879 of December 2007 that shareholders have the right to demand and receive explanations from boards.

The CONASSIF Governance Regulation (Article 46.7) provides that the governance of the institution must protect and facilitate the exercise of shareholders rights, amongst, which it mentions the opportunity to participate effectively and vote in the general shareholders meetings, and the right to be informed of the rules governing such meetings, including voting procedures. The Governance Regulation also covers the right to raise questions at board meetings and submit resolutions to general meetings.

The Code of Commerce does not specifically provide for the right to participate in nominations, elections or remuneration decisions. However, the Governance Regulation fills this gap. The Governance Regulation (Article 46.7.iii) specifies that shareholders have the right to participate effectively in key corporate governance decisions such as the appointment or election of board members. Shareholders should also have the opportunity to make their views known regarding the compensation policy for board members and senior management, with share remuneration being subject to shareholder approval.

According to the Code of Commerce, shareholders have the right to be represented at general meetings by proxy (Article 146). And, if a company’s articles of incorporation do not expressly prevent it, there is no impediment to voting from abroad. The Governance Regulation goes somewhat further in that it requires that fair treatment be guaranteed to all shareholders, including minority shareholders and foreigners.

However, neither the Code of Commerce nor the Governance Regulation address the issue of electronic voting. The absence of a detailed rule regulating the subject of cross-border voting and voting through electronic means is a potential area for improvement in the governance framework. The solution would be a legal standard regulating the use of technology to ensure cross-border voting and prohibiting the restriction of such right via articles of incorporation or bylaws.

Principle II.D states that shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the G20/OECD Principles, subject to exceptions to prevent abuse.

In Costa Rica there is no prohibition against investors consulting with each other or reaching agreements, except in the case of illicit activities such as price fixing or undue use of privileged information.

Principle II.E states that all shareholders of the same series of a class should be treated equally. Capital structures and arrangements that enable certain shareholders to obtain a degree of influence or control disproportionate to their equity ownership should be disclosed.

The Code of Commerce establishes in its Articles 120 and 121 that common shares grant identical rights and represent equal parts of the company capital. The Code of Commerce also states that any stipulations that exclude one or more owners of common shares from participating in the profits of the company shall have no legal effect. It thus guarantees equal treatment with respect to dividends. The CONASSIF Governance Regulation establishes in its Articles 46.4-5 the obligation to disclose agreements, capital structures and other types of capital groupings that might enable some shareholders to acquire a disproportionate degree of control compared to the shares that they own.

Five of the equity issuers on the BNV1 also issue preference shares without voting rights. There is no indication that shareholders with preferred shares receive differential treatment with respect to ownership of this class of shares. Furthermore, there is no indication that the issuance of preference shares by these companies has enabled the controlling shareholders of these companies to exert disproportionate control. In four out of five companies with preference shares, a controlling owner or owners own a majority of the company’s shares, in some cases exceeding 90%.

Regarding the disclosure of shareholder agreements and other structures that might be used to exercise disproportionate control, in the past, there was no regulatory obligation to disclose such agreements or structures. SUGEVAL became aware that such arrangements could affect share prices through the case of Grupo Financiero Improsa, which resulted in the disclosure of an agreement between Improsa and the International Finance Corporation (IFC). The CONASSIF Governance Regulation now requires issuers to disclose all such agreements.

Principle II.G states that minority shareholders should be protected from abusive actions by controlling shareholders and should have effective means of redress. This principle was added to this review, in addition to the principles set down in the Concept Paper, because the issue of minority shareholder protection is acute in Costa Rica. In Costa Rica, when conflicts occur between minority shareholders and listed firms, it is usually with respect to access to information and, in particular, as regards dividends. Such conflicts are usually resolved with the controlling shareholder but, on occasion, go to the regulator or the courts.

Depending on the right that the shareholder wants to exercise (whether it falls under law such as the Commercial Code or under securities market regulation), the shareholder may appeal to legal authorities and/or the regulator. Fundamental principles of company law (for example, Article 47.4 of the CONASSIF Governance Regulation, which specifies that the processes and procedures of general shareholders meetings allow all shareholders to enjoy fair treatment and not unduly hinder the issuance of votes) must be resolved by a judge.

On 4 August 2016, the Minority Shareholder Protection Law (Protección al Inversionista Minoritario) was approved as a way to address some of the weakness in minority shareholder protection detected in the World Bank’s assessment of Costa Rica in its Doing Business Report. The law modified Articles 26 and 189 of the Code of Commerce. Article 26, as revised, regulates shareholder access to company books. This had, on limited occasions, been identified as an area of dispute between minority and controlling shareholders. Article 189, as revised, establishes board members’ duties of diligence and loyalty, and the obligation to act in the best interests of the company, taking into account the interests of the company and its shareholders.

The CONASSIF Governance Regulation provides for some general protections in its section on the equitable treatment of shareholders. Article 47 calls for the equitable treatment of all shareholders, including foreign and minority shareholders, and allows shareholders to seek redress in the event their rights are violated. The discussion of Principle I.B provides some context regarding the degree to which shareholders may seek redress from the regulator and the courts. Article 47.2 also specifies that minority shareholders are protected from direct or indirect abusive actions by, or in the interest of, controlling shareholders.

Costa Rica’s initial Self-Assessment concluded that further attention was required to bring minority shareholder protection up to the OECD standard. The reasons were that the modifications to the Code of Commerce only regulate shareholder access to information, the right to demand audits, and the responsibility of the board members, while the Governance Regulation remains general.2 As a consequence, Costa Rica should consider the development of more detailed regulations that address the issue of how new provisions of the Governance Regulation may be implemented, for example, with respect to the recommendation that companies protect shareholders from direct or indirect abusive actions.

Principle II.H, recommends that markets for corporate control be allowed to function in an efficient and transparent manner.

The rules and procedures regarding markets for corporate control are clearly articulated in Costa Rica’s law and are disclosed and easily available on the web. Tender offers, corporate control agreements, mergers and transformations, and company control matters are regulated through a combination of the Securities Market Law, the Public Offering of Securities Regulation (Reglamento de Oferta Pública de Valores), the Code of Commerce and the law On Mergers and Transformation of Companies. The CONASSIF Governance Regulation draws directly on the wording of the G20/OECD Principles to articulate the need for transparency in extraordinary transactions.

In addition, the Governance Regulation requires that the norms and procedures applicable to acquiring company control and special transactions, such as mergers or the sale of substantial portions of the company’s assets, be clearly articulated and disclosed to the shareholders so that they may participate in decisions and understand their rights and avenues of recourse. Control transactions must be carried out at transparent prices and under fair conditions that protect the rights of all shareholders within their respective categories.

Regarding mandatory offers (the requirement that a shareholder holding more than a certain percentage of a company must offer to buy the remaining shares on terms as good as its most recent purchases), according to the rules on takeover bids found in the Public Offering of Securities Regulation (Reglamento de Oferta Pública de Valores), when an offeror intends to acquire a stake equal to or greater than 25% of share capital, but less than or equal to 50%, the offer must be made on a number of securities representing at least 10% of the capital of the company concerned. When the offeror intends to acquire a stake greater than 50%, the offer must be made on a number of securities that enable the acquirer to reach at least 75% of the capital of the company concerned. The offer should be addressed to: 1) holders of all shares of the affected company with voting rights; and 2) holders of all rights to acquire or subscribe for shares with voting rights, as well as holders of bonds convertible into shares with voting rights.

The price is to be determined by the offeror and may consist of cash or shares of another company. In the event of an exchange of shares, the offer must be clear as to the nature, valuation and characteristics of the securities offered in exchange, as well as to the proportion in which the exchange is to take place. All offers must ensure equal treatment of securities of the same class. If the compensation consists of shares, the offering must include a valuation of the company made by an independent expert. If the shares are quoted on a stock exchange, the market value of the shares presented by a brokerage firm that is not part of its economic group must be included. Additionally, the offering shall state information on the issuer of the offered shares in the exchange, including the main activities of the company and an analysis of the trajectory of the company in terms of its financial situation and the results obtained in the last two reporting periods. Finally, the offering must disclose agreements between the offeror and the board of the affected company, including any specific advantages that might accrue to the members of the board. The board of the affected company must publish a detailed report with their opinion about the final offer, including the disclosure of any agreement between the affected company and any of the offerors.

Principle II.H.2 further states that anti-takeover devices should not be used to shield management and the board from accountability

To date, there has been no use of anti-takeover devices in Costa Rica. Though anti-takeover devices are not explicitly prohibited by law, there are limitations on actions designed to thwart a takeover. Regulations require that the board of directors of the affected company refrain from carrying out any transaction that is not specific to the ordinary activity of the company or that may hinder an offer during the period of the tender.

In particular, the board may not: 1) agree to the issuance of debt, except when executing prior agreements or those related to the usual activities of the company; 2) carry out transactions in the securities affected by the offer that may affect them; or 3) dispose, tax or lease company assets that may disturb the offer, except as per prior agreements. In addition, any previous agreement between the company and the bidder or between any of these and the members of the board should be disclosed.

The CONASSIF Governance Regulation specifies that anti-takeover devices may not be used to reduce the accountability of senior management or the board of directors.

Principle II.F states that related party transactions should be approved and conducted in a manner that ensures proper management of conflicts of interest and protects the interest of the company and its shareholders. More specifically: 1) Conflicts of interest inherent in related party transactions should be addressed; and 2) Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation.

The framework for the supervision of related party transactions is in place. The Code of Commerce requires companies to adopt related party transaction policies. The policies must include the obligation for any transaction, acquisition, sale, mortgage or pledge of assets that involves the general manager, any board member, or a related party to be reported to the board, and provide all relevant information on the interests of the parties in the transaction. In line with the above, the persons involved are to recuse themselves from decision making in the transaction. In addition, the Code of Commerce provides the definitions and criteria for identifying relationships of influence and interest of persons and institutions.

Furthermore, the Governance Regulation requires the board to identify, prevent and manage conflicts of interest, establish minimum conditions including the definition of conflict of interest for the board of directors, committees, support units and staff, as well as establish mechanisms to determine the existence of conflicts of interest and the manner in which these will be disclosed and managed. Specific related party transactions must be disclosed under Article 43.9 of the Governance Regulation and are also required under IAS 24 in the event the company produces IFRS compliant financial statements.

There are, however, difficulties in identifying conflicts of interest and who may be involved in a related party transaction based on publicly available information. The fundamental impediments to transparency are the Data Protection Law (Ley de Protección de la Persona Frente al Tratamiento de sus Datos Personales) and privacy rights embedded in the Political Constitution. Both serve to protect the identities of beneficial owners. The Securities Market Law also restricts access to certain information kept at the National Register of Securities and Intermediaries (Registro Nacional de Valores e Intermediarios). According to Article 6 of the law, the registry must contain information on all market participants, except investors. However, Article 8 (m) requires information on significant shareholdings (equal or greater than 10% of the subscribed capital) to be made public in the prospectus that is filed with the National Register of Securities and Intermediaries. In addition, with the reform to the Securities Market Law adopted in October 2019, SUGEVAL was provided with access to confidential beneficial ownership information of shareholders of listed companies for regulatory purposes. Furthermore, there is a new registry of shareholders managed by the Central Bank that was created in response to a recommendation made by the OECD in relation to tax matters. The law that establishes the registry is entitled the Law to Enhance the Combat against Tax Fraud, (Ley para Mejorar la Lucha Contra el Fraude Fiscal).

The Code of Commerce requires the general manager, board members, and related parties to report conflicts of interests in transactions to the board, providing all relevant information on the interests of the parties in the transaction. The Governance Regulation establishes the duty of board members and all personnel to disclose any matter that could result or has resulted in a conflict of interest. The Governance Regulation also requires companies to disclose an annual corporate governance report on their websites that includes information on related party transactions.

In addition, all listed companies produce financial statements according to IFRS. Under IFRS, International Accounting Standard, IAS 24 requires disclosure of basic information on related party transactions. This information is to include: 1) the name of the person acting as counterparty in the transaction; 2) type of operation; 3) terms and conditions of the operation in case guarantees are granted or received; 4) the currency; and 5) the amount of the operation.

Principles III.A states that “Institutional investors acting in a fiduciary capacity should disclose their corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights”. Principle III.C states that institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts of interest that may affect the exercise of key ownership rights regarding their investments.

The Securities Market Law provides in Article 114 that SUGEVAL will dictate the necessary norms to regulate conflicts of interest between stock market participants including the prohibition of operations between companies belonging to the same group, and to prevent operations or the transfer of information that may harm the investing public. Market participants can be understood to include: issuers, intermediaries, risk rating agencies, investment fund management companies, stock exchanges and any other company that participates directly or indirectly in the securities market.

The Governance Regulation reinforces prior legislation and regulations. Under the regulation, institutional investors acting as trustees should disclose their general corporate governance and voting policies in relation to their investments, including the procedures foreseen to decide on their use of the right to vote. In addition, they should disclose the way in which they manage conflicts of interest that could affect the exercise of fundamental ownership rights regarding their investments.

Principle III.E states that insider trading and market manipulation should be prohibited and the applicable rules enforced.

Both insider trading and market manipulation are sanctioned by the Securities Market Law (Articles 102, 103, 104, 157 sub-paragraph 30 and 157 sub-paragraph 10), and by the Criminal Code (Articles 251 and 252). Moreover, CONASSIF published a regulation whereby the regulated parties must have policies in place to prevent insider trading. Additionally, under the CONASSIF Governance Regulation, regulated parties must establish mechanisms to avoid the use of insider information and abusive treasury stock transactions by shareholders.

Insider trading and price manipulation are conducts regulated by the criminal court. If they are detected, SUGEVAL has the duty to report them to the Public Prosecutor’s Office to begin investigations and judicial process. For the purpose of administrative sanctions, it is necessary to demonstrate that the person who has privileged information has carried out operations directly or indirectly, or has communicated the information to which they had access, or recommended operations with securities.

Once this is demonstrated, the individual can be fined. In the case of legal persons, the fine can be five times the benefit obtained as a direct consequence of the infraction, or 5% of the assets of the company whichever is higher. In the case of natural persons, they can be sanctioned with a fine of five times the benefit obtained as a direct consequence of the infraction committed, or with a fine of 200 base salaries (approximately USD 145 000), whichever is higher.

In practice, there have been some recent preliminary investigations into two cases of suspected insider trading and market manipulation, but SUGEVAL dismissed both cases due to insufficient evidence.

Guideline IV.A provides that the state should strive toward full implementation of the G20/OECD Principles of Corporate Governance when it is not the sole owner of SOEs, and of all relevant sections when it is the sole owner of SOEs. Concerning shareholder protection this includes: 1) the state and SOEs should ensure that all shareholders are treated equitably; 2) SOEs should observe a high degree of transparency, including equal and simultaneous disclosure of information, towards all shareholders; 3) SOEs should develop an active policy of communication and consultation with all shareholders; 4) the participation of minority shareholders in shareholder meetings should be facilitated so they can take part in fundamental corporate decisions such as board elections; and 5) transactions between the state and SOEs, and between SOEs, should take place on market consistent terms.

As noted above, shareholder protection for private sector enterprises and listed firms had previously been identified as a weakness in Costa Rica. In order to address certain shortcomings, the Executive Branch developed a series of reforms to the Code of Commerce (Project N°19530), which were approved by the Legislative Assembly in August 2016. While reforms have taken place in the legal framework for private sector enterprises, the issue of minority shareholder protection has limited consequences for Costa Rica’s SOEs. Of the 29 SOEs in the state’s portfolio, only CNFL (a subsidiary of the ICE Group) has minority shareholders. And, both the percentage shareholding and the number of minority shareholders in CNFL are small.

Guideline IV.A.5 calls for transactions between the state and SOEs, and between SOEs, to take place on market consistent terms. (This issue is addressed below under: Ensuring a level playing field between SOEs and private sector competitors.)

Guideline IV.C states that, where SOEs are required to pursue public policy objectives, adequate information about these should be available to non-state shareholders at all times.

There are virtually no non-state shareholders in Costa Rican SOEs with the minor exception of CNFL mentioned above. Nevertheless, making information available on the pursuit of public policy objectives remains an important objective and the OECD recommends that the costs of public services in SOEs be defined, assessed and reported.

Disclosure and transparency: Requiring timely and reliable disclosure of corporate information in accordance with internationally recognised standards of accounting, auditing and non-financial reporting

The Concept Paper, in its guidance for assessing Costa Rica’s corporate governance framework suggests three main areas of focus. A first key issue is the application of accounting and auditing standards and practices (Principles V.B and C and Guidelines VI.A, B, and C). A second key emphasis is the importance of disclosing information on two aspects of corporate information: 1) enterprise governance, ownership and voting structures (Principles II.E.2, V.A.3 and V.A.9 and Guideline VI.A.3); and 2) disclosure of related party transactions (Principle V.A.6 and Guideline VI.A.8). This section, therefore, is broken down into three substantive sections: 1) accounting and auditing standards; 2) disclosure of governance, ownership, and voting structures; and 3) disclosure of related party transactions.

Principle V.B recommends that information should be prepared and disclosed in accordance with high-quality standards of accounting and financial and non-financial reporting, while Principle V.C calls for an annual audit to be conducted by an independent, competent and qualified auditor in accordance with high-quality auditing standards.

With respect to the G20/OECD Principles, Costa Rica’s governance framework is now substantially consistent with the recommendations of the G20/OECD Principles as a result of measures taken during the accession review process. All companies accessing the capital markets through the BNV must report according to IFRS.

With respect to regulated entities, i.e. listed companies and financial sector entities, the Regulation on Financial Information was issued in the second half of 2018. It requires all regulated financial institutions to comply with current IFRS by the beginning of 2020 and establishes the automatic adoption of new standards or reforms adopted by the IASB. The regulation permitted eight temporary deviations from IFRS that were to be phased out through 2024 through additional legal or regulatory actions. One legal reform was approved in December 2018 (Law No. 9.635) and two other legal reforms were addressed through the Law on Consolidated Supervision. An action plan to achieve full consistency with IFRS was approved by CONASSIF in October 2019.

For unregulated entities, CONASSIF accepts the national accounting standards set by the Chamber of Certified Public Accountants (Colegio de Contadores Públicos de Costa Rica—CCPA) for private companies and those set by the Ministry of Finance for SOEs (a fuller discussion of reporting standards for SOEs is found below). Through its Circular No 06-2014, the CCPA ratified IFRS and its respective interpretations as the valid accounting standard for private companies in Cost Rica.

Principle V.C recommends that an annual audit should be conducted by an independent, competent, and qualified auditor, in accordance with high-quality auditing standards in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects.

The auditors of the financial statements of all regulated entities are expected to follow the requirements set by the Chamber of Certified Public Accountants (CCPA). Regarding the implementation of International Standards of Auditing, ISA was formally adopted by the CCPA in 1998. In 2005, the CCPA updated its standards and agreed that all subsequent updates to ISA would be incorporated automatically into national practice.

In 2015, the IFAC Member Compliance Program Dashboard Report indicated that Costa Rica had demonstrated commitment to IFAC’s mission and capacity to participate in IFAC’s compliance programme. In the Dashboard Report, the CCPA was deemed to have appropriate levels of: 1) operational and financial viability; 2) governance structures; and 3) operational structures. These conclusions were confirmed in later reviews of Costa Rica by IFAC.

According to the Regulation of External Auditors (SUGEF Agreement 32-10), supervised subjects must undergo an annual audit by an external audit firm or independent external auditor listed in the Register of Eligible Auditors, which is part of the National Register of Securities and Intermediaries established by the Securities Market Law. Independent external auditors must comply with ISA and must be independent from the institution, financial group or conglomerate to be audited.

In 2012, the World Bank Report on Observance of Standards and Codes (ROSC) on Accounting and Audit had shown that in many cases the actual conduct of audits fell short of good practice. In response, the CCPA reported that it had made efforts to improve the application of ISA in practice and that practices have improved.

Nevertheless, some issues merit further attention. The CCPA continues to labour under capacity constraints that restrict their ability to close the gaps between actual practices and the global standards and to improve the quality of the accounting and audit profession. The nature and scale of this challenge should not be misunderstood. Improving accounting and audit practices implies a cultural change that will require a significant investment in training and systems.

Furthermore, the profession has no formal public oversight or external accountability as has increasingly become the norm in OECD countries. According to the G20/OECD Principles, independent oversight of the profession is an important factor in improving audit quality. Some efforts have been made to strengthen oversight since the beginning of the accession review. The legislation necessary to this effect was adopted in October of 2019 (Amendments to Law Regulating the Securities Market and other related laws). The law reinforces oversight of the audit profession and the implementation of ISA by allowing SUGEVAL to impose sanctions on auditors when irregularities or other infringements are detected. The law also establishes that an auditor can be removed from the registry of certified auditors and prohibited from providing services to supervised entities if they do not comply with standards. While the introduction of sanctioning power may serve to strengthen accountability, they cannot be expected to have the same impact as that of an accounting and audit oversight body.

Be that as it may, the various challenges facing the accounting and audit profession are not necessarily germane to the enterprises that fall under the scope of the G20/OECD Principles or the SOE Guidelines. Listed companies and SOEs do not generally rely on the audit services of small audit firms that with limited capacity and/or resources. More often, they typically choose to be audited by leading international audit firms (the so-called Big 4) who are not only expected to comply fully with ISA but who also have mechanisms to ensure the quality of their audits.

Guideline VI.A recommends that all SOEs report material financial and non-financial information in line with high-quality internationally recognised standards of corporate disclosure. In addition, the Guideline requires SOEs to report on significant concerns for the state as an owner and the general public taking into account their size and capacity to do so.

The Accountant General’s office (Contabilidad Nacional), which is part of Ministry of Finance, is the technical body responsible for the financial reporting practices of SOEs and IFRS implementation. In addition, Costa Rica has a general policy that establishes the transparency and disclosure requirements for SOEs and autonomous state institutions. In April of 2018, the Ministry of the Presidency issued Directive 102-MP, General Policy on Transparency and Disclosure of Financial and Non-Financial Information for SOEs, their Subsidiaries and Autonomous Institutions (Política General sobre Transparencia y Divulgación de Información Financiera y No Financiera Para Empresas Propiedad del Estado, sus Subsidiarias, e Instituciones Autónomas). The directive is wide-ranging in scope and establishes a disclosure policy for both financial and non-financial information for SOEs.

As with the Governance Regulation, the General Policy on Transparency makes reference to best international practice including the G20/OECD Principles and SOE Guidelines, the OECD’s Accountability and Transparency Guide for SOEs (2010), the World Bank toolkit entitled Corporate Governance of SOEs (2014) and the United Nations Conference on Trade and Development (UNCTAD) Guidance on Good Practices in Corporate Governance Disclosure. As a consequence, the General Policy on Transparency corresponds with international and OECD practices and its full implementation would serve to bring Costa Rica’s SOEs in line with OECD and other international standards. The Costa Rican authorities began to monitor and report on implementation through information provided in its first aggregate report on SOEs published in October 2019. The report found only partial compliance with expected reporting practices, indicating the importance of maintaining such monitoring and reporting in the future.

With respect to financial reporting standards, Costa Rica had experienced considerable delays in implementing IFRS since the original passage of legislation in 2009. In February 2018, the government issued Decree 41039 entitled Closing of Gaps with International Accounting Standards in the Public Sector of Costa Rica and Adoption and/or Adaptation of the New Regulation (Cierre de Brechas en la Normativa Contable Internacional en el Sector Público Costarricense y Adopción y/o Adaptación de la Nueva Normativa), which sets the deadline for SOEs to close remaining gaps in the implementation of IFRS at 1 January 2020. As noted in greater detail below, full implementation for some SOEs is, nevertheless, expected to take longer.

Financial SOEs fall under a special reporting regime. All financial SOEs are subject to financial disclosure regulations issued by CONASSIF. Financial SOEs are required to comply with the IFRS in accordance with Chapter IV of the Regulation of Financial Information. They must also send quarterly or annual financial reports to the Superintendencies depending on their national or foreign status.

CONASSIF regulations had required the use of an outdated and modified version of IFRS. By late 2018, all financial institutions, with the exception of Banco Internacional de Costa Rica and INS, were still using IFRS valid as of 1 January 2011. The consequence was that, as of 2018, financial statements for financial SOEs were not comparable to banks internationally. In September 2018, CONASSIF and SUGEF passed an accord entitled Regulation on Financial Information (Reglamento de Información Financiera) to close the gaps with IFRS. The accord also establishes 1 January 2020 as the deadline for private and public financial institutions to comply with extant IFRS, but allows for certain exceptions that will be gradually phased out through 2024. While current variances from IFRS are expected to disappear over the next few years, there is a risk that future changes in tax law and other regulations could encourage continued deviations.

Amongst non-financial SOEs, two (INCOP and INCOFER) are fully compliant with IFRS and received unqualified (positive) opinions from their independent external auditors for their 2018 financial statements. An unqualified opinion is issued if the financial statements are presumed to be free from material misstatements. In addition, RECOPE applied IFRS in 2018 but received a qualified (negative) opinion. A qualified opinion is a reflection of the auditor's inability to give an unqualified, or clean, audit opinion. The remaining non-financial SOEs report according to national standards. Of these, two (AyA and Correos de Costa Rica) received unqualified (positive) opinions from their auditors while four (FANAL, ICE, JPS, and SINART) received qualified (negative) opinions. JAPDEVA reported using national standards but had only produced unaudited 2018 statements as of October 2019. As of October 2019, SINART had audited financial reports, which had, nevertheless, not been published.

As of 2019, the auditors of Costa Rica’s two SOE banks (BCR and BNCR) report the use of CONASSIF and SUGEF accounting standards for their 2018 financial reports. For INS, the independent external auditor reports compliance with CONASSIF and SUGEF standards and the use of IFRS only when national norms do not prescribe an accounting treatment. Though financial statements prepared under regulatory accounting standards are sometimes accepted by investors, some independent auditors noted in their audit opinions that statements may not be suitable for the purposes of users other than local regulators.

Part of the reason for the slow transition to IFRS is that the laws themselves envisaged gradual change, which allowed SOEs to avoid full compliance for years. More technical justifications for the delays were attributed to: 1) the need to train accountants; 2) the lack of appropriate computer systems; 3) potential fiscal impacts; 4) concerns regarding how IFRS statements might impact national accounts; 5) the pricing of regulated products and services such as water and electricity; and 6) that IFRS statements would reveal that some SOEs were in worse financial condition than previously understood. In the end, the delays in implementation appear to be due less to technical challenges than: 1) the considerable reticence amongst SOEs to comply fully with IFRS; 2) the policy of the Accountant General to pursue a policy of gradual implementation; and 3) the absence of political will.

In any event, the state of disclosure amongst SOEs and SOE banks suggests that the implementation of IFRS will require more time and effort. In terms of its future evolution, all financial firms including SOE banks should be compliant with current IFRS beginning in 2020, with exceptions to be gradually phased out by 2024. INS anticipates being fully compliant by 2021, with the exception of implementation of IFRS 17 (insurance contracts), which may take longer. ICE reported that full IFRS implementation is anticipated in 2022-23. While IFRS may be in sight for these enterprises, a significant number of SOEs still operate without publishing annual financial statements that are fully compliant with IFRS and which fail to receive a positive opinion from their independent external auditors. Irrespective of the accounting standard used, it remains an important goal for all SOEs to publish audited annual financial reports on a timely basis.

Beyond what financial reporting practices mean for the overall quality of disclosure (and the lack of comparability between SOEs), Costa Rica’s mix of accounting practices undermines the government’s capacity to prepare high-quality national accounts. The Costa Rican government has been aware of the problem and in February of 2018, the Presidency and the Ministry of Finance issued Executive Decree 41039 entitled Closing of Gaps with International Accounting Standards in the Public Sector in order to remove the differences between accounting practices in Costa Rica’s public sector and International Public Sector Accounting Standards (IPSAS).

While the decree focuses on public sector accounting (IPSAS), the proper preparation of national accounts also relies on the application of a uniform set of standards across public institutions and SOEs (Government Business Enterprises or GBEs under IPSAS nomenclature) in order for proper consolidation to take place. For SOEs, which IPSAS defines as commercially orientated entities that have been assigned the financial and operational authority to sell goods and services at a profit, the applicable accounting standard is IFRS. However, precisely what state institutions should apply IFRS versus IPSAS has been the matter of some controversy within the IASB. Achieving clarity on what constitutes a GBE and what accounting standards to apply will likely prove to be a challenge in Costa Rica and it may be some time before the national accounting system will be in a position to produce consistent national accounts.

Access to information is a public right in Costa Rica. Article 30 of the Political Constitution provides that “open access is guaranteed to administrative departments in order to inform matters of public interest.” More specifically, the Comptroller General has the legal backing to access any information on SOEs including confidential information. The Political Constitution and the of the Law Against Corruption and Illicit Enrichment in the Public Service (Ley Contra la Corrupción y el Enriquecimiento Ilícito en la Función Pública) guarantee public access to information, specifically information related to income, budgeting, custody, control, management, investment and the spending of public funds unless such information could endanger the public interest and, specifically, SOEs operating in a competitive context.

In practice, however, there have been different interpretations of what constitute state secrets, confidential information and the public interest so that such differences have needed to be adjudicated in the courts. For example, there have been cases of SOEs trying to prevent the Comptroller General from publishing their findings or transmitting their reports within government. While enterprises in OECD countries have a generally recognised right to maintain the confidentiality of certain business information, in Costa Rica such justifications may have been used to avoid publicising the financial difficulties of certain SOEs or other critical findings of the Comptroller General.

Disagreements over what can legitimately be held secret have led to unusual workarounds. In the case of the ICE Group, (following the recommendation of the Comptroller General to ensure better access to ICE Group information for relevant oversight bodies), the Council of Ministers decided to designate the Environment and Energy Minister and the Science, Technology and Telecommunications Minister to request information from the ICE Group board and to inform the Council of Ministers regarding any aspect that should be known.

The different views on the issue had even resulted in lawsuits being filed against the Comptroller General, which were widely covered in the press. The view of the Comptroller General was that its attempts to share information within government had legal basis. They argued that under the inter-institutional co-ordination principle, issued by the Supreme Court’s Constitutional Chamber, confidentiality protections cannot be used by public entities under state control to restrict information flows within the state and concluded that the confidential information of any SOE may be communicated between state bodies to fulfil their legal responsibilities for control and supervision.

As of January 2019, confidentiality policy was being addressed in a decentralised manner at the level of each SOE. Article 5 of the General Policy on Transparency and Disclosure instructs SOEs to develop a confidentiality policy that establishes the motivations and exceptional circumstances under which information may be declared confidential as well as its legal basis. A potential weakness of this decentralised approach is that SOEs can decide themselves what is confidential and that there may be little incentive for them to be transparent. As of October 2019, five of 12 parent SOEs had provided their confidentiality policies to Costa Rica’s Presidential Advisory Unit, of which only one had developed a confidentiality policy that clearly defined what should and should not be disclosed to the public in the interest of open government and transparency.

Guideline VI.B recommends that SOE financial statements be subject to an independent external audit based on high-quality standards. The Guideline also specifies that specific state control procedures do not substitute for an independent external audit.

The degree of implementation of International Standards on Auditing (ISA) is fundamentally dependent upon the quality of the local audit profession. ISA was formally adopted by the Chamber of Certified Public Accountants (CCPA) in 1998. With respect to audit, there is no direct legal requirement for SOEs to be audited using ISA. There is, however, a more general requirement under Law 1038 for auditors of all regulated and non-regulated entities to follow the requirements set by the CCPA, which call for the use of ISA. Among the SOEs and SOE banks that provided financial statements audited by an independent external auditor in 2019, all complied with ISA.

An additional, relevant contextual factor is that many SOE boards appear to lack expertise in accounting, auditing, control and good governance practices, each of which is needed to effectively oversee the work of the independent external auditor. Furthermore, in early 2019, whilst all financial SOEs had audit committees, only five non-financial SOEs had functional audit committees.

Guideline VI.C recommends that government ownership entities develop consistent reporting on SOEs and publish annually an aggregate report on SOEs.

The Presidential Advisory Unit prepared an aggregate report on SOEs that was presented to the Council of Ministers in September 2019 and made public in October 2019. Overall, the report is a strong first attempt at aggregate reporting that compares favourably to similar efforts by ownership entities in OECD countries. It contains summary descriptions of SOEs, their missions, and basic financial performance indicators, which are accompanied by some discussion and analysis. The length and layout of the document make it easy to read and user-friendly.

In addition to financial data, the aggregate report contains a section that describes the governance practices of SOEs based upon their public disclosure. While this section only reports if disclosures (required under the General Policy on Transparency) were made, it gives an excellent idea of the degree to which SOEs comply with the good governance practices that are being promoted as a result of the accession process.

In future, some additional items could usefully be added to the aggregate report including: 1) a discussion of the state of the SOE sector as a whole and its impact on the state budget and the economy; 2) the objectives that the state wishes to achieve through state ownership; 3) more information on the achievement of specific public service objectives; 4) the performance of the state in exercising its ownership and oversight responsibilities; and 5) a consolidated financial statement for the SOE sector. The difference between combined and consolidated statements is that consolidated statements net out inter-company liabilities and thus present a more accurate picture of the financial health of the SOE sector as a whole.

Principle II.E.2 recommends requiring the disclosure of capital structures and control arrangements, and Principle V.A.3 similarly recommends requiring the disclosure of material information on major share ownership, including beneficial owners, and voting rights.

Article 8 (m) of the Law Regulating the Securities Market requires information on significant shareholdings (equal or greater than 10% of the subscribed capital) to be made public through the prospectus that is filed at the National Register of Securities and Intermediaries. CONASSIF Regulation SGV-A-19 also establishes the requirement for shareholders of listed equity issuers with a significant participation (equal or greater than 10% of the subscribed capital) to report their ownership to the issuer, the BNV and SUGEVAL. The CONASSIF Corporate Governance Regulation requires that companies make available information on their ownership and significant holdings on their website or through other easily accessible means. These disclosure requirements offer the stock market information regarding those who have significant influence in the decision making process and in the running of the company’s business.

In addition, with the Law Amending the Law Regulating the Securities Market, adopted in October 2019, SUGEVAL now has access to beneficial ownership information of all shareholders of listed companies. This means the regulator can take measures to detect improper practices. While shareholders of listed equity with ownership equal to or greater than 10% must report their ownership to the issuer, BNV and SUGEVAL, other legal provisions may make public access to such information difficult. Both the Data Protection Law (Ley De Protección de la Persona Frente al Tratamiento de sus Datos Personales) and privacy rights embedded in the Political Constitution may increase the difficulty for the public to obtain information establishing the identity of beneficial owners, or to determine how an enterprise might be controlled. On the other hand, the CONASSIF Governance Regulation requires that companies make available information on their ownership and significant holdings on their website or through other easily accessible means, but this review did not assess the extent to which such reporting provides clear information on beneficial ownership.

Disclosure of beneficial ownership has been a contentious issue in Costa Rica. Major shareholders and beneficial owners have sought to guard their privacy rights and attempts to draft laws to promote greater transparency have been contested in the Legislative Assembly. And, while legislation such as the Law to Enhance the Combat against Tax Fraud, (Ley para Mejorar la Lucha Contra el Fraude Fiscal) has made it possible, at least in principle, for tax authorities to trace beneficial ownership, such information is not generally made public. This reticence to disclose information on beneficial owners can make it difficult to gain a full appreciation of capital structures, control arrangements, and related party transactions.

Principle V.A.9 calls for the disclosure of governance structures and policies, including the content of any corporate governance code or policy, and the process by which it is implemented.

The CONASSIF Governance Regulation requires that all listed companies disclose information on their corporate governance practices on their web sites or through other easily accessible media to interested parties. This information must be made available annually, and updated whenever major changes are made, and must include, at least:

  • Ownership of shares with significant holdings;

  • Remuneration policy applicable to members of the governing body and senior management;

  • Information on the board, including composition, size, members, selection process, independence criteria;

  • Information on members of the board, including qualifications and experience, management positions in other companies, stakes in transactions or matters that affect the company, and independence status;

  • Information on senior management, including responsibilities, line reporting, qualifications, and experience;

  • Transactions with related parties in the last year;

  • Major events that could hinder the achievement of business objectives;

  • Information regarding committees, including objectives, responsibilities, composition, and meeting frequency; and

  • Any other information or clarification related to its corporate governance.

The Governance Regulation also requires listed companies to have governance codes and disclose them.

Guideline VI.A.3 calls for disclosure of the governance, ownership and voting structure of the enterprise, including the content of any corporate governance code or policy and implementation processes.

To the extent SOEs fall under the CONASSIF Governance Regulation that applies to regulated entities, they are required to have governance codes and disclose them in addition to other information on their governance practices. Furthermore, all SOES are required to comply with best practice disclosure under the General Policy on Transparency, which requires SOEs to indicate whether they have policies regarding ethics and corporate governance.

With respect to the actual practice of governance reporting, an examination of websites in 2016 showed that most SOEs provided little information on their governance. It was apparent from the examination that SOE disclosures had been viewed mainly as a “box-ticking” compliance exercise. Important information such as the composition of boards, data on individual board members and whether board members might or might not be considered independent was not provided in a systematic fashion. Other key corporate governance disclosures were infrequent such as, for example, ethics policies, and material risk factors, or information on risk management systems. Nor was there any disclosure of a qualitative discussion of governance by SOE boards. Furthermore, the majority of SOEs did not issue a Directors’ Report with their financial statement though this is widely viewed as a good practice.

In 2018, a follow-up review of SOE websites suggested that governance disclosure had improved. For example, both INS and RECOPE disclosed their governance codes. However, disclosure remains far from uniform and stands to improve significantly. It would appear necessary for the Administration to both track the level of disclosure, assess it in comparison to best practice, and ensure that good disclosure becomes the norm rather than the exception. The Presidential Advisory Unit has already moved in this direction and can be expected to play an even more important role in encouraging better and more uniform disclosure in future.

Principle V.A.6 recommends requiring the disclosure of material information on related party transactions and the terms of such transactions to the market individually.

As noted above with respect to related party transactions and reporting on conflicts of interest, Costa Rica’s governance framework requires disclosure of information on material related party transactions both to the board and to the public as per SUGEVAL regulations, the Corporate Governance Regulation and IAS 24 for companies that produce their accounts under IFRS.

To the extent that listed companies comply with IFRS, they would be in compliance with Principle V.A.6 that requires disclosure of transaction terms on an individual basis. IAS 24 specifically requires the disclosure of the following: 1) the amount of the transaction; 2) the amount of outstanding balances, including terms and conditions and guarantees; 3) provisions for doubtful debts related to the amount of outstanding balances; and 4) expense recognised during the period in respect of bad or doubtful debts due from related parties.

However, the restrictions on the disclosure of beneficial ownership discussed above, may limit the ability of shareholders and other market participants to identify related parties, making it more difficult for them to verify whether related party transactions are being correctly identified and reported.

Guideline VI.A.8 recommends that SOEs disclose information on any material transactions between SOEs and the state or other related entities.

The General Policy on Transparency clarifies what is understood by related party transactions, as well as the duty to disclose these in the annual report or, if applicable, as a notification of a material event. In addition, material related party transactions are disclosed when SOEs prepare their annual financial reports according to IFRS. Since SOEs with equity and/or bond listings on the BNV are required to disclose IFRS statements, such SOEs should be disclosing material related party transactions. A related concern is that SOEs do not generally have or disclose any formal related party transaction policy though some elements thereof are found in administrative law.

Establishing effective separation of the state’s role as an owner of state-owned enterprises and the state’s role as regulator, particularly with regard to market regulation

The Concept Paper and the SOE Guidelines focus on the overall responsibilities of the SOE ownership entity and ensuring that there is a clear separation between the government’s role as an owner of SOEs and its role as regulator. Relevant recommendations under the SOE Guidelines in this regard include: the development of an SOE ownership policy (Guideline I.B); the rationale for SOE ownership and objective-setting for SOEs (Guideline I.D); simplifying and standardising SOE legal forms (Guideline II.A); the operational autonomy of SOEs (Guideline II.B); the centralisation of the ownership function and exercise of state ownership rights (Guideline II.D); board nomination processes (Guideline II.F.2); board member remuneration (Guideline II.F.7); and the separation of the state’s ownership and other state functions (Guideline III.A).

Guideline I.B recommends development of an ownership policy defining the overall rationale for state ownership.

The Protocol of Understanding of the Relations between the state and the State-Owned Enterprises (ownership Protocol) is Costa Rica’s ownership policy. The ownership Protocol contains a cover letter signed by the President of the Republic expressing Costa Rica’s commitment to improving the direction of companies governed by the Executive Branch and seeking to implement the principles and guidelines of good corporate governance adopted by the international community with particular reference to the G20 and the OECD. It is an important achievement that should help guide Costa Rica’s SOE policy and the work of the Presidential Advisory Unit in the future. The ownership Protocol was published in October 2019 after a process of consultation with SOEs and the Council of Ministers and is accompanied by a directive reflecting the official position of the government.

Costa Rica’s ownership Protocol dedicates a significant amount of space to consolidating various bits of extant legislation and regulation. The ownership policy also contains additional aspirational recommendations that reflect international best practice, even if the details of how such aspirations remain to be fleshed out in practice. While it is not possible to summarise the ownership Protocol in detail, some major themes are noteworthy.

One major theme is the discussion of the rationale for state ownership. The SOE Guidelines suggest that a rationale for state ownership should exist and that countries justify their continued ownership through periodic reviews of their SOE portfolio. The ownership Protocol states that SOEs must meet at least one of the following criteria:

  • Its functions or purposes are necessary to safeguard a national economic or strategic interest;

  • It is the only way to ensure universality in the provision of public service;

  • The direct provision of some good or service by the state is required; or

  • There is a strategic policy or project that justifies state investment.

The discussion of an ownership rationale is a large step in Costa Rica where the role of the state in the economy and SOEs has largely been an unquestioned article of faith. It could be hoped that a reflection on the rationale for state ownership would encourage a closer examination of whether the state’s policy objectives are being achieved and if the SOE structure is the best method for achieving such objectives.

Another major theme regards the financial performance of SOEs, objective setting and performance monitoring. The ownership Protocol now introduces the need to ensure the financial sustainability of SOEs. This is of crucial importance in Costa Rica because, historically, the indicators tracked by the state focused almost exclusively on the attainment of social goals; some indicators looked at budgetary impacts and expenditures but none monitored the financial health of SOEs from a shareholder perspective.4

What is meant by “shareholder perspective” in this case is an assessment of the SOE’s financial health, sustainability and financial performance, which would typically include an analysis of turnover and profitability indicators (sales and operating margins), financial efficiency indicators (such as return on assets), leverage and solvency (such as debt-equity ratios and free cash flow); and other non-financial efficiency indicators (such as labour efficiency e.g. revenues per employee). A shareholder perspective in this sense provides information to the state and, in particular, the Ministry of Finance, that is essential for understanding the economic sustainability of SOEs, their impact on the macro-economy and possible financial and fiscal risks associated with SOEs.

Additionally, the ownership Protocol sets out the broad outlines of objective setting and a performance monitoring system that has the capacity to analyse and report on the efficiency and financial health of SOEs. The ownership Protocol indicates that performance targets will be set via a “note of expectations” sent from the Administration to SOEs, which will establish goals and Key Performance Indicators (KPIs). In turn, the board of the SOE is to be given the opportunity to provide feedback on the performance targets and may make their own proposals before the final note of expectations is agreed.

Overall, the implementation of this new system for setting performance objectives corresponds with practice in other OECD countries and should allow for far better monitoring of SOEs. While the process described in the ownership Protocol has yet to be implemented, the Presidential Advisory Unit had already begun to monitor both the financial and social performance of SOEs as part of the preparation of the government’s first aggregate report on SOEs, published in October 2019.

Guideline I.D recommends that the state define the rationales for owning individual SOEs and subject these to recurrent review. Guideline I.D also recommends that any public policy objectives assigned to an individual SOE or group of SOEs be clearly mandated and disclosed.

A description of the rationale for state ownership is described above. Prior to the passage of Costa Rica’s ownership policy, various pieces of legislation described the purpose of state ownership. Previously, the discussion of rationale was limited to general statements in the Political Constitution on SOEs serving the public interest and detailed statements in the founding documents of SOEs that set down specific objectives such as, for example, providing broad access to electricity, telephony or sanitation services. Neither set down the specific criteria that could help determine how to decide whether an SOE should remain under state ownership or not. This can now be found in Costa Rica’s new ownership policy.

The main tool for establishing policy objectives for SOEs, besides their founding laws, has traditionally been the NDP (which was supplanted by the NDPIP). The NDP contained national, sectoral and individual SOE strategies and focused on social performance goals. This approach to objective-setting will be supplemented by a new objective setting and performance monitoring system, as described in Costa Rica’s new ownership policy, which should permit a greater focus on the sustainability of SOEs and include financial and non-financial performance measures.

Guideline II.A recommends that governments simplify and standardise the legal forms under which SOEs operate and that SOEs’ operational practices follow commonly accepted corporate norms.

Practice with respect to standard legal forms does not correspond to the SOE Guidelines, which recommend that, as far as possible, governments should base the legal form of SOEs on private law and avoid creating a specific legal form when this is not absolutely necessary for the achievement of the enterprise’s objectives. This OECD recommendation reflects the belief that the adoption of commercial structures (e.g. corporatisation) increases transparency and that making state commercial activities comparable with those of the private sector facilitates their control and levels the playing field for competitors in deregulated and competitive markets.

Costa Rica’s legislative framework, on the other hand, results in a highly heterogeneous treatment of SOEs. While there is some commonality in rules, the individual laws that establish most SOEs come with distinct rights, obligations and governance practices. One area in which the differences are particularly visible is with respect to the nominations of board members, which make it difficult for the state to apply nominations policies uniformly across all SOEs.

For example, in the case of ICE, improving board composition was made difficult because of its founding law. ICE’s founding law requires that three of seven board members be engineers, with expertise in electricity or telecommunications, one board member must have a degree in economics, one in computer sciences, and another in law with a specialisation in public law. The Chair must also have a specialisation in one of these fields. In addition, each must be a member of their corresponding professional associations. Such a narrow legal requirement significantly reduces ICE’s flexibility in developing a board composition that responds to its own needs. It skews boards overly towards engineers, and makes it more difficult to find board members with other important skills such as business, finance, accounting and control, innovation, corporate turnaround and restructuring, governance, etc.

The conclusion that can be drawn from Costa Rica’s experience is that statutory legal forms unnecessarily restrict SOEs. Should the standard legal form of a limited liability company have been used, decisions regarding board composition would have been left up to the owners and the board. A simpler legal structure would also be useful to avoid; 1) contradictions in Costa Rica’s many laws that impact SOE governance; and 2) the need to modify multiple laws in order to implement policy consistently.

As consciousness of good governance increased in Costa Rica over the course of the accession review process, the problems with past legal traditions and the use of different legal forms for SOEs became more apparent. At the time of writing, the set of laws that provides the framework for the governance and operation of SOEs remains complex. Some SOEs continue to enjoy exclusive rights to operate in certain markets under more or less competition, have different social obligations, are required to have different board compositions, may or may not combine the roles of the Chair and CEO, enjoy exemptions from procurement rules, and enjoy certain fiscal exemptions and advantages amongst others. Reforms to standardise legal forms and streamline this complex set of laws should remain an objective for Costa Rica in the longer term.

Guideline II.B recommends that governments allow SOEs full operational autonomy to achieve their defined objectives and to refrain from intervening in SOE management. The annotations clarify that governments may still act as active owners, but that direction given by the state to the SOE or its board should be limited to strategic issues and public policy objectives.

Costa Rican SOEs have some autonomy. However, that autonomy is mainly permitted with respect to achieving social goals. Furthermore, public finance controls and anti-corruption rules restrict certain actions of SOEs. In the end, though legally autonomous, extant rules allow SOEs and SOE boards little room for manoeuvre. This does not mean that there is any direct interference by the state in the decision-making processes of the SOE. No significant direct interference was reported during the accession review process. Nevertheless, press reports do seem to suggest that the possibility exists and that, in the absence of a legal instrument that sets down the decision-making rights of government versus boards versus management, there is the potential for overstepping limits.5

A positive side to Costa Rica’s tight framework of rules is that the rule of law prevents the government from changing the duties or objectives assigned to SOEs in an unpredictable fashion. The actions of SOEs must follow the NDP within its legally established responsibilities. So, while SOEs have some autonomy, at the same time, they are circumscribed in their actions outside of the framework of what is permitted by official plans and law. The concern with respect to Costa Rican SOEs may, thus, be the effect on innovation rather than direct government interference.

Guideline II.D recommends that the exercise of state ownership rights should be clearly identified within the state administration and that the exercise of such rights should be centralised in a single ownership entity or carried out by a co-ordinating body. This “ownership entity”, the Guideline further recommends, should have the capacity and the competencies to effectively carry out its duties.

At the beginning of the accession process, Costa Rica did not have a centralised institution to fulfil the functions of an ownership entity as defined under the SOE Guidelines. Rather, it had a decentralised system of ownership supervision and control. Several governmental entities collected information and implemented legal requirements and policies across all governmental institutions. The most important institution centrally responsible for exercising SOE ownership rights is the Council of Ministers. Its main power over SOEs was the appointment of board members to autonomous institutions, and the removal, by a qualified majority of two-thirds of the votes, of board members of autonomous entities.

By October 2017, a decree was passed to establish an ownership entity (the Presidential Advisory Unit). The decree was entitled Creation of the Presidential Advisory Unit for Management and Co-ordination of State Shareholdings and the Management of Autonomous Institutions (Creación de la Unidad Asesora para la Dirección y Coordinación de la Propiedad Accionaria del Estado y la Gestión de las Instituciones Autónomas). The decree makes specific reference to the need to establish an ownership entity in order to comply with the needs of the OECD accession process.

The decree also makes direct reference to the responsibilities of an ownership entity as defined in the SOE Guidelines. The responsibilities of the Presidential Advisory Unit under the decree include: 1) develop an ownership policy; 2) develop systems to inform the Council of Ministers on the performance of institutions and to support decision making; 3) analyse audits and studies on institutions; 4) advise the Council of Ministers on how to fulfil their role as a shareholder; 5) advise on the nominations of board members; 6) advise on setting objectives; 7) co-ordinate disclosure policy; 8) recommend remuneration practices; 9) inform on good governance practices; and 10) design and promote training, amongst others.

According to the decree, the Presidential Advisory Unit has responsibility not only for state-owned enterprises but also other government bodies. These other bodies include the Central Bank and ARESEP the general tariff regulator in Costa Rica and other institutions dedicated to development objectives such as the Institute for Rural Development (Instituto de Desarrollo Rural).

There could be important implications for the decision to put the oversight responsibilities for SOEs and government agencies in the same institution. Costa Rican authorities suggest that combining oversight of SOEs and other state bodies is necessary because the Council of Ministers is responsible for both. In addition, it is argued that it is sometimes difficult to define with precision what constitutes an SOE in Costa Rica (as is the case with Banco Popular, which is owned by workers but has strong state influence through its board and is subject to public sector rules in its management).

On the other hand, there is also a potential risk that the Presidential Advisory Unit might become unfocused and that its resources become stretched. Furthermore, the skills required for the oversight of government bodies are not the same as for the oversight of SOEs for whom shareholder-style oversight (i.e. a greater focus on efficiency and returns, and good management and governance) is a goal. To address this concern in the short term, the decree states that the Presidential Advisory Unit should focus solely on SOEs during its first two years of existence and that, at the end of this period, it will evaluate its resource requirements before broadening its scope to encompass autonomous institutions.

When originally established, the Presidential Advisory Unit answered to the Presidency of the Republic (although all board appointments—with one exception, were to be approved by the Council of Ministers). At the time of writing, the ownership policy indicated that the Presidential Advisory Unit would continue to answer to the Presidency and Council of Ministers but would also come under the oversight of a steering committee composed of the Ministry of the Presidency, MIDEPLAN and the Ministry of Finance. The involvement of MIDEPLAN (which has traditionally focused on the achievement of social policy goals) and the Ministry of Finance (which could be expected to demand greater accountability for business and financial performance) could contribute to achieving a balance of economic and social objectives.

The Presidential Advisory Unit became operational in early summer 2018 and with its establishment being formally announced in January 2019.

The new ownership entity should have sufficient skills and capacity for information gathering and analysis, policy development and the capacity to provide both the Council of Ministers and SOEs with guidance on the governance of Costa Rica’s SOEs. As of late 2019, the Secretary of the Council of Ministers served in a dual capacity as the head of the Presidential Advisory Unit. The unit is supported by three additional civil servants in technical support roles with backgrounds in public administration and financial analysis and plans to add two more.

In its short existence, staff have demonstrated a good grasp of technical aspects of SOE governance, which they have demonstrated through: 1) the drafting of an ownership policy; development of an aggregate report on SOEs; 3) the development of a web-based system for selecting board members and creating a candidate pool; 4) the implementation of a new board member selection system; 5) overseeing the development of a corporate governance training programme for board members; and 6) feedback on draft laws related to the governance of SOEs.

On the other hand, the Presidential Advisory Unit has not yet had the time or opportunity to develop the authority to drive some important governance reforms. These would include establishing performance indicators for SOEs, developing a common remuneration policy for SOE board members and executives, and forcefully pushing the implementation of IFRS amongst other things. This is understandable given the newness of the unit, the number of reforms required, and its lean staffing. It is anticipated that, in future, the Presidential Advisory Unit will emerge as a proactive resource in the development of SOE policy in line with best practice.

The founding decree does not specify sources or levels of funding but suggests that financial, human and technical resources may be provided by both the public and private sectors and that the unit may benefit from the support of other government institutions such as MIDEPLAN.

Guideline II.F.2 recommends that the state, in exercising its rights as an informed and active owner, should establish well-structured, merit-based and transparent board nomination processes in full—or majority-owned SOEs and should actively participate in the nomination of all SOE boards and contribute to board diversity.

The initial examination of the nominations process for SOE board members that took place in 2016 showed that Costa Rica’s nominations process was structured but not formalised in writing beyond basic parameters set down in law. The basic process was:

  • The Presidency gathered CVs received in response to a public request for expression of interest;

  • The list was supplemented by individuals recommended by ministries;

  • CVs were screened to identify a smaller group of qualified candidates;

  • Candidates were assessed for their competence and integrity and to ensure that they complied with the specifications in the constituting law of the SOE;

  • Sworn statements were collected from individuals to ensure candidates’ probity; and

  • Potential nominees could be discussed with the chairs of SOE boards.

Unlike the SOE Guidelines, which aim to de-politicise boards, individuals with political backgrounds were considered as part of the recruitment process. Costa Rica’s process ultimately yielded individuals who the Presidency could trust and who were politically acceptable to a variety of stakeholder constituencies. Neither the process nor the identity of potential candidates were disclosed to the public.

One of the key recommendations that emanated from the accession review was to formalise the board nominations process and to focus on merit and getting board members with more business experience. It was also recommended that the nominations process become more transparent to the public. In response, a draft decree was developed in 2017 that aimed to bring board member nominations processes in line with the SOE Guidelines. The decree was entitled the Regulation for the Selection and Evaluation of Board Members of SOEs and Autonomous Institutions (Reglamento para la Selección y Valoración de Candidatos para Cargos del Órgano de Dirección de Empresas Propiedad del Estado e Instituciones Autónomas).

The Selection and Evaluation decree was ultimately issued in August 2019 and formalises the nominations process by establishing criteria for candidate selection and the stages and outcomes of the process. In addition, the decree that establishes Costa Rica’s Presidential Advisory Unit specifies that it has the responsibility for the assessment of candidates and for making recommendations to the Council of Ministers while the decree on Selection and Evaluation provides details regarding how selection should be done including that it must be based on merit, and that formal and transparent procedures should apply. It also specifies the basic criteria that must be fulfilled by candidates, calls for the creation of a database of candidates and requires the development of an online tool where persons may express their interest in SOE board positions. The decree does not alter the power of SOEs to nominate board members to their own subsidiaries, but requires subsidiary SOEs to produce formal nominations procedures in line with the precepts of the decree.

The website, developed by the Presidential Advisory Unit, has been functioning since June 2019 and collecting a variety of information to better inform the decision-making process of the Council of Ministers. Thirteen board members were selected under the new process in 2019 with nine more scheduled for 2020.

Costa Rica has a system of staggered terms for board members that is designed to prevent a wholesale change in board composition as a result of changes in political administrations. Law No. 5507, adopted in 1974, establishes a system that ensures continuity under what is commonly referred to as the “4-3 rule”.6 The system allows incoming administrations to nominate four of seven board members while three of the previously nominated board members are allowed to stay on. Overlapping terms amongst board members and executives also encourage continuity. Board members generally have terms of eight years, the Chair (Presidente) four years and the General Manager six years. The system also results in a balance of political views and is generally viewed positively despite occasions when strong differences arise at board level from opposing political factions.

Nevertheless, the eight-year terms for most board members and the timing of the expiration of terms have certain disadvantages. One is rigidity in board composition, which makes it difficult to replace board members who are not performing well or to shape the board to address gaps in skills and experience. Another is that the law requires that new board members be appointed immediately after an administration comes to power, making the process rushed and possibly working to the detriment of finding the best available board talent.

A change in law would be useful in order to avoid situations where a new administration is forced to nominate a large number of board members all in one go within a short period of weeks. A new law should contemplate allowing existing board members to stay on until a proper process can be completed. A slight delay in changing board members could make the board transition more fluid, reduce pressures at the beginning of a new administration, and provide the time to find the talent that is best suited to the SOE.

The government’s new ownership policy, described above, calls for future action to develop “legal reforms to allow a staggering of the appointments of the members of the boards of directors. This is in the aim of ensuring that there is an adequate transition to preserve the knowledge acquired by the members of the board as a complement to new members, as well as a reasonable period of time to implement the selection mechanism for new members of the Board of Directors.”

Guidelines II.F.7 calls for establishing a clear remuneration policy for SOE boards that fosters the long- and medium-term interest of the enterprise and can attract and motivate qualified professionals.

The relevance of board member fees is multi-fold. First, if fees are too low, it becomes difficult to attract competent candidates to board posts. While high fees are not generally acknowledged to motivate better performance, excessively low fees have been shown to reduce the level of satisfaction and commitment that individuals feel in the workplace.7 On the other hand, excessively high fees raise costs and may imperil board member independence. Ideally, fee levels should be sufficient to attract and motivate board members while being competitive with other SOEs and institutions of similar importance in the private sector. Increasingly, best practice recommends that board members have at least part of their compensation paid in the form of a fixed honorarium thus reducing the incentive to conduct overly-frequent meetings.

In Costa Rica, board members of autonomous or semi-autonomous institutions are remunerated through meeting fees as reflected in the Law on Allowances for Directors of Autonomous Institutions of 1962, which provides that fees are adjusted to inflation. Executive Chairs are paid under a separate regime and receive a fixed salary. Other laws, such as the Organic Law of the National Banking System, or laws specific to individual statutory SOEs establish meeting fees for SOE board members. Fee maximums are also regulated under the Special Budget Law of 1989, which originally set them at approximately USD 5 per meeting. The Special Budget Law was modified by the Strengthening of Public Finances law, which sets a monthly limit of 10 base salaries (approximately USD 4 800 per month).

In practice, fees range widely between SOEs, as shown in a recent inventory in Table 3.1 below. In a separate study, the Comptroller General reported that SOE board member allowances for 2018 ranged between approximately USD 80 and USD 1 000, with an average payment per meeting of approximately USD 270. Total monthly remuneration averaged approximately USD 900 with a maximum reported at USD 3 800 in a single month. A number of observations can be made from the limited available data:

  • The remuneration of board members is far from uniform.

  • There may be incentives for board members to increase the number of board meetings because they stand to increase their earnings significantly.

  • Board members are able to augment their fees even further by holding board positions on SOE subsidiaries and by organising extraordinary board meetings.

  • There is no public disclosure of board member fees thus limiting transparency and public accountability for remuneration practices.

The ownership Protocol describes the challenges of remuneration in broad terms and describes the goal of building compensation schemes that are formal, objective, fair and able to attract and maintain talent. Current law is both specific and restrictive, which suggest that achieving the objectives of the ownership policy and changing laws will be a challenge. At the time of writing, a broader research study was being conducted on remuneration practices in the public sector in co-operation with the IDB and MIDEPLAN. That study has the objective of establishing new fee scales for SOE boards based on data from the public and private sectors. The study is expected to be completed by July 2020.

Guideline III.A calls for a clear separation between the state’s ownership function and other state functions that may influence the conditions for state-owned enterprises, particularly with regard to market regulation. The review seeks to establish whether SOEs are used as vehicles for industrial, regional and/or sectoral policies, and if the responsibility for industrial/sectoral policies are separated from the state’s ownership function.

The laws establishing SOEs in Costa Rica, in addition to sectoral regulation, provide SOEs with the explicit objective of helping achieve the fulfilment of public goods. All the systems for planning (NDP and, more recently, the NDPIP), monitoring (MIDEPLAN) and control (Comptroller General and Ministry of Finance) coincide in aiming at achieving policy goals, ensuring the proper control of activities, ensuring their efficiency, and monitoring policy outcomes.

The SOE ownership function (viewed as the actions that a shareholder might take to ensure that the enterprise is profitable and remains sustainable in a commercial environment) is not represented within state oversight structures (despite the fact that both the Comptroller General and the Ministry of Finance perform financial control functions). Ownership is, in practice, strongly decentralised and, until the recent establishment of the Presidential Advisory Unit, no individual central institution had taken a shareholder perspective on SOEs.

The confluence of policy and ownership objectives in Costa Rica is reflected in a number of ways. For one, both are present in the founding legislation of SOEs where greater prominence is given to an SOE’s policy objectives. In addition, policy and execution were linked in the NDP process. Other indicators that policy and ownership functions are closely intertwined are: 1) the presence of ministers and former legislators on SOE boards; b) board compositions that have frequently included appointees with political backgrounds; 3) SOEs providing staffing and other resources to ministries (See RECOPE in Table 3.2 immediately above); and 4) the combination of the roles Chair and CEO in Law 5507 companies, which permits politically appointed chairs more direct control of the operations of the SOE. Furthermore, SOE boards have, in the past, been significantly politicised. At the SOE level, extensive interviews with SOE boards and executives suggests that there is no clear separation between commercial and policy objectives within SOEs.

On the other hand, Costa Rica does have a number of institutional arrangements to support independent regulatory oversight of certain SOEs. The separation of regulation and policy is somewhat clearer, for example, in the banking sector (independent oversight of the financial sector is handled by CONASSIF and the Central Bank), and with respect to tariff-setting in certain monopoly sectors (ARESEP and SUTEL).

With respect to market regulation, the main interaction between the state and non-financial SOEs is through tariff setting. Tariff setting is principally under ARESEP. ARESEP had its origins in the National Electricity Service (Servicio Nacional de Electricidad), which was established in 1928. Today, ARESEP is an autonomous regulator that enjoys broad freedom in defining tariffs and the methodologies for setting them.

The ARESEP board is appointed by the Council of Ministers and ratified by the Legislative Assembly. The board is composed of a Regulator General and three additional experts in regulation. The ARESEP board’s principal task is to define the policies and the methodologies for tariff setting. In addition, they have some responsibility for monitoring and ensuring that public policy objectives related to access to and quality of services are achieved. Methodologies are intended to be consistent with Costa Rica’s overall social development strategy, which aims to provide fair access to public services and achieve sustainability objectives. Methodologies are subject to public discussion before being approved by the board. Despite legal and institutional safeguards that reinforce ARESEP’s independence, press coverage in 2016 regarding the appointment of a new Regulator General raised some questions in this regard.

ARESEP reports being guided by the principles of economic efficiency, social equality, environmental sustainability and resource conservation in the price-setting process, and the sectoral goals set in the NDP. ARESEP aims to set tariffs in a manner that allows for full cost recovery by establishing rates of return built around recognised costs. This is intended to allow SOEs to retain earnings in order to ensure proper maintenance and reinvestment.

Costa Rica avoids some common pitfalls of other countries where tariff-setting comes under political pressure to keep consumer prices low and where there is a tendency to compensate SOEs to the least extent possible for the services they provide in order to minimise their impact on state budgets. Such pressures often generate severe budget constraints for SOEs and may eventually cause systemic arrears problems. This is not the case in Costa Rica. Most SOEs report tariffs that are satisfactory from their perspective. To cite one example, AyA reported that it was able to both cover costs and retain a cushion for future investment.

On the other hand, the risk that such tariff-setting may lead to excessive prices for consumers must also be recognised. Although it was beyond the scope of this review to assess the reasonableness of current tariffs for SOE services in Costa Rica, other OECD reviews have raised concerns about pricing levels in regulated sectors such as energy, transport and water where SOEs are predominant. The OECD Economic Survey of Costa Rica of 2016 suggests that between 2006 and 2014, the tariffs of regulated services rose more than any other business cost. The survey pointed specifically to electricity tariffs that are higher in Costa Rica than in most OECD countries. The survey concluded that while price regulation ensures that tariffs are set at recovery levels, there is little incentive for productivity improvement since cost increases can easily be passed on to consumers.8

SUTEL is the regulator of the telecommunications sector while ARESEP and the National Telecommunications Fund (Fondo Nacional de Telecomunicaciones—FONATEL) have the mission of ensuring that telecommunications services are provided to those parts of the population with limited resources. SUTEL was established as a fully independent regulator as a result of the 2004 free trade agreement with the United States. SUTEL has the double role of regulator and competition agency for the telecommunications sector, which may risk the confusion of regulatory and competition considerations.9 It is a decentralised agency with its own budget partly funded with charges on companies.10

SUTEL is widely perceived to be independent. SUTEL is hierarchically dependent on ARESEP but with legal and budgetary independence, as well as technical and administrative autonomy. It is not subject to the Executive branch’s legal framework. Its board is appointed through a public tender organised by the ARESEP board and must be ratified by the Legislative Assembly. SUTEL is financed through taxes and fees directly apportioned to it and paid by telecommunications operators and service providers. Lastly, SUTEL has a legal personality, and is able to defend its own cases in court without having to resort to or rely on the Attorney General’s Office.11 History suggests that SUTEL is able to act with genuine independence.

Ensuring a level playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions

The Concept Paper calls for consideration of effective redress against SOEs (Guideline III.B); the disclosure of SOE public policy objectives and their costs (Guidelines III.C and III.D); the equal application of law to SOEs and other market competitors (Guideline III.E); access to debt and equity financing under market consistent conditions (Guideline III.F); and competitive and fair public procurement (Guideline III.G). (Guideline III.A is addressed above under: Separation of functions.) The assessment of conformity with the SOE Guidelines is preceded by a background discussion of the level playing field in a number of key sectors. The Accession Review of Costa Rica by the OECD Competition Committee of the OECD should be considered in conjunction with the assessment against the SOE Guidelines.

In Costa Rica, the playing field is more or less level depending upon the sector. The main sectors where SOEs compete with private sector companies are banking, insurance, and telecommunications. Whether the playing field tilts in favour or against SOEs is not always clear. In some cases, conditions favour SOEs. In other cases, conditions work to their detriment, particularly as regards their capacity to innovate. In terms of market conditions, some of the main differences are:

Favouring SOEs:

  • The state provides a guarantee to SOE banks and INS the state-owned insurance enterprise. Regarding SOE banks, this guarantee covers passive banking operations and its quantitative limit is set by the solvency of the state itself.

  • Sovereign guaranties, e.g. the agreement of Costa Rica to guarantee USD 500 million in lending by the Inter-American Development Bank to ICE in 2018, and a past guarantee provided to the government of Spain for lending to RECOPE.

  • SOEs have comparatively easier access to lending from IFIs and DFIs.

  • There is an implicit guarantee of SOEs by the state as reflected in the reports of ratings agencies.

  • State procurement and SOE procurement practices may favour SOEs.

Hindering SOEs:

  • Some employees of SOEs have civil servant status, and operate under civil service rules and pay structures.

  • Difficulty in rationalising human resources.

  • Procurement practices of SOEs are set by the state and can be cumbersome.

  • The obligation to provide public services in certain cases.

  • Restrictions on SOEs’ ability to innovate and compete freely.

There are three types of banks in Costa Rica: 1) private; 2) state-owned; and 3) co-operatives. All compete in the same market and are subject to the same banking regulations though there are significant asymmetries with respect to policy, laws and regulation. The system is based on a multitude of different conditions, and is generally assessed as being both overly complex and non-competitive.12

The lending policies of SOE banks are clearly directed towards providing easier access to capital with the purpose of promoting social goals or to assist certain sectors (such as agriculture), or promoting certain functions (such as education). State-owned banks benefit from an unlimited guarantee from the state. The Organic Law of the Bank National System establishes that “the banks of the state will possess the guarantee and the most complete co-operation of the state and of all its dependences and institutions”. The full value of such guarantees has not been quantified though, in principle, the limit of the state guarantee would be set by the solvency of the state itself.

A draft study by the Central Bank from July 2018 entitled Regulatory Asymmetries in the Costa Rican Banking Market, attempted to quantify various asymmetries between SOE and private banks. Although the study notes that it excluded a number of asymmetries due to the difficulty of quantifying them, it concludes based on a partial review that such asymmetries are significant, while also suggesting that the net costs of regulatory asymmetries are of a similar magnitude for private and SOE banks.

Regardless of the net effect, the different treatment of private and public banks results in distortions to competition and is a source of inefficiency that is imposed on the economy. In Costa Rica, private banks operate mostly on deposits and credits in US dollars, while SOE banks tend to operate in Costa Rican colones. As a consequence, private banks tend to do more business with multinational enterprises that function on the basis of deposits and credits in US dollars. Furthermore, SOE banks tend to lend to clients in regions that are the targets of government policy and do so at lower prices than the private sector. Banks may thus have little incentive to compete when their market shares are stable and effectively assured.

Regarding the impact on efficiency, reports comparing the efficiency levels of SOE versus private banks are equivocal with some suggesting that there are significant differences and others suggesting that these differences are nominal, especially after the introduction of competition into the banking sector in the early 1990s. Yet, most parties agree that the Costa Rican banking sector, as a whole, is less efficient when compared internationally, and that the dominance of SOE banks within the banking sector appears to be dampening competition overall.13 In order to increase SOE bank efficiency, the government issued a directive in November 2015 instructing SOE banks to cut their administrative expenses, so as to reduce their intermediation margin by at least one percentage point by 2018 (La Gaceta, 2015).

While the relative costs and efficiency of private versus public sector banks may be somewhat comparable, the essential point is that the different treatment of private and SOE banks distorts competition and is a source of inefficiency that is translated to the economy. With respect to the future, addressing the various asymmetries to enhance competitive neutrality remain important goals. A significant step towards levelling the playing field was taken through the enactment in February 2020 of a bill to create a deposit insurance and bank resolution scheme applying to both SOE banks and private banks.14

In the insurance field the National Insurance Institute (Grupo Instituto Nacional de Seguros—INS) conducts insurance and securities activities in addition to operating a hospital and the Costa Rican Firefighters. INS had a monopoly on insurance services from 1924 until 2008. Despite the opening of the insurance market in 2008, the level of competition has not increased dramatically, with INS retaining 82% of the insurance market in 2018. INS is subject to regulatory oversight by SUGESE the Insurance Supervisor. In addition, it must comply with reporting requirements of the Legislative Assembly, the Attorney General (Procuraduría General de la República), the Presidency and the Comptroller General.

While the overall legal and regulatory framework under CONASSIF applies to INS and private sector insurers in the same way, INS also operates under some different rules. Operating in favour of INS is the Law on the National Insurance Institute (Ley Del Instituto Nacional de Seguros), which grants INS the same state guarantees extended to SOE banks. Another advantage is that SOEs must buy insurance from INS, although a reform introduced by Law 8653, conditioned this upon INS offering the most favourable terms.

On the negative side, procurement rules are cited as being inflexible and sometimes against the interests of the company. Furthermore, insurance must be provided at cost; there is no profit built into the calculation of insurance prices. In addition, the pay-out on insurance policies may be influenced by public policy concerns e.g. it may be considered in the public interest for an insurance pay-out to be made. Finally, INS also reports that bureaucratic constraints make it difficult for the company to adapt to the requirements of a modern and competitive insurance market.

Costa Rica’s 98.6% electrification rate is the highest in Central America. Its per capita power consumption of 1 611 kWh/year, is ahead of the Latin American average.16 Power system operations are largely the responsibility of ICE, CNFL, and some small municipal utilities. A handful of rural co-operatives generate, distribute and market electricity in rural areas not covered by ICE or CNFL. ICE generates the bulk of electricity supply (around 80%), provides all transmission services in the country, and is responsible for just over a third of electricity distribution.

CNFL, whose main corporate purpose is to distribute and market electricity in the capital, San José, accounts for around 5% of electricity generation and distributes more than 40% of electricity generated in the country. Two municipal companies and four co-operatives cover the rest of power distribution in Costa Rica. These companies also produce a further 3% of electricity.

Private companies, including small hydroelectric projects, sugarcane refineries and wind plants, produce the remaining electricity in Costa Rica. All of the electricity they produce must be sold to ICE, which then transmits it to distributors. Changes introduced by Laws 7200 of 1990, and 7508 of 1995, permit limited private sector participation in electricity generation (30% of the market). At present, the only competition in generation is through ICE contract tendering. ICE and all other companies participating in the distribution market, moreover, provide their services under monopolistic conditions, since all have exclusive market allocation areas.

Another area subject to state concession, and hence outside the scope of competition law, concerns the import, refining and distribution of wholesale petroleum and its derivatives, including fuels, asphalt and gasoline. In these markets, RECOPE has had a legal monopoly since 1993. ARESEP is in charge of setting prices for all hydrocarbons that RECOPE commercialises, as well as safeguarding compliance with other service conditions.

The production and manufacture of alcoholic beverages commercialised in Costa Rica is also a legal monopoly and, therefore, exempt from competition law. This monopoly was created by a law issued in 1885 that aimed at fostering the sugarcane industry and protecting society from health problems derived from alcohol. Under the law, private companies can only manufacture spirits through a state concession provided by the National Liquor Factory (FANAL) and with raw material provided exclusively by the latter. In addition to being the sole manufacturer of raw materials for spirits and derived products in Costa Rica, FANAL also commercialises the finished product. Notwithstanding the above, commercialisation of liquor is open to competition, and COPROCOM (Costa Rica’s Competition regulator) may intervene in case of competition law infringements as, in fact, it has done in the past.

Guideline III.B recommends that SOEs’ stakeholders and other interested parties, including creditors and competitors, should have access to efficient redress through unbiased legal or arbitration processes when they consider that their rights have been violated.

A variety of laws protect stakeholder rights. The right to redress is embedded in Articles 41 and 43 of the Political Constitution, which guarantees expeditious, effective redress for offenses or damage received personally, to property or to moral interests. The Law on the Promotion of Competition and Effective Defence of Consumers provides that any economic agent who feels affected by a conduct that implies unfair competition may resort to court action to assert their rights. The Law on Alternative Dispute Resolution and Promotion of Social Justice, provides that individuals have the right to mediation, conciliation, arbitration and other techniques to settle property-related differences. It is difficult to assess the extent to which effective redress can be achieved when sought against public sector entities. However, there is nothing to suggest that public institutions are in any way above the law. The case of the Comptroller General seeking to assert rights to information against ICE can be cited as an example.

Guidelines III.C and III.D recommend that state ownership entities and SOEs be transparent and disclose costs and revenue structures in cases where SOEs combine economic activities and public policy objectives. In the case of the latter, costs should be clearly identified, disclosed and adequately compensated by the state on the basis of specific legal provisions and/or through contractual mechanisms. The purpose of the recommendation is to help the state and SOEs to better understand the costs and benefits of such services. Such information is considered essential for SOEs to understand whether they are being fairly compensated for their policy commitments and what parts of their activities consume the most resources.

The financial statements of Costa Rican SOEs do not generally break out the portion of revenues and costs that are associated with the provision of public services. Such a breakdown is not required by either national or international financial reporting standards. Consequently, it is difficult to: 1) calculate the return on investment of policy commitments; 2) calculate the efficiency of expenditures; or 3) make decisions on where greater investment in public services might be required or where expenditures should be reduced.

Feedback from both RECOPE and ICE Group suggests that the costs of policy commitments are not being fully compensated by ARESEP, the independent tariff setting authority, and that the capacity to demonstrate the real costs of public services would be of enormous benefit. Despite the challenges that it presents, the introduction of better systems for tracking the benefits and costs of policy commitments would likely have a significant impact on SOE management and governance.

For the moment, no concrete plans exist, though the government’s ownership policy pledges that “The state will also seek to establish in a clear and transparent manner the prioritisation between its business objectives and its public policy objectives, so as to quantify in economic terms the investment that the institution makes in order to fulfil these public policy objectives and the source of their financing (cross-subsidies, tax breaks, direct transfers from the state). This gives the state a global picture of the resources invested to meet its social goals and make informed decisions to focus those resources on social investment with greater return to the population.”

Guideline III.E recommends SOEs undertaking economic activities should not be exempt from the application of general laws, tax codes and regulations, that laws and regulations should not unduly discriminate between SOEs and their market competitors, and that SOEs’ legal form should allow creditors to press their claims to initiate insolvency procedures.

Overall, SOEs are not formally exempt from the application of general law, tax codes or regulations. However, the legal regimes under which SOEs operate remain significantly different from those of private companies. This is due, in part, to the constitution of many SOEs under their own legislation, which often carves out special rights and obligations. Furthermore, the status of employees of some SOEs as civil servants means that personnel issues are subject to the rules that apply to the civil service. Rather than creating an advantage, this makes the resolution of labour issues more cumbersome than in the private sector.

Table 3.3 above. For telecommunications, traditional fixed line telephone service is exonerated from the payment of tax. In other cases, SOEs may have different tax treatments defined in law, such as in the case of the Junta de Protección Social, which has an obligatory income tax of 10%. INS is required to pay the costs of Costa Rica’s firefighters, which is a form of taxation. On the other hand, some SOEs have the right to collect taxes. Before its dissolution, the SOE bank Bancrédito benefited from a monopoly right to collect airport tourist taxes. Overall, the numerous laws that regulate SOEs make for a highly heterogeneous tax treatment.

For information on the general insolvency regime, see Principle IV.F below. With respect to SOEs, there is no case experience in Costa Rica with SOEs that were formally declared insolvent. However, contextual information suggests that both Costa Rica’s financial and non-financial SOEs may not be subject to insolvency claims on an equal basis with the private sector. As reported earlier in this review, SOE banks enjoy an explicit guarantee by the state. This reflects an international reality for Systemically Important Financial Institutions (SIFIs) even if the guarantee is often just implicit.

During the Bancrédito crisis of 2017, Costa Rica stepped in to prevent Bancrédito’s failure not because it was systemic but because of the potential social, employment and reputational impact. An attempt was made to refloat the bank and, when this proved difficult, proposals were made to repurpose the bank into a development finance institution rather than allowing insolvency to take its course. Bancrédito creditors suffered no losses as a result of its failure partly due to the rapid intervention of the state.

Costa Rica’s non-financial SOEs also appear to enjoy either an explicit or an implicit backing by the state. In principle, statutory SOEs cannot cease to function without the intervention of the Legislative Assembly and the abrogation or alteration of their constituting laws. Their legal status would, thus, appear to preclude the application of insolvency law.

This being said, there is evidence that state backing may not always be forthcoming. The 2012 bond offering of RECOPE explicitly warns investors that they stand to lose their investment in the case of an insolvency though such warnings are not evidence of what might occur in practice. On the other hand, Costa Rica’s recent co-operation agreement with the IDB on behalf of ICE explicitly protects creditors against losses.

In contrast to statutory SOEs, subsidiaries are generally constituted as limited liability companies and can, in principle, be declared insolvent under normal insolvency procedures. While there have not been any cases of insolvency where creditor rights might have been tested, the state has indicated a willingness to provide whatever support is necessary to avoid formal insolvency proceedings. This reticence to go the insolvency route was illustrated by the situation of RACSA, a subsidiary of ICE Group, in 2016. RACSA was suspected of being vulnerable to insolvency. However, information on the SOE’s financial health was closely guarded and never fully divulged to the public. The issue of the application of insolvency laws thus never arose.

Guideline III.F recommends SOEs’ economic activities should face market consistent conditions regarding access to debt and equity finance. In particular, the Guideline recommends: 1) SOEs’ relations with all financial institutions, as well as non-financial SOEs, should be based on purely commercial grounds; 2) SOEs’ economic activities should not benefit from any indirect financial support17 that confers an advantage over private competitors; and 3) SOEs’ economic activities should be required to earn rates of return that are, taking into account their operational conditions, consistent with those obtained by competing private enterprises.

SOE relations with financial and non-financial institutions vary significantly and do not always occur on fully commercial grounds. In some cases, the government has guaranteed SOE borrowing. The case of guarantees provided to RECOPE was highlighted above, and ICE has also received sovereign guarantees for borrowing from multilateral banks. State-owned banks report that they are at times encouraged to provide credit to institutions fulfilling public policy objectives, even if they have the capacity to reject such lending. Anecdotal feedback suggests that insurance pay-outs from INS to policy holders fulfilling public sector objectives are more easily approved than other institutions. Where significant infrastructure investment is required, the state may provide capital as was illustrated in the case of AyA. Both the ICE Group and AyA are excluded from the requirements of the Organic Law of the National Banking System, which limits banks from lending more than 20% of their capital reserves to state-owned enterprises. AyA benefits from this exclusion provided the credit is used to build sewage systems, water treatment plants or potable water supply systems. Also excluded from normal rules are Public Works Construction Trust Funds (Fideicomisos para Construcción de Obra Pública).

There are limited cases of direct subsidies to SOEs. INCOFER, the state railway company (like most railway companies internationally) is unable to fully recover costs from consumers and receives subsidies to maintain services. Other SOEs such as AyA benefit from subsidies. There may also be forms of cross-subsidisation in Costa Rica that are difficult to account for. For example, INCOFER makes up part of its operating shortfall through advertisements placed on rolling stock. However, to date, advertising has been purchased mainly by Banco Popular, which, though not formally an SOE bank, operates under significant influence by the state. Business groups have also insinuated that procurement orders from SOEs are given preferentially to other SOEs rather than private offerors.

There is no general requirement for SOEs to generate any rates of return, nor is there any general policy for dividend payments or how to distribute retained earnings. There are, nevertheless, rules that effect the returns of SOEs. For example, some SOEs must offer services at cost including the cost of capital. This is the case of the ICE Group, AyA (the water company), JAPDEVA (port company), and others where surpluses must be just sufficient to guarantee the sustainability of the service. On the other hand, in other cases, SOEs may generate surpluses, which can be retained and capitalised. Finally, some SOEs are obligated to distribute all or some of their surpluses to associations, institutions or organisations of social interest such as, for example, hospitals, pensions, education, small enterprises, as is the case of the state-owned banks and the Junta de Protección Social.

Essentially two types of SOEs exist with respect to autonomy to decide their capital structures. The first group must submit decisions impacting their capital structure to the Central Bank of Costa Rica, the Department of Planning and Economic Policy, and the Treasury. A second group, operating under a modernised corporate structure, has greater autonomy and flexibility in structuring their capital.

SOEs with newer legal forms enjoy wide margins of autonomy in the determination of their capital structure within the limits of the law. Executives determine the capital structure, bearing in mind the SOE’s policy objectives. Nevertheless, the establishing laws of SOEs have thresholds that must be respected, particularly for debt. For example, ICE Group, is authorised to take on debt up to 45% of total assets. In the case of JAPDEVA, the threshold permits debt of up to 50% of its assets.

The more restricted group (which includes the Postal Services of Costa Rica, JPS, and RECOPE) operate under Article 7 of Law 7010. In addition, Article 80 of Law 8114 on the Direction of Public Credit authorises the Minister of Finance to request an SOE to undergo certain credit operations. SOE banks are exempted from the authorisations of the Budgetary Authority and MIDEPLAN and the Direction of Public Credit. Overall, these laws discourage borrowing and typically encourage SOE’s to use retained earnings for investment projects.

Guideline III.G recommends that, when SOEs engage in public procurement, the procedures applied should be competitive, non-discriminatory and safeguarded by appropriate standards of transparency.

At the beginning of the accession process, cumbersome procurement practices were identified as a cost imposed upon SOEs that made it difficult for them to compete with the private sector. Later in the process, concerns were raised by the private sector that exceptions written into the Public Contracting Law of 1995 to allow public entities greater flexibility to contract with other public entities without a public bidding process were being applied so as to prevent the private sector from competing on a fair footing. Some private sector observers claimed that direct contracting had led, in some cases, to excessive costs to the state and poor service delivery and that procurement practices were a way for SOEs to cross-subsidise each other and protect themselves from competitive pressures. Furthermore, some SOEs such as ICE and INS had their own specific exemptions, making for an uneven treatment not just between the private and public sectors but also between SOEs.

In 2017, the government took steps to qualify the broad wording of the Public Contracting Law, Article 2c, through the passage of the Regulations of the Law on Administrative Procurement. Nevertheless, there is still a widespread perception, particularly amongst the private sector, that the Public Contracting Law needs a deeper overhaul. The government now envisages a full reform of the Public Contracting Law to achieve greater efficiency and competition in all public procurement procedures.

The draft law (No. 21.546) aims at reducing the number of exceptions to ordinary procurement procedures and introduce new requirements for their use. Furthermore, it includes principles from the OECD Recommendation on Government Procurement and considers other recommendations made by the OECD Public Governance Directorate. If passed, all Costa Rican SOE’s would be governed by a new and comprehensive law that is aligned with international standards.

These proposed legislative reforms are being preceded by reforms on the operational level through the introduction of an electronic platform for public procurement called the Integrated System for Public Procurement (SICOP).18 The system is designed to rationalise procedures, reduce the potential for discretionary decision-making and corruption, and help the state take advantage of buying economies of scale. Some 80% of all public institutions already report using SICOP. And, some of the biggest public procurement entities such as ICE, INS and the Social Security Administration have committed to start using SICOP in 2020. The use of SICOP is also expected to enhance transparency and improve the state’s capacity to consolidate and analyse information related to its public procurement practices.

While comprehensive legal reforms are promising, the legislative process is still in its initial stages and it is too early to predict when it might be completed. A second, more narrowly focused legislative proposal has also been submitted to the Legislative Assembly, which focuses narrowly on amending Article 2c of the Public Contracting Law to eliminate the exceptions that have raised concerns. This more targeted reform, if passed, could act as a stopgap while work on more comprehensive procurement reform continues.

Recognising stakeholder rights as established by law or through mutual agreements and the duties, rights and responsibilities of corporate boards of directors

This Roadmap core principle relates mainly to Chapters IV and VI of the G20/OECD Principles and Chapters V and VII of the SOE Guidelines on stakeholders and boards. The Concept Paper recommends focusing on: 1) listed company stakeholder rights (Principles IV.A, B and E); 2) the rights, duties and responsibilities of listed company boards (Principle VI.A); 3) SOE stakeholder rights (Guidelines V.A, B and C). A discussion of Costa Rica’s insolvency framework and the enforcement of creditor rights (Principle IV.F) was added to the items identified in the Concept Paper.

The boards of listed company and, in particular, SOE boards received considerably more attention in the Costa Rica review than in other accession reviews. The board section that had appeared under the combined stakeholder and boards principle in past reviews was expanded significantly and therefore has been moved to its own section. Information on board composition, independence, nominations and qualifications of listed company boards (Principle VI.A) and SOE boards (Guideline VII.C) can now be found in below under the heading: The duties, rights and responsibilities of boards.

Principle IV.A recommends that the rights of stakeholders that are established by law or through mutual agreements should be respected.

Costa Rica has the usual legislation and regulations that establish the rights of corporate stakeholders including: labour law; insolvency law; shareholder, consumer and environmental protection laws; and banking legislation. The first line of defence against the infringement of stakeholder rights is the compliance and control function within the enterprise. The second line of defence is the judicial system through, which stakeholders may seek redress in the event that their rights are infringed.

The CONASSIF Governance Regulation has extensive requirements for compliance and control functions that serve to protect stakeholders’ legal and contractual rights. It requires the board to act considering the legitimate interests of clients, owners and other stakeholders and ensure compliance with laws and regulations applicable to the entity. Boards are required to establish a compliance unit or function responsible for promoting and ensuring that the entity operates with integrity and in compliance with laws, regulations, policies, codes and other internal provisions. Such a function should have authority and resources, independence from senior management, and a reporting obligation to the board. The board also has the power to apply disciplinary measures against senior management and other employees in the event of deviations or transgression of its culture, policies, code of conduct, and corporate values.

Principle IV.B recommends that, where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.

Stakeholder rights are protected by and stakeholders may seek legal redress through the courts. When rights are violated, the Political Constitution provides that individuals have recourse to justice and may initiate legal proceedings. They may resort to the Code of Commerce, the Civil Code, the Civil Procedural Code, Labour Law, or any other law or regulation as may correspond. In turn, Costa Rica has a judicial system with a reputation for thoroughness and effectiveness. Additional mechanisms are in place for stakeholders to obtain redress, including alternative dispute resolution mechanisms such as arbitration, conciliation and mediation. However, a significant weakness is the slowness of the judicial system as discussed under Principle I.B.

Principle IV.E recommends that stakeholders, including individual employees and their representative bodies, be able to freely communicate their concerns about illegal or unethical practices to the board and to the competent public authorities and their rights should not be compromised for doing this.

Numerous avenues exist to communicate concerns regarding illegal or unethical practices. Formal channels are internal auditors, the police and public prosecutors. Reporting persons who choose to pursue legal channels to report illegal practices are protected under the Law for the Protection of Victims, Witnesses and Others in the Penal Process (Ley de Protección a Víctimas, Testigos y Demás Sujetos Intervinientes en el Proceso Penal).

The CONASSIF Governance Regulation requires boards to establish mechanisms to promote transparency and accountability to stakeholders, including to encourage stakeholders, including employees and their representative bodies, to openly express their concerns to the board regarding possible illegal or unethical practices, knowing that their rights will not be affected for expressing such concerns. Any attempt at retribution against employee whistleblowers would fall under the protections of labour law.

Under the directive on Strengthening the Strategic Role of SOE boards, passed in February of 2018, boards and managers are required to ensure the existence of whistleblowing policies and procedures, as well as monitor their integrity, independence and effectiveness. They are also required to protect whistleblower confidentiality.

Principle IV.F calls for the corporate governance framework to be complemented by an effective and efficient insolvency framework and by effective enforcement of creditor rights.

While the Concept Paper does not specifically call for corporate governance accession reviews to cover this principle, interviews during the accession review process, findings of the 2018 OECD Economic Survey of Costa Rica as well as a World Bank Report on Observance of Standards and Codes review of Costa Rica’s insolvency framework point to significant weaknesses in this area that merit consideration. Furthermore, according to the World Bank Doing Business Report 2020, resolving insolvency was the area where Costa Rica’s performance was weakest among the 10 business topics covered by the report. Costa Rica’s rank for resolving insolvency is 137 of 190 countries compared to the OECD average of 28. With respect to the recovery rate, creditors can recover 29.5 cents on the United States dollar compared to the OECD average of 70.2 cents on the dollar. Regarding time to resolution, Costa Rica requires 3.0 years for resolution compared to the OECD average of 1.7 years.

Legislation has been proposed to modernise and update the insolvency framework and interviews with insolvency specialists suggest that the implementation of the proposed reforms could lead to important gains in the efficiency and effectiveness of the framework and the economy. A bill of law to modernise Costa Rica’s insolvency framework was introduced before the Legislative Assembly in May 2019. The bill was being developed based on best international practices and proposes to make insolvency systems more effective in enforcing creditor rights and promoting the restructuring and reorganisation of debtors.

This section assesses Costa Rica’s position against Guideline V.A (recognising and respecting stakeholder rights); Guideline V.B (reporting on stakeholder relations); and Guideline V.C (internal controls, ethics and compliance programmes or measures).

Guideline V.A calls on governments, the state ownership entities, and SOEs themselves to recognise and respect stakeholders’ rights established by law or through mutual agreements.

Costa Rica is a state based on the rule of law. It has an institutional structure and a legal framework that seeks to recognise the rights of all citizens. Mutual agreements between any interested party and an SOE are considered enforceable and, provided they do not breach the legal framework, must be respected by all parties. While stakeholder groups may vary depending on the sector, a recurring stakeholder group across all SOEs are employees. The Constitution protects the right of workers to organise and bargain collectively. In interviews conducted for this review, a number of cases were cited in which unions played a visible role in SOEs, particularly with respect to collective bargaining agreements and other decisions related to workforce size and structure. The majority of the statutory corporations SOEs have collective bargaining agreements with their employees.

Guideline V.B recommends that listed or large SOEs report on stakeholder relations, including where relevant and feasible with regard to labour, creditors and affected communities.

In Costa Rica, SOE stakeholder reporting tends to be to the government and not directly to stakeholders from the SOE in the form of an annual stakeholder report. This being said, some SOEs have stakeholder reports on their websites. This practice appears to be informal and at the discretion of the SOE.

The main form of stakeholder reporting occurs through the publication of the National Development Plan (NDP), now NDPIP, which was described above. The NDPIP is a consolidated report that provides readers with an assessment of existing social and economic conditions in Costa Rica and describes the government’s plans to achieve public policy goals. Though SOEs report on their performance against objectives set by the NDP on a semi-annual basis to MIDEPLAN, the NDP does not report on stakeholder performance for individual SOEs. Furthermore, the NDP appears only every five years whilst good practice for private and public enterprise is increasingly to publish stakeholder reports on an annual basis.

New developments should encourage greater transparency towards stakeholders. The General Guideline for the Review of the Functions of Management Bodies and Strengthening of their Strategic Role in State-Owned Enterprises and Autonomous Institutions (Directriz General Para la Revisión de las Funciones de Órganos de Dirección y Fortalecimiento de su Rol Estratégico en las Empresas Propiedad del Estado e Instituciones Autónomas—099-MP) was passed in February 2018. The directive, hereafter referred to as the Strategic SOE Board Directive, suggests that establishing an organisational structure that responds to the legitimate interests of stakeholders is a fundamental responsibility of the board. In addition, the directive requires that indicators be established that can be used as part of the board performance evaluation process overseen by the Presidential Advisory Unit. Moreover, the NDPIP can now be tracked through a website that updates on the progress of the indicators each semester.

Guideline V.C calls on SOE boards to develop, implement, monitor and communicate internal controls, ethics and compliance programmes or measures, including those that contribute to preventing fraud and corruption.

All SOEs are required to have systems of control. The Law on Internal Control requires all public institutions to have internal control mechanisms to: 1) protect and preserve public property against losses, waste, undue use, irregularities and illegal acts; 2) provide reliable and timely information; 3) guarantee efficient operations; and 4) comply with the legal framework.

Ensuring that the internal controls required by law function properly depends significantly on the Comptroller General. Internal auditors and deputy auditors who are appointed by SOE chairs must comply with due diligence requirements including the possibility for the Comptroller General to contest the appointment process if it does not follow proper procedures. The Comptroller General can also audit SOE internal auditors directly. Resources for such audits are limited with the Comptroller General scheduling approximately four audits per year based upon a risk-based assessment. SOEs in the financial sector, in compliance with the CONASSIF Governance Regulation, must have a system to inform their boards, audit committees and other internal committees regarding their internal policies, controls and procedures to ensure best practices in corporate governance.

Interviews with board members, executives and accounting and audit professionals throughout the time period of the accession review, suggest that SOE boards do not rigorously monitor systems of control and that most board members do not have sufficient knowledge of control systems to evaluate whether controls are functioning properly. The oversight and monitoring of the internal control systems is widely viewed by board members and executives as the proper role of the Comptroller General.

The Presidential directive on Strengthening the Strategic Role of SOE boards brings Costa Rican more into line with international expectations. It discusses the role of the board in ensuring sound governance practices and “the existence of policies and procedures for the prevention, detection and combat of any kind of corruption, irregularity or fraud”.

The systems of control required under the Law on Internal Control provide some basic parameters for ethical and responsible behaviour, but the law does not go into the same detail as an ethics or CSR code. With respect to ethics and corporate social responsibility codes, the government’s aggregate report on SOEs indicated that six SOEs had a code of ethics and a sustainability policy available on their web sites.

Regarding the financing of political activities, legislation prohibits the financing of political activities from SOE funds. Rather, the Costa Rican legal framework has a mechanism for state contributions to political parties through Supreme Elections Tribunals. According to the Political Constitution, and the Electoral Code, 0.19% of the gross domestic product from two years prior to the election is set aside for political purposes.

This chapter of the G20/OECD Principles covers the overarching principle that the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. The Concept Paper calls for the accession review to focus particularly on the legal framework in place, including an assessment against Principle VI.A. However, the Concept Paper also provides a flexible framework to address issues in greater detail when, through the review process, additional issues, gaps or priorities for attention are identified. Accordingly, this section of the review was expanded to cover: committees in listed companies (Principle VI.E.2); the responsibility of the SOE board for performance, its role, and the duty to act in the interest of the SOE (Guideline VII.A); SOE board composition and independence (Guideline VII.C); political influence and ministers on SOE boards (Guideline VII.E); the separation of the positions of Chair and CEO in SOEs (Guideline VII.F); and SOE board performance evaluations (Guideline VII.I).

Principle VI.A, states that board members should act on a fully informed basis, in good faith, with due diligence and care and in the best interest of the company and the shareholders.

The Code of Commerce appears to subsume the multiple duties of loyalty, care and good faith, common in other jurisdictions, into a single duty of diligence. The 2016 Minority Shareholder Protection Law, establishes board members’ duties of diligence and loyalty, and the obligation to act in the best interests of the company, taking into account the interests of the company and its shareholders. In addition, the CONASSIF Governance Regulation explicitly defines the duties of care and loyalty and the obligation of the board to act on an informed basis in the interests of the company’s shareholders and other stakeholders. Article 23 on conflicts of interest also prohibits actions that conflict with the corporate interest.

The Governance Regulation also establishes requirements related to the roles and responsibilities of boards. Regarding nominations processes, a clear, formal and rigorous nominations process is recommended to identify, evaluate and select nominees to the board. Regarding board composition, board members are expected to have broad and demonstrable knowledge, skills and experience in relevant areas to foster a diversity of views. In addition, board members should be individuals of recognised repute. All are expected to have an understanding of governance practices and their role in the governance of the company and be capable of exercising sound and objective judgment.

Requirements for transparency include the disclosure of information on board members including credentials and experience, leadership positions in other businesses and interests in transactions or matters that might affect their independence. These disclosures should serve to help assess the degree to which board members may have conflicts of interest. It is to be noted that the Governance Regulation makes a specific reference to information that must not be disclosed. This clause is intended to ensure compatibility with existing laws that protect the identities of beneficial owners, which were described above. Furthermore, any other information should be disclosed that would help to better understand the governance of the enterprise such as information on committees, objectives, responsibilities, composition, meeting frequency, etc.

The Governance Regulation also has requirements with respect to independence. In terms of composition, the board should have at least two independent board members. In addition, the board, as a whole, is expected to fulfil its responsibilities with an independent perspective. The regulation specifies that the board member selection process should aim at independence and that board member elections should result in candidates who are free of conflicts of interest that could prevent them from acting in an objective and independent manner.

Principle VI.E.2 states that boards should consider setting up specialised committees to support the full board in performing its functions, particularly in respect to audit, and, depending upon the company’s size and risk profile, also in respect to risk management and remuneration. When committees of the board are established, their mandate, composition and working procedures should be well defined and disclosed by the board.

In Costa Rica, boards are enjoined to establish committees to support their work. The Governance Regulation mentions four committees: 1) audit; 2) risk; 3) nominations; and 4) remuneration. The heads of both the audit and risk committees are supposed to be independent, while the nominations and remuneration committees are required to have at least one independent board member. The audit committee is mandatory for all enterprises and the risk committee is mandatory for financial companies. Under CONASSIF’s proportional and flexible approach to implementing the regulation, both the nominations and remuneration committee are considered voluntary. In addition, the SUGEF Agreement on Compliance with Law 8204 (Acuerdo SUGEF Normativa Para el Cumplimiento de la Ley Nº 8204) requires any institution under the supervision of any of the superintendencies to have a compliance committee to consider topics related to anti-money laundering and terrorism. Such committees are not board committees but may have the participation of a board member and report to the board.

Guideline VII.A states that the boards of SOEs should be assigned a clear mandate and ultimate responsibility for the SOE’s performance and that the role of SOE boards should be clearly defined in legislation, preferably according to company law. The board should be fully accountable to the owners and act in the best interest of the enterprise.

At the beginning of the accession review process in 2016, there was little systematic survey information available to provide an objective account of how effectively boards function. With respect to SOEs, some SOE board members and managers interviewed for the accession review reported that board performance was variable, that the profile of board members in some SOEs lacked important skills and that there was limited capacity for independent thinking. Few board members had the capacity to oversee the financial reporting, risk management or control functions of the SOE and there was broad agreement that the profiles of board members needed to improve. Since that time, a number of relevant developments have occurred, including the Bancrédito crisis described in Box 3.5 below, and the government’s policies and practices related to board composition and performance have evolved considerably.

In Costa Rica, the role of the board is usually defined in the founding laws of SOEs. Their functions are, generally, to:

  • Direct the SOE and exercise strategic control

  • Appoint and remove managers and assistant managers

  • Define and approve institutional policies and business development strategies

  • Define and approve the administrative structure and organisation of the SOE

  • Set investment policies

  • Appoint the external auditor

  • Protect the SOE’s finances

  • Dictate internal regulations

Though the legal requirements for SOE boards cited above correspond well with the SOE Guidelines, at the beginning of the accession review process, there were some gaps with the SOE Guidelines including: 1) the responsibility of the board for its own governance; and 2) the responsibility of the board for public disclosure.

Furthermore, while much of the law, rules and regulation appear to be in step with OECD practice, a key issue identified at the beginning of the accession review process was the actual role of the SOE board in practice. To illustrate, in Costa Rica, the law requires boards to meet on a weekly basis (limited to a maximum of eight meetings per month). Meeting practice varies considerably between SOEs with board members attending between one and up to a maximum of 11 meetings per month (not including extraordinary meetings), according to a report from the Comptroller General from June 2014. The report found that, on average, board members attend approximately three ordinary board meetings per month.

The number of meetings in Costa Rican SOEs is in strong contrast with the number of board meetings of listed companies in the world’s largest financial markets, which can serve as a benchmark. These would meet on average between seven and eight times per year while it is entirely possible for a Costa Rican SOE board to have that many meetings in a single month.19 The high frequency of SOE board meetings suggests that boards may be micro-managing SOEs and that boards provide a compliance checking function rather than a high-level strategy, oversight and policy-setting function. This conclusion was confirmed by interviews with SOE boards in 2016. Interview feedback also suggests that, at least in some cases, management’s capacity to attend to their main responsibilities is diminished because of the constant demands of meeting preparation.

Another important concern was with respect to the duties of board members. The SOE Guidelines and G20/OECD Principles suggest that the duty of board members is to act in the interest of the company and its shareholders. At the time of writing, SOE statutes, law and SOE business culture suggest that the duty of board members is mainly to the state and to the achievement of the state’s policy goals. In principle, this is consistent with the view that the state is the shareholder of the SOE and that board members act in the shareholder’s interest. However, the priority given to the state’s policy goals over the interests of the SOE means that there has been far less consideration of company interests versus policy interests. The trade-offs and costs involved in choosing between policy goals versus commercial goals are often unclear to the detriment of sound decision-making.

Nevertheless, concerns remain regarding the degree to which SOE boards act in the long-term interest of the SOE they govern. For example, in the cases of FANAL, ICE and RECOPE, environmental and social objectives as set out in the NDPIP take precedence over business concerns and have, to some extent, in the past, even taken precedence over the sustainability of the business.

Two important measures have been passed to re-focus on the higher-level roles that are important to move SOE boards towards good practice. The first measure was Costa Rica’s Strategic SOE Board Directive issued in February 2018. The purpose of this directive was to: 1) align board practices with international standards and specifically with the recommendations of the G20/OECD Principles and SOE Guidelines and the instruments of the Basel Committee; 2) require SOEs to evaluate the roles of their own boards with the purpose of determining what functions are appropriate for board versus management; and 3) report findings to the newly established Presidential Advisory Unit.

The Strategic SOE Board Directive is a significant step forward in defining the proper roles of boards and also in establishing a process of board self-evaluation. The directive clearly places the responsibility for strategy in the hands of board members, requires that board members be qualified, and that board members ensure effective decision-making systems amongst many other best practice recommendations. The directive also defines a duty of loyalty and care to the SOE.

But there are a number of areas where the directive’s articles could be open to significant interpretation. For one, while the duty of loyalty and care towards the SOE are clearly developed, there is also an explicit obligation to act according to the instructions of the state and the Council of Ministers as owner. The problem is not that the Council of Ministers may have final authority but that the decision-making authorities of boards versus the Council of Ministers are not defined. And, while boards are expected to comply with the objectives defined in the NDPIP, there is no explicit definition of the NDPIP’s relative authority. A situation of unclear decision-making authorities and loyalties thus persists.

The second measure was the Regulation on Suitability of Members of the Management Body and Senior Management of Financial Entities, which also came into force in 2018. That regulation defined the profiles of board members and executives needed for banking organisations including SOE banks. Despite foreseeable challenges in implementation, these two measures set the framework for achieving the desired higher-level outcomes of board nominations.

Guideline VII.C recommends that SOE board composition allow the exercise of objective and independent judgment and that all board members—including any public officials—be nominated based on qualifications and have equivalent legal responsibilities.

An analysis of the composition of SOE boards was done by the Presidential Advisory Unit in 2018. This analysis suggested that while SOE boards had a mix of profiles, they tended to have a very strong representation of lawyers, engineers, academics, and individuals with public sector backgrounds.

The founding laws of individual SOEs generally define the needed characteristics of board members. Board members can come from the public or private sectors though some SOEs require board members to have some public sector experience. The most common requirements made in founding documents relate to educational background or sector-specific experience. In some cases, these requirements can be quite specific without necessarily responding to the needs of the SOE.

Since its establishment, the new Presidential Advisory Unit was able to gain practical experience with its new web-based board member selection process. The profile of board members is still determined first and foremost by the statutory laws under which SOEs are established. Once those and other legal requirements are fulfilled, the requirements under the new Rules for the Selection and Valuation of Candidates for Charges of the Management Body of SOEs of 2019 must be followed. At that point, the selection procedures of the Presidential Advisory Unit are followed and the needs of the SOE and the views of the existing board can be taken into account. The current practice is for ministers to conduct interviews with a short list of candidates and share their views with the Council of Ministers who makes the final decision on appointment.

The new board member nominations process was used in 2019 to appoint 13 board members, and the results can be seen in RECOPE, ICE and INS. Overall, an assessment of the current board composition amongst these three SOEs suggests that boards continue to have similar profiles as before with a relative under-representation of individuals with deep business experience albeit, in many cases, with fresh faces who can be expected to bring new views to the SOE. Nevertheless, while there are positive indications that the new board member selection process will yield better board compositions, the impact on board practices and performance can be expected to take time.

The case of ICE Group, the flagship of Costa Rica’s SOEs, illustrates both the benefits and challenges of good board composition. During the first half of 2019, the government suspended six of ICE’s seven board members (all but the newly appointed executive chair) in connection with allegations of wrongdoing related to decisions taken between 2014 and 2018. Pending the investigation, six new board members were appointed in a temporary capacity, according to the new Presidential Advisory Unit process.

The new members bring commercial skills that are hoped will contribute to a better capacity for analysis, particularly in business and finance. Board members now look into financial performance in detail and it is reported that board discussions are richer. Perhaps as a result of changes in the board (but, certainly, also in response to ICE’s poor financial performance), greater impetus has been given at board level to making ICE financially sustainable.

One of the predictable challenges in implementing the Strategic SOE Board Directive is that the laws establishing SOEs define overly-specific board member profiles and limit the SOE’s capacity to have board members with needed expertise such as financial reporting or knowledge of risk management or systems of control. Furthermore, statutory SOEs may limit the roles and responsibilities of board members to certain functions that do not correspond to the requirements of the Strategic SOE Board Directive. Consequently, despite the directive’s positive intent, an actual modification of board practices will likely pose challenges and require changes in law, the mind-set of government oversight bodies, board members and management.

For Costa Rica’s two SOE banks, the Organic Law of the National Banking System, requires that four out of seven board members must have an academic degree (equivalent to a bachelor degree) and that one of them has to have a degree in economics and one in law. In addition, they must be Costa Rican citizens over 25 years of age and have knowledge and experience in economics, finance, bank, administration or in topics related to economic and social development. No other banking experience is required.

A new regulation was enacted in May of 2018 entitled Regulation on the Suitability of Members of the Management Body and Top Management of Financial Entities, which applies to all financial companies supervised by SUGEF including SOE banks. It covers essential issues in board member selection including fit and proper testing, experience, the need to select board members in response to company needs, conflicts of interest, proper selection procedures and so on.

The issue of gender diversity on boards was considered during the accession review process. Some requirements exist to ensure gender diversity on boards through the Law on Promotion of the Social Equality of the Woman and the law on the Minimal Percentage of Women on Boards of Associations, Unions and Solidarity Associations of 2010. The law establishes a 50% quota for representation of each gender on SOE boards. In the case of uneven numbers of board members, the policy calls for the SOE to alternate between a female majority and male majority to maintain an equal ratio over time. Gender representation on SOE boards was 57% male and 43% female as of October 2019.20

Independence of mind is, arguably, the ultimate protection against the risks and failures one observes in some SOEs and SOE banks globally. The Strategic SOE Board Directive prescribes the roles and responsibilities of SOE boards though it does not specifically address the issue of independence or objectivity of mind. On the other hand, independence is required by the laws establishing SOEs as well as legislation applying to civil servants, and, in practice, all Costa Rican SOE boards are composed of non-executive board members who are at least technically independent from management. The only exception is where the roles of Chair and CEO are combined.

The concept of independence is embedded in the individual laws establishing SOEs as well as in other legislation. For example, the founding law of INS suggests that “the Board of Directors shall exercise its duties with full independence and under its exclusive responsibility, within the rules established by law, applicable regulations and the principles of procedure.” In addition, the Law Regulating the Insurance Market limits the number of board members who can be owners, with no more than 40% of Board members being shareholders in the entity, or relatives of such shareholders, up to third degree of kinship or affinity. Nor can they be employees of enterprises of the same economic or financial group. In addition, Costa Rica’s ownership Protocol restates legislative requirements that board members be able to “form an objective opinion” and be free of “any other internal or external influence on their judgment”.

The concept of independence is also embedded in the laws that rule state-owned banks. The Law of the National Banking System says: “Each Board of Directors shall exercise its functions with absolute independence and under its exclusive responsibility, within the rules established by law, applicable regulations and the principles of the procedure. Board members shall have complete freedom to exercise their functions in accordance with their consciences and their own criteria, and shall therefore be personally liable for any action they take in connection with the overall direction of the respective bank.” In addition, the law seeks to create independence by restricting board members from being: 1) members and employees of any branch of government; 2) employed by the bank itself; 3) board members or employees of any other bank; 4) current or previous board member of a private financial corporation, or related to such an individual; or 5) a shareholders or authorities of those corporations.

The recently established Presidential Advisory Unit is expected to develop further mechanisms to promote the capacity of SOE boards to act independently in their decision making.

Guideline VII.E calls for mechanisms to be implemented to avoid conflicts of interest preventing board members from objectively carrying out their board duties and limiting political interference in board processes.

In the past, SOE board members were often selected along party lines, and in the banking sector, board members were sometimes reported to be former members of the Legislative Assembly. In some SOEs, there were cases where ministers or their adjuncts, and civil servants were board members. Interviews conducted in 2016 and 2017 showed that in some cases ministers (or vice ministers) were directly involved in decision making and had, for example, instructed SOEs to be more active in investing in certain technologies and services rather than others. The level of state involvement in SOE affairs was illustrated by the frequency of meetings between ministers and CEOs, which could occur on a monthly basis. Some interviewees insisted that such involvement was positive but also acknowledged the possibility of subjecting SOEs to undue influence and diminishing the accountability of the board.

In 2018, a sample of 12 SOEs (excluding FANAL and subsidiary boards) showed that 16% of board members had overtly political backgrounds (e.g. having served in the Legislative Assembly or former ministers or vice ministers). This does not mean, however, that the remaining 84% of board members acted independently from government because Costa Rica is a small country where informal interactions between government and SOE officials are frequent.

One of the key recommendations of the SOE Guidelines is that ministers and other high-level government officials not sit on SOE boards.21 As of September 2019, there were ministerial representatives on two SOE boards: 1) the Costa Rican Petroleum Refinery (RECOPE); and 2) indirectly, the National Liquor Factory (FANAL), which is considered an SOE for the purposes of the accession review and which does not have a board of its own.

In 2019, the Legislative Assembly approved a law that prevents ministers or vice ministers from acting as board members of RECOPE. The law is entitled Law Derogating Article 9 of Law No. 7152, Organic Law of the Ministry of Environment, Energy, of 5 June 1990, and Impediment of the Governing Council to Appoint Ministers or Vice Ministers on the Board of Directors of the Costa Rican Petroleum. The legislation required the Minister of Environment, Energy and Telecommunications to leave the RECOPE board by the end of 2019. Interviews with RECOPE board members suggest that the departure of the minister would allow both board members and executives to act more independently in accord with the recommendations of the SOE Guidelines. The departure was also seen as an opportunity to find a replacement board member with business experience and thereby strengthen the board and provide needed impetus for the renewal and transformation of RECOPE.

FANAL has the monopoly for licensing of alcoholic products in Costa Rica. The monopoly was originally granted to foster the sugarcane industry and protect society from health problems associated with alcohol consumption. FANAL is governed by the board of the National Council for Production (CNP), which, in turn, has the Minister of Agriculture on its board of directors. As of October 2019, the Executive submitted a draft bill to the Legislative Assembly, to remove the Minister of Agriculture as CNP board member, in order to comply with the OECD’s recommendation. At the time of writing, the government was also considering the possibility of turning FANAL into a government concession. In the event that FANAL remains an SOE, a better long-term solution would be to provide it with its own board and ensure that the board has no ministers, is sufficiently apolitical, has independent members, and is able to act with objective and independent judgement.

Guidelines VII.F calls for the position of the board Chair to be separate from the CEO.

Regarding the separation of the roles of board chairs and executives, the SOE Guidelines recommend that the functions of the Chair and the CEO not be held by the same person in order to create greater independent oversight of the SOE’s executives. In Costa Rica, SOEs subject to Law 5507 combine the Chair (Presidente) and chief executive officer (Ejecutivo) into the single position of Executive Chairman (Presidente Ejecutivo).

Guideline VII.I states that SOE boards should, under the Chair’s oversight, carry out an annual, well-structured evaluation to appraise their performance and efficiency.

The assessment of SOE boards is now considered a key oversight responsibility of the state according to Costa Rica’s ownership Protocol, issued in 2019. In fact, the provision of such information is required under the Strategic SOE Board Directive and, in addition, Directive 039-MP General Policy for Board Performance Evaluation, issued in March of 2019. These provisions instruct SOE boards to conduct self-evaluations and report the results of those evaluations to the Presidential Advisory Unit tasked with SOE oversight. Such information had been provided to the Presidential Advisory Unit by the preponderance of SOEs at the time of writing. The Unit was conducting an analysis, with individual recommendations being issued to SOEs in order to strengthen the final evaluation instrument.

The SOE Guidelines suggest that evaluations could also be instrumental in developing effective and appropriate induction and training programmes for new and existing SOE board members. Costa Rica has recognised the importance of training to change attitudes and practices. Since February 2019, training was being provided by the Costa Rican Institute of Corporate Governance (ICG) under the supervision of and in collaboration with the Presidential Advisory Unit. As of August 2019, 106 board members from 13 SOEs had received training with the objective of eventually reaching all SOE board members, key SOE executives, and selected government officials over the following year-and-a-half. Many SOEs report that training has provided them with new insights that have led to some practical changes. In addition, training sessions have provided board members from different SOEs the opportunity to interact with each other and exchange views on practices and how to meet governance challenges. Feedback suggests a continuing need to reinforce board practices and capacities and further attention to topics such as financial reporting practices and the implementation of International Financial Reporting Standards, risk management, oversight of internal controls, and ensuring the financial sustainability of the enterprise.


Republic of Costa Rica (2019), Aggregate Report on SOEs 2019, https://www.hacienda.go.cr/docs/5dd69dd20f54e_Reporte%20agregado%20empresas%20del%20Estado%202019%20v8Nov2019.pdf

Costa Rica (2017), G20/OECD Corporate Governance Principles Self-Review 2017, (unpublished).

Herzberg, F. (1968), One More Time: How to Motivate Employees, Harvard Business Review.

La Nación, Transparencia en el ICE, 6 November 2018, https://www.nacion.com/opinion/editorial/editorial-transparencia-en-el-ice/UTUJMMF6DJCWLOEODX6CBI2JPY/story/

La Nación, Directivos del Banco Popular crean cinco altas jefaturas antes de irse, 10 June 2018: https://www.nacion.com/data/directivos-del-banco-popular-crean-cinco-altas/GDTZBRA3KVDRDHFPEVVOT6ZKOQ/story/

OECD (2019), Guidelines on Anti-corruption and Integrity in State-Owned

Enterprises, www.oecd.org/corporate/Anti-Corruption-Integrity-Guidelines-for-SOEs.htm

OECD (2016), OECD Economic Surveys: Costa Rica 2016: Economic Assessment, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-cri-2016-en

OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris, https://doi.org/10.1787/9789264236882-en.

OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition, OECD Publishing, Paris, https://doi.org/10.1787/9789264244160-en.

Renewable Energy Policy Network for the 21st Century (2019), www.ren21.net.

SICOP (Sistema Integrado de Compras Públicas) (2019), https://www.sicop.go.cr/index.jsp.


← 1. Banco Cathay de Costa Rica, Banco Lafise, Banco Promerica de Costa Rica, Corporación ILG International and Grupo Financiero Improsa

← 2. Costa Rica Principles Self-Review 2017.

← 3. La Nación, Transparencia en el ICE, 6 November 2018: https://www.nacion.com/opinion/editorial/editorial-transparencia-en-el-ice/UTUJMMF6DJCWLOEODX6CBI2JPY/story/

← 4. Quantitative data and budgets have been closely followed by the Comptroller General. However, their purpose is to check budget compliance and not financial performance or achievement of financial performance objectives.

← 5. La Nación, Directivos del Banco Popular crean cinco altas jefaturas antes de irse, 10 June 2018: https://www.nacion.com/data/directivos-del-banco-popular-crean-cinco-altas/GDTZBRA3KVDRDHFPEVVOT6ZKOQ/story/

← 6. See Table 2.11 above for a list of the SOEs to which this law applies. In addition, separate legislative acts establish similar systems for additional SOEs: RECOPE, RACSA, CNFL, SINART, INCOFER, the Junta de Protección Social, and Correos de Costa Rica.

← 7. Frederick Herzberg (1968), One More Time: How to Motivate Employees, Harvard Business Review. The article is considered a classic and has influenced a generation of scholars and managers on issues of compensation.

← 8. OECD Economic Survey of Costa Rica of 2016, pp. 119-125. The issue of pricing levels is not taken up in the more recent OECD Economic of Survey of 2018.

← 9. OECD Accession Review Competition Committee.

← 10. OECD Economic Survey of Costa Rica of 2016, p. 115.

← 11. OECD Accession Review Competition Committee.

← 12. BCR.

← 13. OECD Economic Survey of Costa Rica of 2016.

← 14. The new law on deposit insurance is not reviewed or described in detail in this report, due to its enactment after the Corporate Governance Committee completed its review in October 2019.

← 15. This section is largely based upon the OECD Accession Review of Costa Rica for the Competition Committee draft report by the Secretariat.

← 16. Renewable Energy Policy Network for the 21st Century, www.ren21.net.

← 17. This includes, for example, preferential financing, tax arrears or other preferential trade credits from other SOEs. It can also include SOEs’ receiving inputs (such as energy, water or land) at prices or conditions more favourable than those available to private competitors.

← 18. SICOP (Sistema Integrado de Compras Públicas) https://www.sicop.go.cr/index.jsp.

← 19. Numerous studies have been made of the frequency of board meetings. The number of meetings depends on the size and type of company and the country but little information on SOE boards is available. For private companies, a Compliance Week study of 1 500 S&P companies conducted in 2011 suggests that the figure is 7.8 meetings per year and that this figure has been declining over time. Simple averages should be viewed with caution; it is important to consider ranges of practice. Figures from the Conference Board, Deloitte, E&Y and Spencer Stewart suggest that major listed companies generally do not go below six or above 12 meetings per year.

← 20. Aggregate Report on SOEs 2019, Republic of Costa Rica: https://presidencia.go.cr/wp-content/uploads/2019/11/Reporte-agregado-empresas-del-Estado-2019-v8Nov2019.pdf

← 21. OECD Guidelines on the Governance of State-owned Enterprises (2015), Annotations, Chapter VII.C.

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