OECD Guidelines on Corporate Governance of State-owned Enterprises: A tool for value creation

Considering the significant values at stake, it is only reasonable that governments are trying to improve their role as owner. One important challenge is to refrain from undue political interference in the day-to-day management of state-owned enterprises. Another is to make sure that governments do not distort competition in the way they use their regulatory and supervisory powers. The recently issued OECD Guidelines on Corporate Governance of State-Owned Enterprises provides useful advice on how to avoid both problems.

Corporate governance is usually discussed in relation to spectacular scandals in large companies, such as Enron, WorldCom and Parmalat. These are well known cases that have caused heated debate and generated demands for additional rules and regulations. And while improvements in the legal and regulatory framework have proven to be necessary, we should never forget that corporate governance is much more than just mechanical compliance with a set of regulations. It is about value creation and the tools that shareholders, boards, managers and others need in order to build competitive enterprises. This is also true for state-owned enterprises and their owner - the government.

Governments in OECD member countries are important owners of commercial enterprises. How well they perform their ownership functions will therefore have a substantial impact on public finances, corporate performance and business sector development. Moreover, state-owned enterprises often supply key services, such as water, energy and transportation, which are critically important to the wellbeing of all citizens and the competitiveness of private sector companies.

In several OECD countries the value added by stateowned enterprises represents between 5 and 25 per cent of GDP and as much as 10 per cent of employment. The economic weight of state-owned enterprises is even greater in many non-OECD countries, where state-owned enterprises sometimes dominate economic life. In Asia, they represent more than 30 per cent of stock market capitalisation, making the quality of government ownership a concern for a large number of minority shareholders. In India alone, the 242 companies controlled by the federal government constitute almost 25 per cent of GDP.

Considering the values at stake, it is only reasonable that governments are trying increasingly to develop their expertise as owners and improve the governance of their enterprises. But while the benefits are obvious, practicing corporate governance of state-owned enterprises is a complex undertaking. One overriding challenge is to find the right balance between the government´s responsibility to be an active owner, while refraining from undue political interference in the management of the company. Another challenge is to make sure that the government does not distort competition in the way it uses its regulatory and supervisory powers.

In order to assist and support governments in their efforts to improve their policies, OECD countries agreed to develop the OECD Guidelines on Corporate Governance of State-Owned Enterprises. The immediate responsibility for these efforts was vested with the OECD Working Party on Privatisation and Corporate Governance of State-Owned Assets, which brings together policy makers and practitioners from the countries with the most advanced corporate governance systems. The Group concluded its work in spring 2005 when the proposed guidelines were submitted to the OECD Council for adoption.

The guidelines cover six different areas:

Ensuring an effective legal and regulatory framework for state-owned enterprises
The state acting as an owner
Equitable treatment of shareholders
Relations with stakeholders
Transparency and disclosure
Responsibilities of the boards of state-owned enterprises

In each of these areas the guidelines provide a set of principles, which are supported by more detailed annotations including background information and references. In terms of the regulatory framework, for example, it recommended that the state´s ownership functions are carried out by a centralised ownership entity, or through effectively coordinated entities. It is also suggested that the government simplify and streamline the operational practices and the legal form under which the state-owned enterprises operate. In order to encourage the state´s role as an informed and active owner, the guidelines recommend that the government develop and disclose an ownership policy. Such a benchmark would also make it easier to assess how well the government actually performs its ownership functions.

On the sometimes controversial issue of board representation, the guidelines state very clearly that the government should let the boards exercise their responsibilities and respect their independence. Furthermore, the government should not be involved in the day-to-day management of state-owned enterprises and should allow them full operational autonomy to achieve their objectives. Instead, the guidelines recommend that the government´s influence over the board is exercised through a transparent board nomination process and active participation in the process of nominating the boards. If properly implemented, these recommendations, as well as other recommendations outlined in the guidelines, should go a long way to ensuring that state ownership is exercised in an accountable and professional manner that enhances value creation.

Since the very day they were issued, the guidelines have attracted great interest, both from OECD and non-OECD countries. They have been translated to several languages, including Chinese, and have been used in country assessments, training and seminars around the world. This increased awareness has also led to an unprecedented demand for more detailed accounts of practical experiences that suggest how to actually apply the guidelines. Some countries have more experience in this area than others, but concrete information about "how to actually do it" is mostly scattered and incomplete. Moreover, this information often lacks the direct input and first-hand experience that practitioners can provide. In the coming years, the OECD Working Group is expected to fill this important gap. Norway and other countries with advanced state-ownership policies have an important role to play in these efforts, in which countries with less experience can learn from past successes and mistakes. By taking on this task, the OECD countries can also make sure that the guidelines remain a living document, put to active use for the benefit of all citizens with an interest in well-managed and competitive state-owned enterprises.

Mats Isaksson
Head of Corporate Affairs
OECD