Accountability standards for state-owned enterprises

Published October 9, 2014

According to Jermyn Brooks, who is a member of TI board, it is crucial to understand that similar governance principles apply to all organizations. Both private and state-owned enterprises should have a proper organizational structure with clear delegation of authority and all the usual organizational regulations. In general, the same rules that are shown to be efficient in the private sector can operate very well in the SOE sector.

It is necessary to find the balance between the overly excessive and the insufficient levels of political intervention into the SOE governance. These enterprises are owned by the state and therefore the relationship between the board/management and the state must be very clearly defined. However, the government should not get down to the level of micromanagement. Only strategic decisions could be decided either on the government level or by civil servants who represent the state as the owner or shareholder of an SOE, but the day-to-day business should be left to be run by professional managers.

The main task for the government is to give the SOEs ambitious goals and make clear that the ultimate goal of the SOEs is to bring benefit for their owners – the society. Sometimes an SOE – especially if it receives subsidies or donations from the state or has non-commercial functions – appears to be more of a governmental organization than a for-profit enterprise. However, the budgeting system in governmental institutions differs significantly from that in the private sector. Therefore even those SOEs that perform non-commercial functions or receive donations from the state should follow the best examples set by the private sector and try saving as much as possible and increasing the efficiency as much as possible instead of operating in accordance to the flawed perception that the entire given budget must be spent.

For this reason non-commercial goals – if there are any – need to be very clearly stated. The SOE needs to prepare a budget, where clearly and transparently stated non-commercial goals are taken into account. It does not have a direct profit and loss responsibility because by being assigned non-commercial goals, the enterprise is given targets which usually won’t allow it to operate in profit. However, such an enterprise should still put in effort so as to carry out the assigned non-commercial functions at lowest possible costs – a task that requires a transparent and efficient financing system of non-commercial functions.

Different legal forms of SOEs should not become a pretext to avoid implementation of transparent and efficient governance principles. You can have the whole spectrum of SOEs, ranging from organizations which carry out solely commercial functions all the way to enterprises that provide a necessary public service at a loss. There are different legal forms of SOEs in Lithuania as well – there are corporate legal forms and statutory enterprises. However, regardless of the legal form of an SOE or the functions it carries out, one should try to maximize the efficiency of the way these companies are working. Therefore it’s important for policy-makers to understand that bringing changes to such enterprises is actually not about stubbornly doing things in a particular way – it’s all about maximizing the efficiency for the benefit of society.

A very important role in the governance of SOEs is played by the boards. In order to help SOEs maximize the benefit they provide to the society, the boards of SOEs should be comprised of specialists with good command of business principles. Of equal importance is electing the right chair of the board. It’s difficult to say whether the chairperson should be an independent person or someone from the public sector. However, it is quite clear that the CEO of the company should not also be the chairman of its board.

The SOEs’ boards should consist of active members who can offer relevant knowledge and insights that would benefit the company. Unfortunately, in various countries SOEs’ boards are comprised of people who are looking for what to do when they perhaps lose a high office. Whenever it is possible, such occurrences should be avoided. Moreover, there should be a clear distribution of responsibilities within the board as well as between the board and the senior management. It is also advisable that the SOEs have specific committees, like risk committee, finance committee or audit committee, which would be composed either of members of the board or people accountable to them.

Finally, it should be emphasized that the SOEs can be an enormous force for good in implementing corporate social responsibility (CSR) standards across a country. If the SOEs insisted that all of their suppliers sign up to anti-corruption, environmental or employment standards, then through their supply chain they could have a large beneficial impact on privately-run businesses of all sizes. This can be achieved by having an open bidding system and demanding that only companies that have the right CSR standards can bid to provide an SOE with products or services. Similar models are currently being implemented by Transparency International in, for example, Egypt or India. SOEs can have a significant impact, particularly because SOEs are often involved in very large scale infrastructure projects and the incentives to get these contracts on the part of the private sector are very great.

The text was first published in the annual report of Lithuanian Governance Coordination Centre.