A state-owned enterprise (SOE) is a business entity created or owned by a national or local government, either through an executive order or legislation. SOEs aim to generate profit for the government, prevent private sector monopolies, provide goods at lower prices, implement government policies, or serve remote areas where private businesses are scarce.
The government typically holds full or majority ownership and oversees operations. SOEs have a distinct legal structure, with financial and developmental goals, like making services more accessible while earning profit (such as a state railway). They can be considered as government-affiliated entities designed to meet commercial and state capitalist objectives.
Compared to government bureaucracy, state owned enterprises might be beneficial because they reduce politicians’ influence over the service. Conversely, they might be detrimental because they reduce oversight and increase transaction costs (such as monitoring costs, i.e., it is more difficult and costly to govern and regulate an autonomous SOE than it is the public bureaucracy). Evidence suggests that existing SOEs are typically more efficient than government bureaucracy, but that this benefit diminishes as services get more technical and have less overt public objectives.
SOEs are common with natural monopolies, because they allow capturing economies of scale while they can simultaneously achieve a public objective. For that reason, SOEs primarily operate in the domain of infrastructure (e.g., railway companies), strategic goods and services (e.g., postal services, arms manufacturing and procurement), natural resources and energy (e.g., nuclear facilities, alternative energy delivery), politically sensitive business, broadcasting, banking, demerit goods (e.g., alcoholic beverages), and merit goods (healthcare).
Board of Directors of a state-owned enterprise (SOE)
Boards of directors play a fundamental role in corporate stewardship and performance. Over the last decade, OECD governments have sought to professionalise boards, ensure their independence and shield them from ad hoc political intervention. In general these approaches have worked; most countries report better quality board discourse and ultimately improved SOE performance. Yet, more remains to be done to raise efficiency by implementing the aspirational standards of governance, accountability and transparency established by the OECD Guidelines on Corporate Governance of State-Owned Enterprises.
Summary of good practices Role of boards of directors:
The board plays a central function in SOE governance and should act as an intermediary between the ownership function and the SOE’s executive management. Therole of the board should be clearly defined and founded in legislation, preferably according to general company law.
The role of the board of directors should focus on strategic guidance and corporate performance, and shift focus away from a traditional “conformance” role. The state should inform the board of its objectives and priorities through proper channelstoensuretheboardmaximumautonomyandindependence. Nomination framework and practices
A robust nomination framework is one that clearly specifies the nominating power is transparent and is consistent in its application. Ministerial or executive powers normally have the ultimate responsibility for nominations. This brings legitimacy to the process, but it should not undermine the role of the ownership function.
Where feasible, board appointments should be subject to co-ordination or consensus on a whole-of-government basis. Board appointments, even in wholly-owned SOEs, should be entrusted to the annual general meeting of shareholders Establishing a transparent and consistent method to identify applicants from a wider pool of talent will improve board composition and bring uniformity in the assessment process.
Specialised bodies in charge of advising or accrediting the nominations can bring further objectivity and transparency to the nomination process. The Board should be involved in the nomination process in an advisory capacity. Mechanisms should exist to facilitate non-government shareholders’ participation in the board nomination process. Board composition
Persons directly linked with the executive powers should not sit on SOE boards. Other state representatives should be nominated based on qualifications, subject to specific vetting mechanisms.
Independent directors should be independent from management, government and business relationships. Specific safeguards should be established to verify that nominees comply with requirements. The Corporate governance framework should promote transparant and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory, enforcement authorithies.
Note: The Organization for Economic Cooperation and Development (OECD) announced that it would open accession talks with Indonesia, after receiving the approval of the group’s 38 members. In a statement announcing the decision on February 20, OECD Secretary-General Mathias Cormann described the move as “historic.
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