1. Corporate Governance Group
Global Capital Markets Department World Bank
Financial Oversight in Public Enterprises: The Challenge of Corporate Governance
September 24, 2009
CReCER Sao Paolo

2. SOEs and public enterprise reform: An old policy debate…
SOEs were an important part of the WB lending program from the beginning
1960s-1980s: various attempts at public enterprise reform
1980s-1990s: privatization is the answer (key part of the “Washington Consensus”)
“Public enterprise reform” discredited.

3. What is good practice in the area of SOE governance?

4. Good practice…
… is not really different from private sector companies!
Big difference: places demands on State to behave as an active, engaged, and non-political shareholder

5. Good practice tends to be defined by the OECD Guidelines on SOE Governance
Their origins:
Continuing prominence of State Owned Enterprises (SOEs) in OECD Economies
Success in reforming corporate governance in the state owned sector (Sweden, Denmark, New Zealand, France, UK)
Pressure on SOEs from liberalization
Strong demand from non-OECD economies

6. The OECD Guidelines
Ensuring an Effective Legal and Regulatory Framework for SOEs
The State Acting as an Owner
Equitable Treatment of Shareholders
Relations with Stakeholders
Transparency and Disclosure
Responsibilities of the Boards of SOEs

7. 1. Ensuring an Effective Legal and Regulatory Framework for SOEs
Key Issues
SOEs should be treated like any other company
“Level playing field”
The Guidelines recommend…
Simplifying legal forms
Removing any special access to finance
Eliminating exemptions from legal rules or enforcement
Direct budget financing of any special obligations

8. 2. The State Acting as Owner
Key Issues
“Ownership” is often not a distinct state function from regulation and policy setting
Political interference and meddling
Lack of accountability
The Guidelines recommend…
Create an ownership function
Setting explicitly policy goals
Develop an ownership policy
Clarify role of shareholder and role of board

9. 2. The State Acting as Owner: Ownership function is key
Establishes and oversees governance norms
Develops commercial and non-commercial objectives
Monitors performance
Nominates board
Accountable to Parliament

10. 3. Equitable Treatment of Shareholders
Key Issues
State can abuse the interests of other shareholders
The Guidelines recommend…
State / companies should treat other shareholders fairly
Maintain high degree of transparency
Encourage participation by other shareholders

11. 4. Relations with Stakeholders
Key Issues
SOEs have complex relations with stakeholders
Both exemptions and special obligations
The Guidelines recommend…
Making policy objectives explicit, and paying for them out of budget
Developing codes of ethics and compliance programs

12. 5. Transparency and Disclosure
Key Issues
SOEs are opaque
Difficult for owners to monitor performance
Little public information available
Special audit and accounting requirements may not always enhance transparency
Guidelines recommend…
Disclosure equal to listed companies
Private sector audits, accounting standards. SOEs have external auditors
… but also meeting public sector requirements
Introducing aggregate reporting

13. 6. Responsibilities of the Boards of SOEs
Key Issues
Boards responsibilities tend to be emptied out
Board Composition is politicized
Oversight tends to be limited
Guidelines recommend…
Qualified Board Members
Appropriate balance of Executives, Non-Executives, and Independent Directors

14. What have we learned from our work in this area?
Lessons Learned
What have we learned from our work in this area?

15. What we do… Country-level corporate governance diagnostics:
Listed companies (CG ROSC program)
Financial sector
SOE governance framework
Develop action plans for reform
Produce targeted research

16. How we do: our approach to SOE Governance Reviews
Compare country situation to international standards / good practice – as reflected in the OECD Guidelines
Methodology consists of:
Questionnaire and surveys to be completed locally
Report with three sections:
Overview of the governance framework
Description of the public sector portfolio
Key issues and policy recommendations
Reviews carried out in 9 countries – on-going work in 4 others

17. Key lessons learned
In general: compliance with the guidelines very low in our client countries
Considerable debate on the organization of the ownership function
WB just starting to integrate into our own activities

18. Key lessons learned: Low Awareness of Int’l Good Practice
Very low transparency, no aggregate reporting
Board practices typically poor
Politically motivated boards common
Confusion over “ownership policies” – which are rarely if ever formalized.
Practical problems with juggling commercial and non-commercial goals
Conflict between (longer-term) “governance” and (shorter-term) privatization goals and institutions

19. Key lessons learned: Observations on ownership entities…
In many countries there is confusion about who the owner is
Current systems are patchwork, kludgy, “organic” rather than the outcome of any formal design

20. Follow-up technical assistance
Capacity building and training of the ownership entity
The development of the ownership policy
The development of a reporting framework
Work at the company level with a specific enterprise, to create a “champion” of SOE governance reform
Training of board members

21. Corporate Governance Group
Thank you!
Pasquale di Benedetta
Corporate Governance Group
World Bank
Washington, DC