The OECD Guidelines on Corporate Governance of State Owned Enterprises     The OECD Guidelines on Corporate Governance of State Owned Enterprises Louis Bouchez Corporate Affairs Division, OECD Delhi, India 16 - 17 February 2006 The views expressed in this paper are those of the author and do not necessarily represent the opinions of the OECD or its Member countries Scale and Scope and economic impact After privatization waves in the 80’s and the 90’s, SOEs still have a significant economic impact in a number of OECD countries - SOEs are still significant in many OECD countries Asset value / GDP > 20% in Finland, Slovak, Sweden, Italy, France, Korea, almost Turkey SOE represent > 10 % market capitalization in Turkey, Czech R., > 30% in Italy and Finland and Greece, and > 50% in Norway SOEs are in “strategic sectors” (infrastructure and utilities such as energy, transport, telecoms,…) Pressure for reform - Globalisation in most industries, technological changes and liberalization in many infrastructure sectors and network industries, traditionally dominated by SOEs, made necessary readjustment / restructuring of the state sectors Exemple: centralization of the “ownership function” in a number of OECD countries since the late 90’s (the Netherlands (1999), Sweden, Denmark, Norway (2001-2002), UK (2003), France (2004), Finland (2005),… - Financial difficulties, even severe backlashes of some large SOEs made this demand even more pressing Exemple: France Telecom in 2001: 9 B Euros losses / decrease by 12 b Euros in equity capital Difficulties attributed to failures in the way the state exercised its ownership function (conclusions of two official reports: “Barbier de la Serre” Report and Special Parliamentary Report “Douste- Blasy”)

Outline Rationale for developing the Guidelines Process and main characteristics Priorities in the Guidelines A new pillar to the OECD corporate governance work The Asian Network on corporate governance of SOEs SOEs face specific challenges in terms of governance Passive ownership from the state and undue political interference Soft budget constraints( largely protected from bankruptcy and takeover threat) Complex chain of accountability Expected benefits from improvement in the governance of SOEs Avoid severe and unexpected difficulties as witnessed in the recent past Efficiency gains, better performances and better valuation of state assets (for potential future privatization) Facilitate SOEs’ access to capital, both debt and equity (so facilitate and secure their international expansion when relevant) SOEs will better compete with their private sector competitors Improved overall public governance, including through greater transparency Contribute to fiscal sustainability (decrease in budgetary burden and public debt) In addition, strong demand from many non-member countries SOEs are often more important in non-OECD countries than in OECD countries. They play a very significant role in a number of major players, such as China, India, Russia, and to a lesser extend, Brazil and South-Africa. The overall performance of SOEs in non-member countries has been disappointing. Decades of partial reforms have led to the conclusion that poor performance was often linked to governance difficulties. Inattention to governance issues during privatisation has often led to spectacular failures and widespread abuses Consequently, the reform of the corporate governance of SOEs has become a priority in many non-member economies. The 2005 focus of our Policy Dialogue with China on Corporate Governance is the corporate governance of SOEs (meeting 19 May in Beijing) and CG of SOEs has been selected as a priority topic by the Asian and Russian Roundtables

1. Rationale for developing the Guidelines Scale and scope of the state sector Impact of SOEs on economic performance Pressure for reform deriving from globalization and liberalization Specific governance challenges Expected benefits from improvements of SOE governance Strong demand from non-OECD economies SOEs face specific challenges in terms of governance Passive ownership from the state and undue political interference Soft budget constraints( largely protected from bankruptcy and takeover threat) Complex chain of accountability Expected benefits from improvement in the governance of SOEs Avoid severe and unexpected difficulties as witnessed in the recent past Efficiency gains, better performances and better valuation of state assets (for potential future privatization) Facilitate SOEs’ access to capital, both debt and equity (so facilitate and secure their international expansion when relevant) SOEs will better compete with their private sector competitors Improved overall public governance, including through greater transparency Contribute to fiscal sustainability (decrease in budgetary burden and public debt) In addition, strong demand from many non-member countries SOEs are often more important in non-OECD countries than in OECD countries. They play a very significant role in a number of major players, such as China, India, Russia, and to a lesser extend, Brazil and South-Africa. The overall performance of SOEs in non-member countries has been disappointing. Decades of partial reforms have led to the conclusion that poor performance was often linked to governance difficulties. Inattention to governance issues during privatisation has often led to spectacular failures and widespread abuses Consequently, the reform of the corporate governance of SOEs has become a priority in many non-member economies. The 2005 focus of our Policy Dialogue with China on Corporate Governance is the corporate governance of SOEs (meeting 19 May in Beijing) and CG of SOEs has been selected as a priority topic by the Asian and Russian Roundtables

2. Process and main characteristics Extensive and inclusive consultations with relevant players from OECD members and non-member countries (Paris 2004) The Guidelines: are non-binding and non-prescriptive are complementary to the OECD Principles of Corporate Governance do not preclude/alter privatization policies are based on a Comparative Report - Initiative and financing: Some countries (Nordics) called for OECD guidance in their reforms beginning of 2001 In June 2002, the OECD Steering Group mandated the OECD Working Group on Privatisation and Corporate Governance of SOEs to develop non-binding guidelines on corporate governance of SOEs Enough VCs were gathered by the spring 2003 to launch the project in June 2003 Voluntary Contributions were received from Germany, Sweden, Norway, Denmark, Finland and Korea. - Working Group on Privatisation and Corporate Governance of SOEs 4 meetings from June 2003 to February 2005 - Consultations Fall 2004: High level consultative meetings with CEO/Chairman of large SOEs, parliamentarians, BIAC and TUAC, state supreme audit bodies, etc.. … From OECD member and non member countries - Public consultation on the web in the winter 2004-2005 - Adoption: Final Agreement within the Working Group in February 2005 Approval by the OECD Steering Group on Corporate Governance in March 2005 Adopted by the OECD Council 28 April 2005 Comparative Report Based on a Questionnaires on actual practices to which 24 countries answered To be published in June 2005

3. Priorities in the Guidelines 3.1 Ensure a level-playing field with the private sector 3.2 Reinforce the ownership function within the state administration 3.3 Improve transparency of SOEs’ objectives and performance 3.4 Strengthen and empower SOE boards 3.5 Provide equitable treatment of non-controlling / minority shareholders The OECD Guidelines address four priorities in reforming the governance of SOEs: firstly, ensuring a level-playing field with private sector firms; secondly, reinforce the ownership function should within the state administration; thirdly, improve transparency and accountability vis-à-vis both the state, as shareholder, society and the media; finally empower SOE boards.

3.1 Ensure a level-playing field with the private sector Separate regulation and the shareholding function Transparency of special obligations Harmonization in legal forms More flexibility in capital structures Competitive conditions in access to finance More fundamentally, the Guidelines call for the legal and regulatory framework to ensure a level-playing field in markets where SOE and privately-owned firms compete. This implies a clear separation between the ownership function and other state functions that may influence the conditions for SOEs, particularly regulation, and a streamlining of legal forms under which SOEs operate. This also requires that any obligations and responsibilities that an SOE is required to undertake in terms of public services beyond the generally accepted norm is clearly disclosed and compensated in a transparent manner. Finally, the Guidelines also call for more flexibility in the SOEs’ capital structures and for competitive conditions regarding their access to finance. This requires, inter alia, that all relations between SOEs and state-owned banks, financial institutions and other SOEs should be based on purely commercial ground.

3.2 Reinforce ownership function within the state administration Centralization / coordination of the ownership function Clear and disclosed ownership policy No direct interference in day-to-day activities Let boards carry out their responsibilities Accountability secured Effective exercise of ownership rights Regarding the organisation of the ownership function, the Guidelines recommend a certain degree of centralisation, or at least effective co-ordination. Centralisation of the ownership function is the current trend within OECD countries. The objective of this centralization is a clear identification, a consistent policy, more flexibility in resources, and therefore a reinforcement of the ownership function. They also call for a clarification or a reinforcement of accountability vis-à-vis Parliaments and urge governments to develop and disclose clear ownership policies. A central recommendation is for government not to get directly involved in the day-to-day management of SOEs, but to respect the independence of SOE boards and allow them to exercise their responsibilities. A crucial issue is for the state to set up well structured and transparent nomination processes for SOEs boards, based on competences and skills. Decreasing the number of board members coming from the state administration may prove to be instrumental in reinforcing boards’ independence, although this issue remains very sensitive in some countries.

3.3 Improve transparency of SOEs’ objectives and performance Consistent and aggregate disclosure Reinforced internal audit Independent external audit High quality standards for accounting and audit Disclosure as listed companies Disclosure of material information, including financial assistance from the state, transactions with related entities and risk factors With regards transparency and disclosure, the Guidelines call for reinforced internal control and external and independent audits based on international standards for large and listed SOEs. They also call attention to specific issues such as disclosure on material risk factors and on material transactions with related entities. These issues could undeniably give rise to abuses and are considered as serious concerns in a number of countries, particularly in non-OECD countries. Any financial assistance received from the State, including guarantees, or commitments made on behalf of the State should also be disclosed. Finally, the Guidelines recommend that the state ensures a consistent and aggregate reporting on SOEs, allowing the general public, the Parliament and the media to have a clear view of the performance and evolution of SOEs.

3.4 Strengthen and empower SOE boards Structured and skill-based nomination process Clear mandate and full responsibility Able to appoint CEO Able to exercise independent judgment limit number of state representatives on the board separation between Chair and CEO Systematic evaluation of board Empowering SOE boards is certainly critical for improving the governance of SOEs. This will imply clarifying their mandate and allowing them to fully carry out their responsibilities in monitoring management and strategic guidance. To this aim, it is recommended that SOE boards have the power to appoint and remove CEOs of SOEs, which is far from being the current practice in many OECD countries. They should be composed so that they can exercise objective judgement, and this often implies that the Chair is separated from the CEO and that there are not an excessive number of board members coming from the state administration. Practice within OECD countries varies a lot in this regard. The solution has been to put emphasis on the nomination process and on competencies and skills necessary for having a competent board. The fiduciary duty of all board members towards the company and all its shareholders has been also reminded. The Guidelines also recommend a systematic appraisal of SOE boards’ performance.

3.5 Provide equitable treatment of non-controlling minority shareholders Important for State’s capacity to attract outside funding Impact on valuation of SOEs Relevant for the general perception of the State as an owner Prevents the State pursuing objectives outside the SOE’s interests SOEs face specific challenges in terms of governance Passive ownership from the state and undue political interference Soft budget constraints( largely protected from bankruptcy and takeover threat) Complex chain of accountability Expected benefits from improvement in the governance of SOEs Avoid severe and unexpected difficulties as witnessed in the recent past Efficiency gains, better performances and better valuation of state assets (for potential future privatization) Facilitate SOEs’ access to capital, both debt and equity (so facilitate and secure their international expansion when relevant) SOEs will better compete with their private sector competitors Improved overall public governance, including through greater transparency Contribute to fiscal sustainability (decrease in budgetary burden and public debt) In addition, strong demand from many non-member countries SOEs are often more important in non-OECD countries than in OECD countries. They play a very significant role in a number of major players, such as China, India, Russia, and to a lesser extend, Brazil and South-Africa. The overall performance of SOEs in non-member countries has been disappointing. Decades of partial reforms have led to the conclusion that poor performance was often linked to governance difficulties. Inattention to governance issues during privatisation has often led to spectacular failures and widespread abuses Consequently, the reform of the corporate governance of SOEs has become a priority in many non-member economies. The 2005 focus of our Policy Dialogue with China on Corporate Governance is the corporate governance of SOEs (meeting 19 May in Beijing) and CG of SOEs has been selected as a priority topic by the Asian and Russian Roundtables

4. A new pillar to the OECD CG work Dissemination and discussion in non-OECD countries Priority topic in both the Asian and Russian Roundtable Dedicated country meeting and policy dialogue in China, Ukraine and Egypt Presentation of the Guidelines in other Roundtables (MENA, Latin America, SEE and Eurasia) Follow-up on OECD country work Co-operation on Korean reforms Thematic issues such as aggregate reporting on nomination and evaluation for SOE boards Dissemination and discussion in non-OECD member countries The 2005 focus of our Policy Dialogue with China on Corporate Governance is the corporate governance of SOEs (meeting 19 May in Beijing). CG of SOEs has been selected as a priority topic by the Asian Roundtable / First meeting of a dedicated Task Force 20 May in Beijing. The task Force will report (Policy Brief) to the Asia Roundtable in September 2005 in Indonesia CG of SOEs has also been selected as a priority topic by the Russian Roundtable: A Task Force will first meet beginning of June. A specific meeting on corporate governance of SOE will be held in Kiev beginning of July, under the framework of the Eurasian Roundtable. Other Round Tables will discuss the Guidelines in their next meeting in the Fall 2005 (MENA, Latin America, SEE). The Global Corporate Governance Forum invites the OECD to present and discuss the Guidelines in the Pan-African Forum on Corporate Governance in October 2005. OECD Work Demand for OECD support from Korea who plans to reform the governance of its SOE. Work more in-depth on priority issues (still to be determined)

5. The Asian Network on CG of SOEs Initiated in May 2005 as new activity of the Asian Roundtable on CG, in order to: Raise awareness on CG of SOEs Evaluate existing CG policy framework of SOEs Influence policymaking in Asia by providing a forum for peer policymakers Support CG reforms in SOE The Asian Network will meet in 2006 and 2007 to discuss each of the 6 chapters of the Guidelines Intention to draft (i) a Policy Brief providing concrete policy recommendations and (ii) a comparative report Dissemination and discussion in non-OECD member countries The 2005 focus of our Policy Dialogue with China on Corporate Governance is the corporate governance of SOEs (meeting 19 May in Beijing). CG of SOEs has been selected as a priority topic by the Asian Roundtable / First meeting of a dedicated Task Force 20 May in Beijing. The task Force will report (Policy Brief) to the Asia Roundtable in September 2005 in Indonesia CG of SOEs has also been selected as a priority topic by the Russian Roundtable: A Task Force will first meet beginning of June. A specific meeting on corporate governance of SOE will be held in Kiev beginning of July, under the framework of the Eurasian Roundtable. Other Round Tables will discuss the Guidelines in their next meeting in the Fall 2005 (MENA, Latin America, SEE). The Global Corporate Governance Forum invites the OECD to present and discuss the Guidelines in the Pan-African Forum on Corporate Governance in October 2005. OECD Work Demand for OECD support from Korea who plans to reform the governance of its SOE. Work more in-depth on priority issues (still to be determined)

The Guidelines can be downloaded on our website at: www.oecd.org/daf/corporate-affairs/soe Please let me know any comments or questions you may have at: louis.bouchez@oecd.org