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

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.

What is good practice in the area of SOE governance?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Corporate Governance Group Thank you! Pasquale di Benedetta Corporate Governance Group World Bank Washington, DC 202-473-6553 202-522-1604