Presentation on theme: "Corporate Governance Group"— Presentation transcript:
1 Corporate Governance Group Global Capital Markets Department World BankFinancial Oversight in Public Enterprises: The Challenge of Corporate GovernanceSeptember 24, 2009CReCER Sao Paolo
2 SOEs and public enterprise reform: An old policy debate… SOEs were an important part of the WB lending program from the beginning1960s-1980s: various attempts at public enterprise reform1980s-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 EconomiesSuccess in reforming corporate governance in the state owned sector (Sweden, Denmark, New Zealand, France, UK)Pressure on SOEs from liberalizationStrong demand from non-OECD economies
6 The OECD GuidelinesEnsuring an Effective Legal and Regulatory Framework for SOEsThe State Acting as an OwnerEquitable Treatment of ShareholdersRelations with StakeholdersTransparency and DisclosureResponsibilities of the Boards of SOEs
7 1. Ensuring an Effective Legal and Regulatory Framework for SOEs Key IssuesSOEs should be treated like any other company“Level playing field”The Guidelines recommend…Simplifying legal formsRemoving any special access to financeEliminating exemptions from legal rules or enforcementDirect 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 settingPolitical interference and meddlingLack of accountabilityThe Guidelines recommend…Create an ownership functionSetting explicitly policy goalsDevelop an ownership policyClarify role of shareholder and role of board
9 2. The State Acting as Owner: Ownership function is key Establishes and oversees governance normsDevelops commercial and non-commercial objectivesMonitors performanceNominates boardAccountable to Parliament
10 3. Equitable Treatment of Shareholders Key IssuesState can abuse the interests of other shareholdersThe Guidelines recommend…State / companies should treat other shareholders fairlyMaintain high degree of transparencyEncourage participation by other shareholders
11 4. Relations with Stakeholders Key IssuesSOEs have complex relations with stakeholdersBoth exemptions and special obligationsThe Guidelines recommend…Making policy objectives explicit, and paying for them out of budgetDeveloping codes of ethics and compliance programs
12 5. Transparency and Disclosure Key IssuesSOEs are opaqueDifficult for owners to monitor performanceLittle public information availableSpecial audit and accounting requirements may not always enhance transparencyGuidelines recommend…Disclosure equal to listed companiesPrivate sector audits, accounting standards. SOEs have external auditors… but also meeting public sector requirementsIntroducing aggregate reporting
13 6. Responsibilities of the Boards of SOEs Key IssuesBoards responsibilities tend to be emptied outBoard Composition is politicizedOversight tends to be limitedGuidelines recommend…Qualified Board MembersAppropriate balance of Executives, Non-Executives, and Independent Directors
14 What have we learned from our work in this area? Lessons LearnedWhat have we learned from our work in this area?
15 What we do… Country-level corporate governance diagnostics: Listed companies (CG ROSC program)Financial sectorSOE governance frameworkDevelop action plans for reformProduce 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 GuidelinesMethodology consists of:Questionnaire and surveys to be completed locallyReport with three sections:Overview of the governance frameworkDescription of the public sector portfolioKey issues and policy recommendationsReviews carried out in 9 countries – on-going work in 4 others
17 Key lessons learnedIn general: compliance with the guidelines very low in our client countriesConsiderable debate on the organization of the ownership functionWB just starting to integrate into our own activities
18 Key lessons learned: Low Awareness of Int’l Good Practice Very low transparency, no aggregate reportingBoard practices typically poorPolitically motivated boards commonConfusion over “ownership policies” – which are rarely if ever formalized.Practical problems with juggling commercial and non-commercial goalsConflict 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 isCurrent 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 entityThe development of the ownership policyThe development of a reporting frameworkWork at the company level with a specific enterprise, to create a “champion” of SOE governance reformTraining of board members
21 Corporate Governance Group Thank you!Pasquale di BenedettaCorporate Governance GroupWorld BankWashington, DC