This chapter introduces undue influence as it pertains to the risk of corruption in SOEs, and discusses main challenges, in order to establish which aspects of the OECD ACI Guidelines are most pertinent and thus which national practices can help contribute those specific goals.
Safeguarding State-Owned Enterprises from Undue Influence
Implementing the OECD Guidelines on Anti-Corruption and Integrity in State-Owned Enterprises
Report
Corporate Governance
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1. The risk of undue influence in SOEs
Abstract
This report aims to shed light on one of the main concerns related to the integrity and governance of SOEs – that is, the risk of undue influence in SOE operations for personal or political benefit and at the expense of the firm or even citizens as the ultimate shareholder. This issue is pronounced in the legal text of the ACI Guidelines (OECD, 2021[1]), “[recognising] that SOEs should not be operated as conduits for political finance, patronage, or personal or related-party enrichment”. The Guidelines state that the risk of SOEs being used deliberately by high-level public officials for these purposes must be considered.
When surveyed in 2017, over half of the SOE leaders participating around the world expressed concern about “a lack of integrity in the public and political sector”, ranking it the number one challenge to improving integrity in their companies.1 SOEs rated interference in decision making, favouritism (nepotism, cronyism, and patronage) and non-declaration of conflict of interest among the top five risks in their companies (out of 24).
Since those findings were issued in 2018 and the Guidelines were adopted in 2019, public controversies have indicated that many SOEs remain vulnerable to being exploited or used as ‘cash cows’ to support personal and political aspirations of individuals or groups. Information gathered through the Working Party’s country reviews and regional networks point to some lingering weaknesses in corporate governance and ownership arrangements that can expose SOEs to such exploitation. SOE leadership positions are often politicised at the expense of merit-based nomination processes that leave key decision-making bodies open to undue influence. Objectives can be unclear and communications opaque, leaving room for high-level officials to assign SOE decision-makers with instructions that are nonstrategic or operational in nature.
Table 1.1 below presents the multiplicity of ways that public officials or those in their networks (in third-party positions or within SOEs) can influence decisions in their favour (for political financing, or personal or related-party enrichment).
Table 1.1. Manifestations of undue influence in SOEs: a typology
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Where exploitation manifests (*all from real cases of corruption or irregular behaviour) |
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|---|---|---|
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Source of exploitation |
Ownership entity and/or on decision-making by those able to exercise decisions related to SOEs |
SOE and its decision-making bodies |
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Third-party actors external to but with relationships with public officials/politicians, and external to SOEs (e.g. business, intermediaries/ agents) |
|
|
|
Actors internal to government/public sphere (including politicians), and external to SOEs |
|
|
|
Actors internal to the SOE |
|
|
Source: Based on assessment of multiple cases of corruption involving SOEs.
Based on an assessment of the typology of the manifestations of the risk of undue influence of SOEs and the cases of corruption that underpin it, it emerges that there are certain commonalities regarding the risk of undue influence or common red flags (Table 1.1):
Exploitation usually relies on patronage or placement of orchestrators’ “people” in key (that is, decision-making) positions (whether at the state or company level).
There is usually a combination of exploitation, threats, pressure, or coercion as well as, at the same time, a degree of opportunistic behaviour. SOEs (or individuals within) can be perpetrators, victims, or both at once. In other words, there are both facilitators and followers – as will be discussed in the case study presented in Chapter 2.
There is most often a combination of an absence of controls and override of controls but depending on the corruption scheme one will be more prominent than the other. Undue influence in SOEs could include ignoring roles and responsibilities correctly established by law.
Corrupt individuals create a situation where individuals – in decision-making positions in government or at the SOE level – are unable (often in the presence of threats, pressure to follow or perform) or unwilling (opportunistic behaviour or self-seeking behaviour, or fear of reporting or ‘doing the right thing’) to walk away from known corruption risks.
There is often multiplicity of patronage, political financing and personal or related party enrichment. Or at least patronage, plus political party financing or enrichment. For instance, funds from SOEs may be used for individuals and families and/or political parties – with the latter usually requiring a broader network of facilitators within the company.
The Working Party identified that corruption risks “may be heightened in instances of (i) a general lack of integrity in the public sector; (ii) a lack of professionalism in the exercise of state ownership; (iii) risk management and corporate controls that are insufficient or ignored, and; (iv) weak enforcement or undue protection from legal enforcement and other disciplining forces”. The above conclusions demonstrate that these basic premises established in the ACI Guidelines still hold.
1.1. Undue influence as a proxy for understanding the risk of patronage, political party financing or personal or related party enrichment
Tackling actual or potential exploitation of SOEs is inherently complicated and would probably call for a full implementation of both of the Working Party’s instruments. The report’s scope however will be narrowed to protecting key decisions of ownership entities and SOEs from undue influence by high-level public officials. Explanation is provided below.
This thematic report of national practices looks at means of insulating SOEs from undue influence in decision making as a proxy for limiting political financing, patronage, and enrichment. Interfering in key decisions is one of the main ways in which high-level officials can manipulate SOEs to secure those gains. In other words, it is the means to the end. In order for corrupt individuals (or groups of individuals) to improve chances of re‑election by having an SOE cater to their jurisdiction, skim bloated contracts or mandate that an SOE hires a company ultimately owned by them, they most often need to control or at least interfere in key decisions.
In jurisprudence, undue influence implies that the exertion of power renders the exploited party unable to freely exercise independent will. In the case of state ownership entities, representatives may be pressured to make decisions that are incongruent with the rationales of state ownership and ignorant to due process for setting objectives, nominations, and monitoring. In the case of SOEs, representatives’ free will (that is, autonomy) to make decisions in the best interest of the firm are at best limited. Undue influence is not corruption by definition but, for the purposes of this report, will be considered as such when high-level officials abuse their authority to tilt operations towards their personal or political gain.
Political patronage is itself a form of undue influence in decision making when high-level officials bypass or ignore formal processes, requisite qualifications, or limitations on their personal or state power to nominate or appoint members of boards or executive management. Insofar as exploitation of SOEs by high-level officials usually relies on at least one ‘insider’ in the company to be acting in concert with or on their behalf, political patronage also paves the way for other forms of corruption.
Box 1.1. State capture in South Africa’s SOE sector: a real-life illustration
For years, some officials at the highest levels of government in South Africa worked illicitly with private individuals to orchestrate a scheme of state capture, implicating many of the most economically important SOEs in the country. Information about this can be found in the reports of the “Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector including Organs of State”, better known as the Zondo Commission, which detail the ways in which corruption took hold in the public and political sector, SOEs and private‑sector parties. According to the reports, elected and public officials and their non-state allies used and abused their influence and powers to secure allies in key positions in state institutions and SOEs and developed corrupt relationships with private sector representatives and state entities that would help facilitate the entrenchment of political power and diversion of SOE and other state resources for personal and related-party enrichment.
The Commission highlights the placement of allies in key positions in shareholding ministries, SOE boards and executive management, which let, in the words of the Commission, “fraud and corruption become the order of the day”. In the case of the national airline the appointment of a board member to the position of Chair was subject to controversy. The Commission found that the Chair subsequently “proceeded, through a mixture of negligence, incompetence and deliberate corrupt intent, to dismantle governance procedures, create a climate of fear and intimidation and make a series of operational choices that saw it decline into a shambolic state”. Those that attempted to oppose them were side lined, resigned or were removed. Executive managers that tried to oppose or raise concerns about “unreasonable and unlawful demands… were slowly but surely removed from their positions”.
Similarly, the capture of South Africa’s main power utility SOE and the largest producer of electricity in Africa was facilitated through a scheme that gave non-state actors a say in the appointment of executive management. Those suspected of not co-operating were removed and replaced. It is reported that in 2015 alone four executives were suspended in the power utility SOE with the Commission concluding that “the members of the [power utility SOE] board took part in the decision to suspend the executives because some must have known that it was part of the scheme and were happy to advance the agenda and others may have simply done so to do the bidding of [the former President]… and not because they regarded the suspensions as in the interest of the power utility SOE.”
The Commission also identified “a pattern of executive interference and political overreach at the SOEs” with ministers, and even the former President, being regularly involved with operational matters. Evidence obtained by the Commission further suggested that corrupt individuals had relationships and direct communication with certain board members and executive management in certain SOEs, where “anyone in the ministry would communicate directly with the CEO and there was not an enforced structure. This meant that issues fell through the cracks. There was a breakdown in the division of roles in the organisation and therefore a breakdown in good governance”.
Aside from external interference, the state capture also required that SOE boards and executive management had to neglect controls and responsibilities that were otherwise dictated by legislation and corporate governance practices. For example, the Commission concluded that “there are many decisions that were made by the 2014 Board of directors of [the main power utility SOE] which were in breach of their duty in terms of section 50(1) and (2) as well as section 51 of the PFMA including their decision to suspend the executives who were suspended and their decision to push three of those executives out of [the power utility SOE] and to pay them the millions of rands that they decided should be paid out to them”.
At the operational level, internal controls and processes for audit and assurance failed, as procurement of goods and services became the primary target for corruption and the means through which funds were diverted into the hands of non-state actors and their cronies. The Commission found that, in the national airline SOE, external auditors during the most problematic years, failed to detect any of the illegal acts occurring, while its internal audit function was “hopelessly ineffective” in identifying or limiting these criminal acts. It further revealed “a steady decline in the quality and effectiveness of the governance of the [national airline SOE] from 2012 onwards” owing in part to the capture and orchestration of the entity’s Chair that allowed for corruption and fraud to take place.
The Commission reports finally show that the neglect for the rules was rooted in a lack of culture of integrity in SOEs that allowed state capture to take hold. The state capture relied on “facilitators” and “followers” within public entities and SOEs, as elaborated upon in the Commission report specific to main power utility SOE but which are considered to be applicable to the entire scheme. These facilitators used threats and intimidation to ensure that the will of non-state actors was carried out and they relied on a culture of silence and compliance from employees within the entities. The followers “were the subordinates to the facilitators who did not stand up to their superiors or speak out when there was evidence of corruption in their organisations”. These followers varied in the degree to which they resisted or complained about the orders they were given, but it is evident that the project of state capture would not have thrived as it did, if these key employees had not participated in the scheme by taking irrational decisions that were not in the best interests of their organisations. While some of these followers attempted to raise red flags, they ultimately compromised themselves and helped to cover up or legitimise skimming of public funds.
Source: Commission of Inquiry into State Capture (2022[2]), https://www.gov.za/sites/default/files/gcis_document/202201/judicial-commission-inquiry-state-capture-reportpart-1.pdf.
1.2. Identifying specific provisions to counteract undue influence
The scope of this thematic report is limited to good practices in limiting interference in (i) the decisions of those responsible for exercising ownership on behalf of the state (e.g., in ownership entities and/or line ministries) and (ii) SOE decision-making bodies (including executive management). In other words, the assessment is of practices and behaviours of natural or legal persons that fall more clearly under the purview of the state ownership entity. It follows that the thematic report would offer good practices on what the ownership functions can do and are doing to limit the possibilities of SOEs being exploited by representatives of government. The report however may also be instructive for countries seeking to limit influence by third parties (e.g. private firms, intermediaries, or foreign interests), as well as useful for promoting increased autonomy and integrity of SOEs around the world.
The ACI Guidelines’ (and SOE Guidelines’) provisions most relevant to the thematic report are grouped into four key themes. The four themes are provided below, and each are unpacked by relevant ACI Guidelines’ provisions in Chapters 2‑6 of this report:
Specific legal protections. The ACI Guidelines recall that SOEs are autonomous legal entities that should be subject to and protected by the general rule of law in their countries of operation. Protection should extend to abuse of SOEs as conduits for political finance, patronage, or personal or related-party enrichment.
Protection of state ownership entities’ integrity and decision making (particularly regarding setting clear objectives, merit-based nomination processes and monitoring SOE performance). The ACI Guidelines promote transparency around objectives and the objectives-setting process, in part to make it harder for illicit interests to change SOE directions at will. Merit-based and professional nominations to SOE boards help to limit the likelihood of patronage, nepotism, and cronyism in appointments.
Protection of boards’ integrity and decision making (particularly regarding strategy and appointing and monitoring management). As established in the SOE Guidelines and elaborated upon in the ACI Guidelines, it is a prime responsibility of the state to ensure that boards have the necessary authority, diversity, competencies, and objectivity to autonomously carry out their function with integrity.
Transparent ownership arrangements and communication. The ACI Guidelines seek to limit opportunities for instructions or dealings that fall outside of formal channels of communication by encouraging state owners to establish with whom, how and when communication should occur.
There are naturally other factors that reduce SOE exposure to corruption and the likelihood that undue influence occurs in decision making. Public sector integrity (covered in ACI Guidelines’ recommendation II) and effective enforcement and sanctions regimes (covered in ACI Guidelines’ recommendation V) are critical in this regard. These provisions will not be explored in detail in this particular report but could form the basis of future thematic studies or assessments of the instrument’s implementation.
References
[2] Commission of Inquiry into State Capture (2022), Judicial Commission of Inquiry into State Capture Report: Part I, Vol. 1: South African Airways and its Associated Companies, https://www.gov.za/sites/default/files/gcis_document/202201/judicial-commission-inquiry-state-capture-reportpart-1.pdf.
[1] OECD (2021), Guidelines on Anti-corruption and Integrity in State-Owned Enterprises, http://www.oecd.org/corporate/Anti-Corruption-Integrity-Guidelines-for-SOEs.htm.
[3] OECD (2018), State Owned Enterprises and Corruption: what are the risks and what can be done, https://doi.org/10.1787/9789264303058-en.
Note
← 1. In 2017, the Working Party surveyed 347 SOE representatives across 213 SOEs (confidentially) and 28 state ownership entities across 34 countries. The results are presented in the OECD report (OECD, 2018[3]), State Owned Enterprises and Corruption: what are the risks and what can be done?, https://doi.org/10.1787/9789264303058-en.