The state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness.
In order to carry out its ownership functions, the government should refer to private and public sector governance standards, notably the G20/OECD Principles of Corporate Governance, which are also applicable to SOEs when the state is not the sole owner of an SOE, and of all relevant sections when it is the sole owner of an SOE. In addition, there are specific aspects of SOE governance that either merit special attention or should be documented in more detail in order to guide SOE board members, management and the state ownership entity in effectively performing their respective roles.
II.A. Governments should simplify and standardise the legal forms under which SOEs operate. Their operational practices should follow commonly accepted corporate norms.
SOEs may have different legal forms from other companies. This may reflect specific objectives or societal considerations as well as special protection granted to certain stakeholders, such as employees whose remuneration may be fixed by regulatory acts or bodies who benefit from specific pension rights and protection against redundancies equivalent to those provided to civil servants.
The state should ensure that as many elements of the Guidelines as possible are implemented in a consistent manner, despite different legal or corporate forms for SOEs throughout its portfolio.
This includes (i) the respective authority and power of the board, management and ministries; (ii) the composition and structure of these boards; (iii) the extent to which they grant consultation or decision-making rights to shareholders and/or to some stakeholders, more particularly, the workforce; (iv) disclosure requirements; and (v) the extent to which they are subjected to insolvency and bankruptcy procedures. SOEs’ legal form and the definition of their activities should in general not prevent them from diversifying or extending their activities in new sectors or overseas, especially if engaged in economic activities and acting in accordance with commercial considerations. Limits on expanding SOEs’ mandate are often relevant if the SOE carries out important public policy objectives or public service obligations, and are aimed to prevent misuse of public funds, stop overly ambitious growth strategies or prevent SOEs from exporting sensitive technologies. Care must be taken to ensure that such legal limits relate to the SOEs’ main line of business, while also ensuring that they do not hamper the necessary autonomy of the board in carrying out its duties.
When standardising the legal form of SOEs, governments should base themselves as much as possible on corporate law that is equally applicable to privately owned companies and avoid creating a specific legal form, or granting SOEs privileged status or special protections, when this is not absolutely necessary for achieving the public policy objectives imposed on the enterprise. Standardising the legal form of SOEs enhances transparency, accountability and facilitates oversight through benchmarking. The standardising should particularly target SOEs engaged in economic activities, using the same means and instruments usually available to private owners also to the state as an owner. Standardising should therefore primarily concern the role and authority of the enterprise’s governance organs as well as transparency and disclosure obligations.
II.B. The state should clearly define owners’ expectations, allow SOEs full operational autonomy to achieve them and refrain from intervening in the management of SOEs. The state as a shareholder should redefine SOE expectations in a transparent manner and only in cases where there has been a fundamental change of mission.
The prime means for an active and informed ownership by the state are a clear and consistent ownership policy, the development of broad mandates and expectations for SOEs, a structured board nomination process and an effective exercise of established ownership rights. The state’s broad mandates and expectations for SOEs should be revised only in cases where there has been a fundamental change of mission. While it may sometimes be necessary to review and subsequently modify an SOE’s objectives due to changing circumstances, the state should refrain from modifying them too often and should ensure that the procedures involved are transparent and in the public interest.
Some government shareholders may formalise their broad mandate and expectations for SOEs to the board through owners’ expectations, letters of expectation, performance contracts or other means, while also engaging in regular dialogue with the governing bodies of SOEs. Their formalisation into a clear set of expectations helps to safeguard board autonomy, and prevent ad hoc government intervention. It also can serve as a means to hold SOEs accountable.
II.C. The state should let SOE boards exercise their responsibilities and should respect their independence. The ownership entity should establish and maintain appropriate frameworks for communication with SOEs’ highest governing body, and typically through the chair.
In the nomination and election of board members, the ownership entity should focus on the need for SOE boards to exercise their responsibilities in a professional and independent manner. It is important that when carrying out their duties individual board members do not act as representatives of different constituencies. Independence requires that all board members carry out their duties in an even-handed and accountable manner with respect to all state and non-state shareholders.
The ownership entity should avoid electing an excessive number of board members from the state administration. Moreover, board members should only be removed for good cause and their appointment and removal should be independent from the state’s election periods or political cycles. This is particularly relevant for SOEs engaged in economic activities, where limiting board membership by representatives of the ownership entity or by other state officials can increase professionalism and help prevent conflict of interest and government intervention in SOE management.
Employees of the ownership entity or professionals from other parts of the administration should only be elected to SOE boards if they meet the required competence level for all board members and if they do not act as a conduit for political influence that extends beyond the ownership role. They should have the same duties and responsibilities as the other board members. Disqualification conditions and situations of conflict of interest should be carefully evaluated and guidance provided about how to handle and resolve them. The professionals concerned should have neither excessive inherent nor perceived conflicts of interest. In particular, this implies that they should neither take part in regulatory decisions concerning the same SOE nor have any specific obligations or restrictions that would prevent them from acting in the enterprise’s interest. More generally, all potential conflicts of interest concerning any member of the board should be reported to the board which should then disclose these together with information on how they are being managed.
It is important to clarify the respective personal and state liability when state representatives are on SOE boards. The state officials concerned may have to disclose any personal ownership they have in the SOE and follow the relevant insider trading regulation. Guidelines or codes of ethics for members of the ownership entity and other state officials serving as SOE board members could be developed by the ownership entity. Such guidelines or codes of ethics should indicate how information passed on to the state from these board members should be handled. Direction in terms of broader policy objectives should be channeled through the ownership entity and enunciated as enterprise objectives rather than imposed directly through board participation. As a general rule, state officials involved in exercising their duties should be held accountable for potential administrative, civil or criminal liabilities resulting from corporate misconduct. Ownership entities should respect the confidentiality of board discussions. Furthermore, strict limitations on the dissemination of this information should be put in place. The state as shareholder should have no greater access to information, than what its shareholding provides as a right.
The state ownership entity should establish and maintain appropriate frameworks for communication with SOEs’ highest governing body, and typically through the chair. Public policy objectives, including public service obligations, if not established by regulation or legislation, should be communicated in the government’s ownership policy or with the owners’ expectations shared with the entire board, and be made public with due regard to corporate confidentiality. If there are non-state shareholders, SOEs’ public policy objectives, including public service obligations should be approved by the annual general shareholders meeting if they are not already public. Accurate records of communication between the ownership entity and SOEs should be maintained. The state should not be involved in operational decision-making, such as directing the SOE’s hiring decisions. The state should publicly disclose and specify in which areas and types of decisions the ownership entity is competent to give instructions.
When representatives of government, including those of the ownership entity, overstep their role and/or act in a way that appears to be irregular, SOEs should be able to seek advice or to report it through established reporting channels.
II.D. The exercise of ownership rights should be clearly identified within the state administration and be centralised in a single ownership entity. If this is not possible, relevant ownership functions should be co-ordinated by a designated body with a clear mandate to act on a whole of-government basis.
It is critical for the ownership function within the state administration to be clearly identified, whether it is located in a central ministry such as the finance or economics ministries, in a separate administrative or corporate entity, or within a specific sector ministry. The ownership function of SOEs is the entity that exercises the power, responsibility, or steering ability to appoint boards of directors; set and monitor objectives; and/or vote on the company shares on behalf of the government.
Centralisation can be an effective way to clearly separate the exercise of the ownership function from other potentially conflicting activities performed by the state, particularly market regulation and policy-making as mentioned in Guideline III.A below, provided that the ownership can be sufficiently well resourced, and its operations shielded from irregular practices. As such, in jurisdictions with weak rule of law, poor governance or high levels of perceived corruption, pooling large amounts of corporate powers in a centralised ownership entity may be accompanied with risks which should be considered when deciding upon an appropriate framework for state-ownership.
A centralised ownership model is characterised by one central decision-making body acting as shareholder in the majority of all or certain categories of SOEs controlled or held, directly or indirectly by the state. Its role will include setting the state’s rationale and objective as an owner for each SOE, nominating directors, evaluating SOEs’ operations and vote at the general meeting. The ownership entity is also responsible for setting and monitoring broad mandates and expectations for SOEs based on its ownership policy, co-ordinating (when relevant) its decisions with other government stakeholders, and defining applicable frameworks and important matters relating to the governance of SOEs.
The centralised ownership entity should be independent or under the authority of one minister. This approach helps in clarifying the ownership policy and its orientation, and also helps ensure its more consistent implementation. Centralisation of the ownership function also allows for reinforcing and bringing together relevant competencies by organising “pools” of experts on key matters, such as financial reporting or board nomination. In this way, centralisation can be a major force in exercising state ownership in a professional and consistent manner, while also facilitating the development of aggregate reporting on state ownership.
If ownership is not centralised, governments should establish a strong co-ordinating entity. The co-ordinating entity should have the mandate to operate on a whole-of-government basis. This entity should be a specialised government unit or corporate entity which operates in an advisory capacity to other shareholding ministries on best practices in corporate governance, technical and operational issues. This will help to ensure that each SOE has a clear mandate and receives a coherent message in terms of ownership expectations or reporting requirements. The co-ordinating entity would harmonise and co-ordinate the actions and policies undertaken by different ownership departments in various ministries, and help ensure that decisions regarding enterprise ownership are taken on a whole-of-government basis – thus ensuring that SOEs are not subject to competing or contradictory policy mandates. The co-ordinating entity should, ideally, also be in charge of establishing an overall ownership policy, developing specific guidelines and unifying practices among the various ministries. The establishment of a co-ordinating entity can also facilitate the centralisation of some key functions, in order to make use of specific expertise and ensure independence from individual sector ministries. For example, it can be useful for the co-ordinating entity to undertake the function of board nomination or performance monitoring.
Exercising ownership rights through state-owned holding companies (SOHCs) is another way of centralisation and, depending on its own corporate governance arrangements and legal form, can permit a separation of the state’s ownership, policy and regulatory functions. In some contexts, the indirect exercise of ownership via SOHCs can ensure arm’s length separation from other government functions thereby shielding SOEs activities from undue political or day-to-day interference. Many SOHC’s have as a mission to act as an owner-representative and to manage the state’s holdings as an active asset manager or investment company with the aim of sustainably growing shareholder value through long-term and active ownership. If an SOHC is incorporated under applicable company law, its corporate form may allow for it to restructure or divest its portfolio assets with more flexibility and agility in line with its overall mission. Experience demonstrates that SOHCs may not be suitable in all contexts, especially if its own governance is vulnerable to undue political interference or other irregular practices. The state as the ultimate beneficiary owner of SOHC should establish rigorous objectives for SOHCs and their portfolio enterprises, and establish legal and regulatory frameworks that ensure SOHCs are conducive to the highest standards of corporate governance, integrity, transparency and accountability.
II.E. The ownership entity should have the capacity and competencies to effectively carry out its duties, and be held accountable to the relevant representative bodies. It should have clearly defined and transparent relationships with relevant public entities.
The ownership entity should have the requisite capacities, personnel, and competencies to effectively carry out its duties. It should be supported by formal regulations, procedures, and an adequate legal framework that effectively and efficiently guides the state’s role as shareholder consistent with those applicable to the companies in which it exercises the state’s ownership rights. In some jurisdictions, this may require enacting a legal framework, consistent with other applicable laws, that transparently establishes the institutional arrangements, and guiding principles and rules needed for the state to exercise its ownership rights over SOEs. The framework may include a clear delineation of roles and responsibilities among state institutions to avoid conflicts of interest, reporting and disclosure requirements and requisite accountability mechanisms.
The relationship of the ownership entity with other government bodies as well as with other state-owned institutional investors such as sovereign wealth funds, development banks and pension funds controlled or influenced by the state should be clearly and transparently defined. A number of state bodies, ministries, administrations or financial SOEs may have different roles vis-à-vis the same SOEs. In order to increase public confidence in the way the state manages ownership of SOEs, it is important that these different roles be clearly identified and explained to the general public. For instance, the ownership entity should maintain co-operation and continuous dialogue with the state supreme audit institutions responsible for auditing the SOEs. It should support the work of the state audit institution and take appropriate measures in response to audit findings. When appropriate, co-operation and dialogue with state bodies with responsibility over public finance can be considered good practices to ensure effective financial oversight related to fiscal risk monitoring and evaluation.
The ownership entity should be held clearly accountable for the way it carries out state ownership. Its accountability should be, directly or indirectly, to bodies representing the interests of the general public, such as the legislature. Its accountability to the legislature should be clearly defined, as should the accountability of SOEs themselves, which should not be diluted by virtue of the intermediary reporting relationship.
Accountability should go beyond ensuring that the exercise of ownership does not interfere with the legislature’s prerogative as regards budget policy. The ownership entity should report on its own performance in exercising state ownership and in achieving the state’s objectives in this regard. It should provide quantitative and reliable information to the public and its representatives on how the SOEs are managed in the interests of their owners. In the case of legislative hearings, confidentiality issues should be dealt with through specific procedures such as confidential or closed meetings. While generally accepted as a useful procedure, the form, frequency and content of this dialogue may differ according to the constitutional law and the different legislative traditions and roles.
Accountability requirements should not unduly restrict the autonomy of the ownership entity in fulfilling its responsibilities. For example, cases where the ownership entity needs to obtain the legislature’s ex ante approval should be limited and relate to significant changes to the overall ownership policy, significant changes in the size of the state sector and significant transactions (investments or disinvestment). More generally, the ownership entity should enjoy a certain degree of flexibility vis-à-vis its responsible ministry, where applicable, in the way it organises itself and takes decisions with regards to procedures and processes. The ownership entity could also enjoy a certain degree of budgetary autonomy that can allow flexibility in recruiting, remunerating and retaining the necessary expertise, for instance through fixed-term contracts or secondments from the private sector.
II.F. The state should act as an informed and active owner and should exercise its ownership rights according to the legal structure of each enterprise and depending on its respective degree of ownership or control.
To avoid either undue political interference or lack of oversight due to passive state ownership that results in negative performance, it is important for the ownership entity to focus on the effective exercise of ownership rights, which must be clearly separated from policy, regulatory or other types of government functions to avoid potential conflicts of interest. The state as an owner should typically conduct itself as any major shareholder when it is in a position to significantly influence the enterprise and be an informed and active shareholder when holding a minority post. The state needs to exercise its rights in order to protect its ownership and optimise its value.
Among the basic shareholder rights are: (i) to participate and vote in shareholder meetings; (ii) to obtain relevant and sufficient information on the corporation on a timely and regular basis; (iii) to elect and remove members of the board; (iv) to approve extraordinary transactions; and (v) to vote on dividend distribution and enterprise dissolution. The ownership entity should exercise these rights fully and judiciously, as this would allow the necessary influence on SOEs without infringing on their day-to-day management. The effectiveness and credibility of SOE governance and oversight will, to a large extent, depend on the ability of the ownership entity to make an informed use of its shareholder rights and effectively exercise its ownership functions in SOEs.
An ownership entity needs unique competencies and should have professionals with legal, financial, economic, sectorial, sustainability-related and management skills that are experienced in carrying out fiduciary responsibilities. Such professionals must also clearly understand their roles and responsibilities as civil servants with respect to the SOEs. In addition, the ownership entity should include competencies related to the specific public policy objectives, including any public service obligations that some SOEs under their supervision are required to undertake.
The ownership entity should moreover have competencies with regard to and be attentive to digital technologies and the risks and opportunities of their use in the oversight and implementation of corporate governance regulatory requirements and practices. Digital technologies may be used to enhance the oversight of ownership requirements, but also require that there is due attention to the management of associated risks. As technologies evolve and may serve to strengthen corporate governance practices, the ownership and regulatory framework may require review and adjustments to facilitate their use.
The ownership entity should also have the possibility to have recourse to outside advice and to contract out some aspects of the ownership function, in order to exercise the state’s ownership rights in a better manner. It could, for example, make use of specialists for carrying out evaluation, active monitoring, or proxy voting on its behalf where deemed necessary and appropriate. The use of short-term contracts and secondments can be useful in this regard.
Prime responsibilities of the ownership entity include:
The applicability of these responsibilities depends on the degree of ownership or control of the state over the SOE. If the SOE is indirectly held by the state via another parent SOE (as part of a corporate group structure), it is the parent company and not directly the state who exercises the following responsibilities. In the case of other shareholders, the ownership rights need to be exercised in accordance with all of these, in line with general corporate law, by-laws and regulations.
II.F.1. Being represented at the general shareholders meetings and effectively exercising voting rights.
The state as an owner should fulfil its fiduciary duty by exercising its voting rights, or at least explain if it does not do so. The state should not find itself in the position of not having reacted to propositions put before the SOEs’ general shareholder meetings. It is important to establish appropriate procedures for state representation in general shareholders meetings. This is achieved by clearly identifying the ownership entity as representing the state’s shares.
For the state to be able to express its views on issues submitted for approval at shareholders’ meetings, it is further necessary that the ownership entity organises itself to be able to present an informed view on these issues and articulate it to SOE boards via the general shareholders meeting.
II.F.2. Establishing and safeguarding well-structured, merit-based and transparent board nomination processes, actively participating in the nomination of all SOEs’ boards, and contributing to gender and other forms of board and management diversity.
The ownership entity should ensure that SOEs have efficient and well-functioning professional boards, with the requisite mix of competencies to fulfil their responsibilities. This will involve establishing a structured nomination and appointment process, safeguarded from undue political influence, respecting other shareholders’ rights and playing an active role in this process. This will be facilitated if the ownership entity is given sole responsibility for organising the state’s participation in the nomination process in the case it directly holds the SOE’s shares.
The nomination of SOE boards should be transparent in the form of a clearly structured process and based on a board profile and an appraisal of the variety of skills, competencies and experiences required, including for its specialised committees. Competence and related experience requirements should derive from an evaluation of the incumbent board and needs related to the enterprise’s long-term strategy. These evaluations should also take into consideration the role played by employee board representation when this is required by law, mutual agreements or is commonplace. To base nominations on such explicit competence requirements and evaluations will likely lead to more professional, accountable and goal-oriented boards. A merit-based nomination and appointment process should also ensure that board selection is decoupled from electoral, partisan or any other potential conflict of interest that may detract from board independence.
SOE boards should also be able to make recommendations to the ownership entity concerning the approved board member profiles, skill requirements and board member evaluations. Setting up nomination committees or specialised commission or “public board” to oversee nominations may be useful, helping to focus the search for good candidates and in structuring further the nomination process. Proposed nominations should be disclosed in advance of the general shareholders meeting (where this is the highest governing body), with adequate information about, inter alia, the professional background, integrity and expertise of the respective candidates. Where the nomination and appointment are taken directly by the ownership entity in the absence of a general shareholder meeting the same guidance shall apply.
It could also be useful for the ownership entity to maintain a database of qualified candidates, developed through an open competitive process. The use of professional staffing agencies or international advertisements is another means to enhance the quality of the search process. These practices can help to enlarge the pool of qualified candidates for SOE boards, particularly in terms of private sector expertise and international experience. The process may also favour greater board diversity, including gender diversity.
Some jurisdictions have established mandatory quotas or voluntary targets for female participation on boards and senior management (including in the executive boards in two-tier systems). The ownership entity should consider the OECD standards on gender, and other forms of diversity, as relevant to the jurisdictions in its nomination practices. This may be based on diversity criteria such as gender, age or other demographic characteristics, as well as on experience and expertise, for example on accounting, digitalisation, sustainability, risk management or specific sectors.
Ownership entities should also consider additional and complementary measures to strengthen the female talent and diversity pipeline aimed at enhancing board and management diversity.
II.F.3. Setting and monitoring the implementation of broad mandates and expectations for SOEs, including on financial targets, capital structure objectives, risk tolerance levels and sustainability consistent with the state’s rationales for ownership.
The state as an active owner should, as mentioned above, define and communicate broad mandates and expectations for fully state-owned SOEs. Where the state is not the sole owner of an SOE, it is generally not in a position to formally “mandate” the fulfilment of specific objectives, but should rather communicate its expectations via the standard channels as a significant shareholder.
SOE mandates are concise documents, sometimes reflected in laws, that give a brief overview of an SOE’s high-level long-term objectives, in line with the established rationale for state ownership in the enterprise. A mandate will usually define the predominant activities of an SOE and give some indications regarding its main economic and, where relevant, public policy objectives. Clearly defined mandates help ensure appropriate levels of accountability at the enterprise level, and can help limit unpredictable changes to an SOE’s operations, such as non-recurring special obligations imposed by the state that might threaten an SOE’s commercial viability. They also provide a framework to help the state define and subsequently monitor the fulfilment of an SOE’s more immediate-term objectives and targets.
In addition to defining the broad mandates of SOEs, the ownership entity should also communicate more specific financial, operational and non- financial performance expectations to SOEs, including with regards to sustainability, and regularly monitor their implementation. This will help in avoiding the situation where SOEs are given excessive autonomy in setting their own objectives or in defining the nature and extent of their public policy objectives, including any public service obligations. The objectives may include avoiding market distortion and pursuing profitability, expressed in the form of specific targets, such as rate-of-return targets, dividend policy and guidelines for assessing capital structure appropriateness. Setting objectives may include trade-offs, for example between shareholder value, long term investment capacity, public policy objectives, sustainability goals and expectations, public service obligations and even job security. The state should therefore go further than defining its main objectives as an owner; it should also indicate its priorities and clarify how inherent trade-offs shall be handled. In doing so, the state should avoid interfering in operational matters, and thereby respect the independence of the board.
II.F.4. Setting up reporting systems that allow the ownership entity to regularly monitor and assess SOE performance, and oversee and monitor their compliance with applicable corporate governance standards, including by making use of digital technologies.
In order for the ownership entity to make informed decisions on key corporate matters, it should ensure that it receives all necessary and relevant information in a timely manner. The ownership entity should also establish means that make it possible to monitor SOEs’ activity and performance on a continuous basis, including by making use of digital technologies. The ownership entity should ensure that adequate external reporting systems are in place for all SOEs. The reporting systems should give the ownership entity a true picture of the SOE’s performance or financial situation in line with internationally recognised financial accounting standards, enabling it to react on time and to be selective in its intervention. Such reporting systems should also be designed to ensure that appropriate government bodies can monitor and evaluate any fiscal risks, particularly where state support is large and depending on SOEs’ level of systemic importance which may affect public finances or financial stability.
The ownership entity should develop the appropriate devices and select proper valuation methods to monitor SOEs’ performance based on their established objectives. It could be helped in this regard by developing systematic benchmarking of SOE performance, with private or public sector entities, both domestically and abroad. For SOEs with no comparable entity against which to benchmark overall performance, comparisons can be made concerning certain elements of their operations and performance. This benchmarking should cover productivity and the efficient use of labour, assets and capital. This benchmarking is particularly important for SOEs operating in sectors where they do not face competition. It allows the SOEs, the ownership entity and the general public to better assess SOE performance and reflect on their development.
Effective monitoring of SOE performance can be facilitated by having adequate accounting and audit competencies within the ownership entity to ensure appropriate communication with relevant counterparts, both with SOEs’ financial services, external and internal auditors and specific state controllers. The ownership entity should also require that SOE boards establish adequate internal controls, ethics and compliance measures for detecting and preventing violations of the law.
II.F.5. Developing a disclosure policy for SOEs that identifies what information should be publicly disclosed, the appropriate channels for disclosure, and mechanisms for ensuring quality of information.
In order to ensure adequate accountability by SOEs to shareholders, reporting bodies and the broader public, the state as an owner should develop and communicate a coherent transparency and disclosure policy for the enterprises it owns. The disclosure policy should emphasise the need for SOEs to report material information. The development of the disclosure policy should build on an extensive review of existing legal and regulatory requirements applicable to SOEs, as well as the identification of any gaps in requirements and practices as compared with internationally-accepted good practice, national listing requirements, including corporate governance codes. Based on this review process, the state might consider a number of measures to improve the existing transparency and disclosure framework, such as proposing amendments to the legal and regulatory framework, or elaborating specific guidelines, principles or codes to improve practices at the enterprise level. The process should involve structured consultations with SOE boards and management, as well as with regulators, members of the legislature, shareholders and other relevant stakeholders.
The ownership entity should communicate widely and effectively about the transparency and disclosure framework for SOEs, and also encourage implementation and ensure quality of information at the enterprise level, including the use of easily accessible and digital platforms for disclosure. Examples of such mechanisms include: the development of guidance manuals and training seminars for SOEs; special initiatives such as performance awards that recognise individual SOEs for high-quality disclosure practices; independent, external assurance and mechanisms to measure, assess and report on implementation of disclosure requirements by SOEs.
II.F.6. When appropriate and permitted by the legal system and the state’s level of ownership maintaining continuous dialogue with external auditors and specific state control organs.
National legislation differs concerning the communication with external auditors. In some jurisdictions, this is the prerogative of the board of directors. In others, in the case of fully state-owned enterprises, the ownership function as the sole representative of the annual general meeting is expected to communicate with the external auditors. In this case the ownership entity will need the requisite capacity, including detailed knowledge of financial accountancy, to fill this function. Depending on the legislation, the ownership entity may be entitled, through the annual shareholders’ meeting, to nominate, elect and even appoint the external auditors. Regarding fully-owned SOEs, the ownership entity should maintain a continuous dialogue with external auditors, as well as with the specific state controllers when the latter exist. This continuous dialogue could take the form of regular exchange of information, meetings or discussions when specific problems occur. External auditors will provide the ownership entity with an external, independent and qualified view on the SOE performance and financial situation. However, continuous dialogue of the ownership entity with external auditors and state controllers should not be at the expense of the board’s responsibility. Overall, the practice that external auditors are recommended by an independent audit committee of the board or an equivalent body and that external auditors are elected, appointed or approved either by that committee/body or by the shareholders’ meeting directly can be regarded as good practice since it clarifies that the external auditor should be accountable to the shareholders.
When SOEs are publicly traded or partially-owned, the ownership entity must respect the rights and fair treatment of minority shareholders. The dialogue with external auditors should not give the ownership entity any privileged information and should respect regulation regarding privileged and confidential information.
II.F.7. Ensuring that ownership rights are exercised on a co-ordinated basis when these are allocated to several ownership entities acting in concert.
The state should directly exercise ownership rights on a co-ordinated basis. Where these rights are allocated to several ownership entities, directly or indirectly, acting in concert, as appropriate, shareholders should be allowed and encouraged to cooperate and co-ordinate their actions in nominating and electing board members, placing proposals on the agenda and holding discussions directly with the SOE in order to improve corporate governance, subject to shareholders’ compliance with applicable law, including for example, beneficial ownership reporting requirements. It must be recognised, however, that co-operation among shareholders should not be used to manipulate markets, and safeguards may be needed to prevent anticompetitive behaviour, abusive actions, and ensure shareholders’ equitable treatment in line with recommendations covered under Chapter IV of the Guidelines.
Such co-operation or co-ordination should not come at the expense of ownership entities’ ability to fulfil any fiduciary duties, to avoid conflicts of interest in the exercise of their responsibilities towards their stakeholders. They should develop and disclose their policies on how they exercise ownership functions in SOEs they invest in and how they manage conflicts of interest, and in line with OECD corporate governance standards.
II.F.8. Establishing a clear and transparent overarching remuneration policy for SOE boards that fosters the long- and medium-term interest of the enterprise and can attract and motivate qualified professionals.
Various policy approaches underpinning board remuneration exist across countries. Establishing a clear and transparent overarching remuneration policy is important to set broad guidelines or principles on remuneration, typically set out in the ownership policy. Such a policy may provide guidance on the levels of remuneration, the role of remuneration committees, and mechanisms for public disclosure and accountability. There is a strong case for aligning the remuneration of board members of SOEs with market practices. For SOEs with predominantly economic objectives operating in a competitive environment, board remuneration levels should be aligned with the longer-term interests of the SOEs and reflect market conditions insofar as this is necessary to attract and retain highly qualified board members. However, care should also be taken to effectively manage any potential backlash against SOEs and the ownership entity due to negative public perception triggered by excessive board remuneration levels. This can pose a challenge for attracting top talent to SOE boards, although other factors such as reputational benefits, prestige and access to networking are sometimes considered to represent non-negligible aspects of board remuneration.
To attract qualified and professional candidates, competitive remuneration schemes reflecting market conditions are hence strongly encouraged. These moreover can add to board integrity. In particular, state owners should find an appropriate balance between remuneration schemes falling below-market levels that hamper the recruitment of qualified candidates, and remuneration levels perceived as being too high which could cause a public controversy over excessive pay in the public sector or provide wrong incentives not linked to the SOE’s and the shareholders’ long-term interests. In some jurisdictions, good practice calls for board remuneration levels to be formally approved by the annual shareholders meeting, being ideally proposed or approved by a committee established by the board or the general shareholders meeting, or set by the ownership entity based on market practices to reflect the complexity of the SOE’s operations. Depending on the size and orientation of the SOE, remuneration levels can also be set by law or based on public sector wage grids, but care should be taken that they remain competitive. Good practice calls for performance-based remuneration components to not be granted to board members, as it may closely align their interest with those of key executives, and may compromise their independence by encouraging management to take excessive short-term risks. In cases where board members receive variable remuneration, careful consideration should be given to the amount of their pay that is linked to performance targets.