The state should ensure that the boards of SOEs have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance, risk management oversight and monitoring of management. They should act with and promote integrity and be held accountable for their actions.
Boards play a central function in SOE governance. In fully or majority-owned SOEs, boards act as an intermediary between the state as a shareholder, other shareholders and the company. They carry the ultimate responsibility, through their fiduciary duty, for the SOEs’ performance and their shareholders’ interests as well as taking into account, among other things, stakeholders’ interests.
Empowering and improving the quality and effectiveness of SOE boards is a fundamental step in ensuring a high quality of corporate governance of SOEs. The state should, depending on its respective degree of ownership and control, ensure that SOEs have strong boards that can act in the interest of the enterprise and its owners, effectively monitor management and protect management from interference in day-to-day operations. To this end, it is necessary to ensure the competency of SOE boards, enhance their independence and improve the way they function. It is also necessary to give them explicit and full responsibility for carrying out their functions and ensure that they act with and promote integrity.
VI.A. The boards of SOEs should be assigned a clear mandate and ultimate responsibility for the enterprise’s performance. The role and duties of SOE boards should be clearly defined in legislation, preferably according to company law. Board members should act on a fully informed basis, in good faith, with due diligence and care, and act in the best interest of the enterprise and the shareholders, taking into account the interests of stakeholders.
The responsibilities of SOE boards should be articulated in relevant legislation, regulations, the government ownership policy and the corporate charters. It is essential and should be emphasised that all board members have the legal obligation to act in the best interest of the enterprise and to treat all shareholders equitably. Good practice calls for boards to take account of, among other things, the interests of stakeholders, when making business decisions in the interest of the company’s long-term success and performance and in the interest of its shareholders. It is also a key principle for board members who are working within the structure of a group of companies: even though a company might be controlled by another company, the duty of loyalty for a board member relates to the company and all its shareholders and not to the controlling company of the group. The collective and individual liability of board members should be clearly stated. There should not be any difference between the liabilities of different board members, whether they are nominated or appointed by the state or by any other shareholders or stakeholders. Training should be required in order to inform SOE board members of their responsibilities and liabilities.
To encourage board responsibility and in order for boards to function effectively, the organisation of boards of directors should be consistent with best practices developed for the private sector. They should be limited in size, comprising only the number of directors necessary to ensure their effective functioning.
Experience further indicates that smaller boards allow for real strategic discussion and are less prone to becoming rubberstamping entities. A directors’ report should be provided along with the annual statements and submitted to the external auditors. The directors’ report should give information and comment on the organisation, financial and non-financial performance, material risk factors, sustainability-related matters, significant events, relations with the workforce and other relevant stakeholders, and the effects of directions from the ownership entity.
VI.B. SOE boards should effectively carry out their functions of reviewing and guiding corporate strategy and supervising management based on broad mandates and expectations set by the shareholders. They should have the power to appoint and remove the CEO. They should align executive remuneration levels with the longer term interests of the enterprise and its shareholders.
In order to carry out their role, SOE boards should actively (i) formulate or approve, monitor and review corporate strategy, within the framework of the overall corporate objectives; (ii) establish appropriate performance indicators and identify key risks; (iii) develop and oversee effective risk management policies and procedures with respect to financial and operational risks, but also with respect to other risks related to human rights, anti-corruption, equal opportunity, labour, digital security, personal data protection and data privacy, competition, environmental and tax-related issues, and health and safety; (iv) monitor disclosure and communication processes, ensuring that the financial statements fairly present the affairs of the SOE and reflect the risks incurred; (v) assess and monitor management performance; and (vi) decide on CEO remuneration and oversee effective succession plans for key executives, with a view to ensuring business and public policy continuity. While comprising contingency mechanisms, succession planning could also be a long-term strategic tool to support talent development and diversity.
One key function of SOE boards should be the appointment and dismissal of CEOs. Without this authority it is difficult for SOE boards to fully exercise their monitoring function and assume responsibility for SOEs’ performance. In some cases, this might be done in concurrence or consultation with the ownership entity and other shareholders. Even in such situations it is considered good practice for the board to retain ultimate responsibility for the CEO selection procedure. The state should express an expectation that the board apply high standards for hiring and conduct of key executives and other members of senior management, who should be appointed based on professional criteria.
If the state is involved in a decisive role in appointing the CEO in fully-owned SOEs despite of this recommendation, particular attention should be paid that appointments are based on professional criteria and a competitive selection procedure led by the board, as in all other appointment procedures, and that appointment periods are independent from election cycles.
Particularly for large SOEs engaged in economic activities, the use of independent experts to manage the selection procedure of key executives is considered a good practice. Boards may also be assisted by a nomination committee which may be tasked with defining the profiles of the CEO and other key executives, and making recommendations to the board on their appointment, with all or a majority of committee members being independent directors. The nomination committee may also help guide talent management and review policies related to the selection of key executives. Rules and procedures for nominating and appointing the CEO should be transparent and respect the line of accountability between the CEO, the board and the ownership entity. Any shareholder agreements with respect to CEO nomination should be disclosed. In some jurisdictions, while the board may have a specialised committee responsible for the nomination of the CEO, it should not be confused with the nomination committee established by the general shareholders meeting responsible for submitting recommendations to the general shareholders meeting regarding the nomination of board members.
It follows from their obligation to assess and monitor management performance that SOE boards should decide, subject to applicable rules established by the state, on the remuneration of the CEO and other key executives. Remuneration packages for key executives should be competitive, but carefully balanced to avoid incentivising key executives in a way inconsistent with the long-term interest of the enterprise, its owners and the public good. Where relevant, SOE boards should ensure that the remuneration of key executives is linked to material risk and company strategy, and tied to performance. SOE boards should also ensure that the annual remuneration is duly disclosed. The introduction of limits on SOE executive remuneration, in absolute terms or on certain remuneration components, may limit potential negative effects of schemes that are not consistent with the owners’ expectations or may reduce the risk of excessive pay that could compromise the company’s reputation. Remuneration schemes should also be based on high-quality data and metrics. Key performance indicators should incentivise a long-term perspective, be linked to material elements of the SOE’s strategy, and be based on high-quality, preferably audited and/or assured, data and metrics. While qualitative objectives and targets may be useful or necessary in certain cases, good practice calls for them to be quantifiable, transparent and auditable, in view of ensuring their credibility.
The introduction of malus and claw-back provisions is considered good practice. They grant the enterprise the right to withhold and recover remuneration from executives in cases of managerial fraud and other circumstances, for example when the enterprise is required to restate its financial statements due to material non-compliance with financial reporting requirements.
VI.C. SOE board composition should allow the exercise of objective and independent judgement. All board members, including any public officials, should be nominated or appointed based on qualifications relevant to the enterprise’s sector of activity and business profile and have equivalent legal responsibilities.
A central prerequisite in empowering SOE boards is to compose and structure them so that they can effectively exercise objective and independent judgement, be in a position to monitor senior management and take strategic decisions. All board members should be selected on the basis of merit, personal integrity and professional qualifications, using a clear, consistent and predetermined set of criteria for the board as a whole, for individual board positions and for the chair, and subject to transparent procedures that should include diversity, background checks and, as appropriate, mechanisms aimed at preventing future potential conflicts of interest (e.g. use of asset declarations). Board members should be selected on the basis of core competences (such as business acumen, financial literacy, and expertise in audit and controls), and possess knowledge and acquired experience in the enterprise’s line of business. Further guidance on the board selection, nomination and appointment process is provided in Guideline II.F.2. They should not act as individual representatives of the constituencies that appointed them, which could be the state as an owner, the parent SOE in case of indirectly held SOEs or state and non-state shareholders together in accordance to company law. SOE boards should also be protected from political interference that could prevent them from focusing on achieving the objectives agreed on with the government and the ownership entity or which could detract from their independence. Any state representatives nominated or appointed to serve on SOE boards should have equivalent legal responsibilities as other board members. For instance, they should not enjoy de jure or de facto exemptions from individual responsibility.
It is considered good practice to strive toward diversity in board composition and in senior management and key executive positions – including with regards to gender, age, geographical, professional and educational background. Board members need commercial, financial and sectoral expertise to effectively carry out their duties. In this respect, private sector experience can be useful. Board members may need to acquire additional skills upon appointment through training or other means. Thereafter, such measures may also support board members to remain abreast of relevant new laws, regulation and changing commercial and other risks.
Mechanisms to evaluate and maintain the effectiveness of board performance and independence should be developed. These can include, for example, limits on the term of any continuous appointments, limits on the possible number of reappointments, limits on the number of board position an individual board member can hold as well as resources to enable the board to access independent information or expertise. SOEs should also engage in board and committee evaluation.
VI.D. An appropriate number of independent board members should be on boards and on specialised board committees.
To enhance the objectivity of SOE boards, an appropriate minimum number of independent board members on SOE boards should be required. Details on the appropriate number of independent board members in specialised committees are provided in Guideline VI.H. Further to the characteristics of independence laid out in the definition of “the governing bodies of SOEs” in the Guidelines, it is also considered good practice to exclude persons with marital, family or other personal relationships with the enterprise’s executives or controlling shareholders. Independent board members should be sufficient counterweight in case of the presence of representatives of the state on boards.
Independent board members should have the relevant competence and experience to enhance the effectiveness of SOE boards. In SOEs engaged in economic activities, it is advisable that they be recruited from the private sector, which can help make boards more business-oriented. Their expertise should include qualifications related to the SOE’s sector of activity and business profile.
VI.E. Mechanisms should be implemented to avoid conflicts of interest preventing any board member from objectively carrying out their board duties and to limit political interference in board processes. Politicians who are in a position to materially influence the operating conditions of SOEs should not serve on their boards. Former such persons should be subject to predetermined cooling-off periods. Civil servants and other public officials can serve on boards under the condition that they are nominated based on merit and conflict of interest requirements apply to them.
Anti-corruption and public integrity laws should be fully applicable to members of SOE boards. The board should oversee the implementation and operation of policies to identify potential conflicts of interest. Board members and key executives should make declarations to the competent authorities without delay regarding actual or potential conflicts of interest and regarding their assets, liabilities, investments, activities, employment, and benefits. Declarations to competent authorities may be made public when the individuals submitting the declarations are legally considered to be "public officials". During board tenure, declarations should be kept up to date and all board members and key executives should disclose any actual or potential conflicts of interest that arise without delay to the board, which must decide how they should be managed or mitigated.
Special attention should be given to managing conflicts of interest and, relatedly, movement of actors between public and private sectors (also known as “revolving door” practices), including through introducing appropriate and substantiated cooling off periods for former politicians and public officials before their appointments to boards. To minimise conflict of interest, opportunities for political intervention and other undue influence by the state, boards should be responsible for maintaining their independence from the government owner and other related government functions.
Further, any collective and individual liabilities of board members should be clearly defined. All board members should have a legal obligation to act in the best interest of the enterprise, cognisant of the objectives of the shareholder and should have to disclose any personal ownership they have in the SOE and follow the relevant insider trading regulation.
Politicians who are in a position to materially influence the operating conditions of SOEs should not serve on their boards. Former such persons should be subject to predetermined cooling-off periods. Civil servants and other public officials can serve on boards under the condition that qualification and conflict of interest requirements apply to them. Moreover, persons linked directly with the executive powers – i.e. heads of state, heads of government, ministers, secretaries of state, heads of regulatory agencies, and their deputies – should not serve on boards as this would cast serious doubts on the independence of their judgment.
SOE board members should not abuse their position for the purposes of political finance, patronage, or personal or related-party enrichment. State owners should act in accordance with international best practices and apply relevant provisions in the OECD Guidelines on Anti-Corruption and Integrity in State-Owned Enterprises and the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions and related instruments. Specific legal measures that prohibit patronage, political financing or personal or related-party enrichment should be applied to SOEs across a variety of criminal and administrative laws, including applying anti-bribery legislation to SOEs. Related party transactions should be made transparent and publicly disclosed.
VI.F. Good practice calls for the chair to be independent and with a role separate from that of the CEO. The chair should assume responsibility for boardroom efficiency and, when necessary, in co-ordination with other board members, act as the liaison for communications with the state ownership entity.
The chair has a crucial role to play in promoting board efficiency and effectiveness. It is the chair’s task to build an effective team out of a group of individuals. This requires specific skills, including leadership, the capacity to motivate teams, the ability to understand different perspectives and approaches, the capacity to diffuse conflicts as well as personal effectiveness and competence. The chair of the board should act as the primary point of contact between the enterprise and the ownership entity in fully-owned SOEs. The chair can also provide the ownership entity with input from the board’s annual self-assessments, to identify skills gaps in the composition of the current board, to assist the ownership entity in board nomination and appointment procedures.
Separating the chair from the CEO helps to ensure a suitable balance of power, improves accountability and reinforces the board’s ability to make objective decisions without undue influence from management. An adequate and clear definition of the functions of the chair and the CEO helps prevent situations where the separation might give rise to inefficient opposition between the two enterprise officers. The head of the management board (where applicable) should moreover not become the chair of the supervisory board upon retirement.
Separation of the chair from the CEO is particularly important in SOEs, where it is usually considered necessary to empower the board’s independence from management. The chair has a key role in guiding the board, ensuring its efficient running and encouraging the active involvement of individual board members in the strategic guidance of the SOE. When the chair and the CEO are separate, the chair should also have a role in agreeing with the ownership entity on the skills and experience that the board should contain for its effective operation.
VI.G. Where employee representation on the board is mandated or commonplace, mechanisms should be developed to guarantee that this representation is exercised effectively and contributes to the enhancement of the board skills, information and independence.
The purpose of employee representation on SOE boards is to strengthen accountability towards employees as stakeholders and to facilitate information sharing between employees and the board. Employee representation can help enrich board discussions and facilitate the implementation of board decisions within the enterprise. When employee representation on SOE boards is mandated by the law or collective agreements, it should be applied so that it contributes to the SOE boards’ independence, competence, information and diversity. Employee representatives should have the same duties and responsibilities as all other board members, should act in the best interests of the enterprise taking into account stakeholder interests where appropriate and should treat all shareholders equitably. Employee representation on SOE boards should not in itself be considered as a threat to board independence.
Procedures should be established to facilitate access to information, training and expertise, and ensure the independence of employee board members from the CEO and management. These procedures should also include adequate, transparent and democratic appointment procedures, rights to report to employees on a regular basis – provided that board confidentiality requirements are duly respected – training, and clear procedures for managing conflicts of interest. A positive contribution to the board’s work will also require acceptance and constructive collaboration by other members of the board as well as by management.
VI.H. SOE boards should consider setting up specialised committees, composed of independent and qualified members, to support the full board in performing its functions, in particular the audit committee – or equivalent body – for overseeing disclosure, internal controls and audit-related matters. Other committees, such as remuneration, nomination, risk management or sustainability may provide support to the board depending upon the SOE’s size, structure, complexity and risk profile. Their mandate, composition and working procedures should be well defined and disclosed by the board which retains full responsibility for the decisions taken. The establishment of specialised committees should improve boardroom efficiency and should not detract from the responsibility of the full board.
The establishment of board committees can be instrumental in enhancing the efficiency of SOE boards, strengthening their competency, focus on specific areas, and underpinning their critical responsibility. They may also be effective in changing the board culture and reinforcing its independence and legitimacy in areas where there is a potential for conflicts of interest, such as with regards to procurement, related party transactions and remuneration issues. The use of specialised board committees, especially in large SOEs, in line with practices in the private sector, adds value to boards including in the fields of audit, remuneration, nomination, strategy, ethics, risk, sustainability, digital transformation and procurement.
In the absence of specialised board committees, these fields should still be clearly covered by the board competency and assigned to board members, and the ownership entity may develop guidelines to define in which cases SOE boards should consider establishing specialised board committees. These guidelines should be based on a combination of criteria, including the size of the SOE and specific risks faced or competencies which should be reinforced within SOE boards.
Large SOEs should at least be required to have an audit committee or equivalent body, with a majority of independent board members, for overseeing disclosure as well as the effectiveness and integrity of the internal control system including internal audit and audit-related matters. They should have the power to meet with any officer of the enterprise. Functions often include responsibility for oversight of risk management, unless shared with or assigned to a risk committee where existing or required by regulation. The need for a separate risk committee will depend upon the company’s size, structure, complexity and risk profile. Depending on the applicable codes or regulation, jurisdictions may recommend nomination and remuneration committees, on a “comply or explain” basis.
It is essential that specialised board committees be chaired by a non-executive and require a minimum number or be composed entirely of independent members. Good practice, however, calls for the share of independent members to account for the majority of specialised board committees, and for committees to be chaired by an independent board member. The proportion of independent members will depend on the type of committee, the sensitivity of the issue to conflicts of interest and the SOE sector. The audit committee, for example, should be composed of financially literate board members and a majority of independent board members. To ensure efficiency, the composition of board committees should include qualified and competent members with adequate technical expertise. Where board committees include outside experts not appointed to the board, fiduciary duties could, in some jurisdictions, apply to them as well. When established, committees should have access to the necessary information to comply with their duties, receive appropriate funding and engage outside experts or counsels according to law or the conditions set forth by the board of directors.
To align their general sustainability policy with state ownership practices, SOEs may consider the establishment of sustainability committees or at least a clear assigned responsibility within boards for sustainability matters, with requisite competencies to advise the board on social and environmental risks, opportunities, goals and strategies, including related to climate. Ad hoc or special committees can also be temporarily set up to respond to specific needs or corporate transactions.
Committees have monitoring and advisory roles, and it should be well understood that the board as a whole remains fully responsible for the decisions taken unless legally defined otherwise, and its oversight and accountability should be clear. Specialised board committees should have written and publicly disclosed terms of reference that define their duties, mandate, working procedures and composition. Specialised board committees should report to the full board and the minutes of their meetings should be circulated to all board members.
VI.I. SOE boards should, under the chair’s oversight, regularly carry out a well-structured evaluation to appraise their performance and efficiency, and assess whether they collectively possess the right mix of background and competences, including with respect to gender and other forms of diversity.
A systematic evaluation process is a necessary tool in enhancing SOE board and specialised committees’ professionalism, since it highlights the responsibilities of the board and the duties of its members. It is also instrumental in identifying necessary competencies and board member profiles. 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. To enhance gender diversity, SOEs should disclose the gender composition of boards and of senior management and alignment with applicable quotas or voluntary targets. SOEs should also consider additional and complementary measures to strengthen the female talent pipeline throughout the company and reinforce other policy measures aimed at enhancing board and management diversity. Complementary measures may emanate from government, private and public-private initiatives and may, for example, take the form of advocacy and awareness-raising activities; networking, mentorship and training programmes; establishment of supporting bodies (women or other business associations); certification, awards or compliant company lists to activate peer pressure; the review of the role of the nomination committee and of recruitment methods. SOEs could establish guidelines or requirements intended to ensure consideration of other forms of diversity, such as with respect to experience, age and other demographic characteristics.
It is also a useful incentive for individual board members to devote sufficient time and effort to their duties as board members. The evaluation should focus on the performance of the board as a collegial body. It could also include the effectiveness and contribution of individual board members. However, the evaluation of individual board members should not impede the desired and necessary collegiality of board work. Good practice calls for the evaluation to lead to a mandatory remedial action plan and for performance against that plan to be reviewed annually or on a regular basis.
Board evaluation should be carried out under the responsibility of the chair and according to evolving best practices. The board evaluation should provide input to the review of issues such as board size, composition and remuneration of board members. The evaluations could also be instrumental in developing effective and appropriate induction and training programmes for new and existing SOE board members. In carrying out the evaluation, SOE boards could seek advice from external and independent experts as well as from the ownership entity. Good practice calls for the board to conduct an evaluation of the board chair, board as a whole, its committees and individual directors regularly, as well as an external review at least once every three years.
The outcomes of board evaluations can also serve as a helpful source of information for future board nomination and appointment processes. However, a balance needs to be struck: board evaluations may be used to alert the ownership entity to a need to recruit future board members with specific skills that are needed in a given SOE board. But they should generally not be used as a tool for “deselecting” individual existent directors which could discourage them from playing an active, and perhaps critical, role in the board’s discussions.
VI.J. SOE boards should actively oversee risk management systems. Boards should ensure that these systems are reassessed and adapted to the SOEs’ circumstances with a view to establishing and maintaining the relevance and performance of internal controls, policies and procedures.
The state should encourage that SOE boards and oversight bodies oversee, and that management implements, risk management systems commensurate with state expectations and where appropriate in line with requirements for listed companies. To the extent that shareholders set expectations in this regard, the board should be accountable to those shareholders for its risk management oversight.
Establishing a company’s risk appetite and culture, and overseeing its risk management system, including internal control processes, are of major importance for boards and are closely related to its corporate strategy. It involves oversight of the accountabilities and responsibilities for managing risks, specifying the types and degree of risk that a company is willing to accept in pursuit of its goals and how it will manage the risks it creates through its operations and relationships. The board’s oversight, thus, provides crucial guidance to management in handling risks to meet the company’s desired risk profile.
When fulfilling these key functions, the board should ensure that material sustainability matters are considered. To this end, boards should ensure that they have adequate processes in place within their risk management frameworks to deal with significant external company-relevant risks. Moreover, the board should ensure that the risk management system entails risk-based due diligence to help companies in identifying, preventing and mitigating actual and potential adverse impacts of the business and account for how these impacts are addressed.
To support the board in its oversight of risk management, some companies have established a risk committee and/or expanded the role of the audit committee, following regulatory requirements or recommendations on risk management and the evolution of the nature of risks. However, the board should retain final responsibility for oversight of the company’s risk management system and for ensuring the integrity of the reporting systems. Some jurisdictions have provided for the chair of the board to report on the internal control process. Companies with large or complex risks (financial and non-financial), including company groups, should consider introducing similar reporting systems, including direct reporting to the board, with regard to group-wide risk management and oversight of controls.