Transparency around material matters, both financial and non-financial, is essential to promote the accountability of SOEs towards shareholders and stakeholders and enables the state to act as an informed owner. This requires subjecting SOEs to the same high-quality accounting, disclosure, compliance and auditing standards as listed companies. This chapter analyses these areas and includes a focus on a benchmarking exercise of national disclosure and reporting practices against international best practices.
Ownership and Governance of State-Owned Enterprises 2024
Abstract
A sound disclosure of material financial and non-financial information ensures that SOEs are accountable towards shareholders and stakeholders and improves the state’s ability to act as an informed shareholder. Furthermore, annual external auditing of SOEs adds an important level of assurance to disclosure. Strong and complete disclosure frameworks tend to apply to some SOEs, typically those that are listed or held at the central government level. Key findings in this chapter include:
52% of jurisdictions require SOEs to disclose both commercial and non-commercial objectives. This is important to foster transparency and accountability towards both investors and stakeholders.
55% of jurisdictions have disclosure requirements for non-listed SOEs on par with those for listed companies while 43% consider them weaker.
While 89% of jurisdictions report that SOEs should disclose information on related party transactions, the majority only requires it for listed and large SOEs. In some cases, certain shareholding relationships between SOEs, or state institutions and SOEs, are not recognised as related party transactions.
While most jurisdictions are developing laws and regulations that will bear on sustainability-related disclosures, 67% report that at least some of their SOEs must already disclose information on employees and key stakeholders.
Requirements to disclose material risks and risk management systems exist primarily for listed and large SOEs. Eighty six percent of jurisdictions require at least some of their SOEs to report on material risks and the risk management strategies in place, and the SOEs that apply the IFRS are required to also disclose off-balance sheet assets and liabilities as a note in their financial reporting.
Lastly, external auditing practices vary between jurisdictions. In 51% of jurisdictions, SOEs are subject to an independent external audit by a qualified auditor. In 34% of jurisdictions only certain SOEs are subject to external audits and in 15% audits are performed by the country’s Supreme Audit Institution (SAI). SAIs are involved in a variety of ways, often relating to the public policy objectives carried out by SOEs.
The SOE Guidelines recommend that SOEs should implement high standards of transparency and disclosure in material matters of the enterprise. For large or listed SOEs, or those motivated primarily by public policy objectives, this entails reporting and disclosure in line with high-quality, internationally recognised accounting and disclosure standards, or national accounting standards which are consistent (OECD, 2024[1]).
Several jurisdictions require SOEs to disclose a wide variety of financial and non-financial information such as the pursuit of commercial and non-commercial objectives, the separation of accounts related to those objectives, information about control structures, board remuneration, material risk factors and management systems, and the granting of support such as state guarantees or subsidies (Table A.B.2 in Annex B provides a detailed breakdown by country).
Several categories of disclosure apply only to larger SOEs or to SOEs that are corporatised. For instance, listed SOEs generally provide a comprehensive range of disclosure information to meet the continuous reporting obligations mandated by stock exchanges or corporate governance codes. Various jurisdictions also require robust disclosure standards for non-listed SOEs. Figure 3.1 shows that 55% of jurisdictions have the same disclosure requirements for non-listed SOEs as for listed SOEs, and 43% have weaker disclosure requirements. Figure 3.2 summarises the overall trends in various financial and non-financial disclosure items.
Source: OECD Working Party on State Ownership and Privatisation Practices.
A recent analysis of the disclosure and transparency practices of SOEs and the responsibilities of SOE boards undertaken by the OECD and the European Commission provides important insights in this area (OECD-EU, 2023[2]). The report benchmarks jurisdictions against the SOE Guidelines in those areas, covering all EU Member States and several OECD member countries (Australia, Canada, Chile, Colombia, Costa Rica, Israel, Korea, New Zealand, Norway, Switzerland, Türkiye, United Kingdom), and non-member economies (Brazil, Philippines, Ukraine). Table 3.1 summarises the results in four categories (a more detailed explanation of the assessment procedure and methodology is provided in Annex A):
Category 1 represents full alignment across all SOEs owned at the central level of government that are economically significant.
Category 2 denotes an alignment of national practices with best practices across the SOE portfolio, where best practice disclosure requirements only apply to those SOEs that are listed or belong to a selected portfolio.
Category 3 means that a disclosure practice deviates from best practice in a material way.
Category 4 suggests that a given disclosure practice is missing.
The results show good alignment with best practices (category 2) for 6 of the 12 indicators, namely financial and non-financial reporting and disclosure, remuneration, board member qualifications, independence and selection process, material risk and risk management, disclosure for related party transactions, and external audits. The other six indicators reveal significant departure from best practices (category 3).
Note: For chart 2, the category “Yes, as called for” refers to responses where the separation of accounts depends on specific circumstances, such as when state aid rules apply.
Source: OECD Working Party on State Ownership and Privatisation Practices.
Concerning the areas deviating from best practices and presenting policy challenges, the benchmarking exercise shows that:
SOE objectives and their fulfilment. There is a lack of standardisation in the disclosure of activities that result from non-commercial objectives. There are no high-level requirements that necessitate the disclosure of public service obligations (PSOs) to the wider public. Typically, there are practices in place that require SOEs to report to the relevant state authority, but not as part of their annual reports.
Separation of accounts related to public service obligations. In EU Member States, separate accounts on commercial and public service obligations should be maintained, in line with applicable EU State Aid requirements. However, some EU Member States as well as non-EU economies only require the separation of accounts in certain instances, typically depending on the type of funding arrangements involved in carrying out a given public service obligation.
Governance, ownership and voting structure of the enterprise. Countries tend to disclose information about the ownership structures in SOEs, such as the shares owned by the state. However, the information disclosed seldom covers control mechanisms such as powers of veto over key corporate decisions established through legislation or corporate bylaws.
State guarantees and / or subsidies. National practices on the disclosure of state guarantees vary significantly across jurisdictions. State guarantees tend to be underreported by SOEs, though sometimes the disclosure of this type of indirect financial support is made by the state authority. Disclosure of subsidies (when provided) tends to be only required for a small pool of large and/or listed SOEs that report according to the IFRS.
Disclosure of issues related to employees and stakeholders. Most guidance regarding the disclosure of stakeholder relations, employees, as well as social and environmental impact tend to be voluntary in nature. Therefore, practices on disclosure of such information differ across SOEs.
Aggregate reporting. The SOE Guidelines recommend that the ownership entity publishes an aggregate report with information on all economically significant SOEs, as discussed in chapter 1. In practice, a growing number of jurisdictions implement aggregate reporting with full or partial coverage on SOEs.
This chapter presents a selection of disclosure, reporting and accountability practices and explores them in greater detail.
Note: OECD member countries Iceland, Japan, Mexico and the United States did not participate in the data gathering exercise. Green/Cat1: Full alignment for all SOEs; Yellow/Cat.2: Alignment for some SOEs; Orange/Cat3: No alignment; Purple/Cat4: Practice is missing.
Source: OECD Working Party on State Ownership and Privatisation Practices.
3.2.1. Disclosure of SOE objectives
Best practice calls for a clear statement to the public of enterprise objectives and their fulfilment, including mandates given by the state. According to the SOE Guidelines, a limited set of basic overall objectives should be identified together with information about how the enterprise manages trade-offs between potentially conflicting objectives. The fulfilment of such objectives should be disclosed by SOEs through key performance indicators (OECD, 2024[1]).
Overall, jurisdictions surveyed generally require a limited form of disclosure of SOEs’ objectives. In 52% of jurisdictions (23 of 44) the main commercial objectives and PSOs are disclosed to the public, while 30% only require a partial form of disclosure1 (Figure 3.3 and Table 3.2). Eighteen percent do not require SOEs to report information regarding the achievement of objectives.
Partial disclosure can mean that disclosure requirements are limited to large or listed SOEs, or that jurisdictions do not clarify how SOE objectives are identified and whether all objectives are subject to disclosure. Partial disclosure also includes jurisdictions where information regarding PSOs is reported to the state ownership entity, which then publishes the information. In Belgium and Switzerland, for example, SOEs prepare reports that are submitted to a relevant authority or a ministry (for certain SOEs this is substituted by a parliamentary hearing), but these are in most instances not disclosed to the public.2 In Korea and the Philippines, objectives are made available through a web portal rather than through SOEs’ individual reporting.3
Are SOEs’ main commercial and non-commercial objectives disclosed to the public?
Source: OECD Working Party on State Ownership and Privatisation Practices.
Are SOEs’ main commercial and non-commercial objectives disclosed to the public?
Note: The category “Yes, partially” includes jurisdictions where disclosure requirements are limited to large or listed SOEs or jurisdictions that do not clarify how SOE objectives are identified and whether all objectives are subject to disclosure. Partial disclosure also includes reporting of information regarding PSOs to the state ownership entity, which then publishes the information.
Source: OECD Working Party on State Ownership and Privatisation Practices.
3.2.2. Disclosure of material transactions with related parties
The SOE Guidelines establish that transactions between the state and its SOEs should occur on market consistent terms. In the case of state ownership, “related parties” tend to be weakly defined, and thus, material transactions between one SOE and another, or between subsidiaries of SOEs, might not be captured by the disclosure of “related party transactions”. Those SOEs that compile financial reports under the IFRS are required to disclose financially material transactions between related parties in accordance with International Accounting Standards (IAS24) and/or other relevant local standards. In EU countries disclosures are further regulated by the EU Shareholder Rights Directive 2017/828 (OECD, 2023[3]).
In 89% of responding jurisdictions (40 out of 45 jurisdictions) SOEs disclose information on related party transactions, but this requirement often only applies to listed and large SOEs (Table 3.3). Since the intricate ownership and shareholding relationships between SOEs and the state and other SOEs often bypass the definition of “related parties” commonly adopted, gaps in reported information may exist. For example, in Austria, shareholding relationships of SOEs with other LLCs are published on the national company register, but transactions between them are undisclosed by the SOE itself.
Do SOEs have to disclose transactions with related parties?
Note: *This category includes listed and large SOEs or SOEs that report under the IFRS. **This category includes jurisdictions where transactions between SOEs or subsidiaries of SOEs may not fall under the definition of “related party transaction”.
Source: OECD Working Party on State Ownership and Privatisation Practices.
3.2.3. Disclosure of matters related to employees and stakeholders
While states encourage SOEs to disclose sustainability-related information, reporting obligations tend to be voluntary. Sustainability information covers various areas, including climate and the environment, social responsibility, governance, employment, and stakeholder relations. Chapter 5 includes a focus on sustainability-related issues, including the disclosure of greenhouse gas emissions by SOEs. Concerning disclosure of information on employees and key stakeholders, 67% of jurisdictions (28 out of 42) report that at least some of their SOEs must disclose information in this area. Some of these jurisdictions choose to only disclose information on selected topics, or only require listed or large companies to disclose such information (Figure 3.4, where Table 3.4 provides a detailed breakdown).
Source: OECD Working Party on State Ownership and Privatisation Practices.
Are SOEs required to disclose information on matters related to employees and other stakeholders that might materially impact the financial and/or non-financial performance of the enterprise? *
Note: *For example, do disclosure requirements encompass information on management/employee relations, relations with creditors, suppliers and local communities, and environmental impact?
Source: OECD Working Party on State Ownership and Privatisation Practices.
3.2.4. Disclosure of material risks and their management
A sound, integrated risk management system allows SOEs to identify, manage and report on material foreseeable risks and measures taken to manage them. It is a core responsibility of the board of SOEs to oversee the management of risks. Disclosure of material risks and risk management strategies provide an important opportunity for SOEs to provide assurance to shareholders and investors of the adequacy of an SOE’s risk management system, and an accurate representation of its financial situation, performance and potential for long-term value creation.
Generally, listed and large SOEs are subject to reporting requirements on material risk factors and their management. Figure 3.5 shows that 86% of jurisdictions (38 out of 44) require at least some of their SOEs to report on material risks and on their risk management strategies, and SOEs that apply the IFRS are required to also disclose off-balance sheet assets and liabilities as a note to their financial reports (Table 3.5 provides a detailed breakdown of information). The remaining 14% do not require SOEs to disclose material risks. Box 3.1 details Lithuania’s approach to corruption risk assessments in SOEs.
Source: OECD Working Party on State Ownership and Privatisation Practices.
Are SOEs required to report information on material risk factors and their management?
Note: *The category includes jurisdictions where only financial sector SOEs are required to disclose material risks, as well as jurisdictions where only large and listed SOEs are required to disclose. **As discussed in OECD (2023[4]), not all SOEs are compliant with the disclosure requirement.
Source: OECD Working Party on State Ownership and Privatisation Practices.
The Lithuanian Governance Co-ordination Centre (GCC) regularly draws up aggregate reports on SOEs held at the central level, and since 2019, also on SOEs held at the municipal level. These reports present information across the entire portfolio of SOEs allowing to evaluate their performance.
Since 2017, the GCC publishes a Good Governance Index, which assesses the quality of the governance of SOEs. In 2021, corruption prevention was among the biggest shortcomings in SOE governance. To address this challenge, SOEs are required to determine every three years their level of resilience to corruption. The methodology is defined by the government, and the results of the evaluation must be disclosed on the website of the SOE or shareholding entity.
Pursuant to the Guidelines for Ensuring Transparency of State-Owned Enterprises, Lithuania’s aggregate reports include information on the implementation of some SOEs’ internal anti-corruption management systems, including information on:
Whether the SOE has implemented an anti-corruption management system
Whether an internal audit has been carried out
Whether preparations have been made for certification in accordance with the standard ISO 37001:2017 "Anti-Bribery Management Systems. Requirements and Guidelines for Use”.
Source: Governance Co-ordination Centre (2023[5]), Annual aggregate report 2022/2023. https://governance.lt/wp-content/uploads/2023/11/VKC-VVI-Metine-Ataskaita_2023_EN_.pdf. Further information was provided by the Lithuanian authorities.
The SOE Guidelines recommend that SOEs’ financial statements should be subject to an annual independent external audit conducted by a qualified auditor in accordance with internationally recognised auditing, ethical and independence standards. Specific state control procedures should not be a substitute for an external independent audit in SOEs (OECD, 2024[1]) (see section 4.10 in chapter 4 on the composition and responsibilities of SOE boards for a discussion of internal audit and control processes).
Fifty-one percent of all jurisdictions (21 out of 41 jurisdictions) require SOEs to conduct external independent audits (Figure 3.6). In 34% of jurisdictions only SOEs classified as large or listed SOEs are subject to independent external audits. In 15% of all responding jurisdictions, most of which are OECD member countries, audits of SOEs are performed by the Supreme Audit Institution (SAI).4
The role of state audit and SAIs may depend on the extent to which SOEs are performing non-commercial activities, and practices differ on a case-by-case basis across jurisdictions. In New Zealand, for example, the SAI manages audits based on an allocation system or tender process through which independent auditors are selected. Appointed auditors come from a pool of audit service providers, which includes the Auditor General, chartered accountancy firms, and a range of medium-sized and smaller audit firms. Box 3.2 provides information on the safeguards implemented by New Zealand and its annual auditing process for SOEs.
Are all SOEs subject to an independent external audit?
Note: In Canada, the SAI may chose not to be the auditor of an SOE. In Azerbaijan, Brazil, Chile, Colombia, Costa Rica, Croatia, Denmark, Estonia, Finland, Greece, Israel, Korea, Latvia, Luxembourg, Netherlands, Portugal, Romania, Slovak Republic, Sweden and Switzerland, the SAI may audit SOEs on an-hoc basis, though it is not responsible for conducting the annual financial audit.
Source: OECD Working Party on State Ownership and Privatisation Practices.
Trust in audited information can be increased by establishing safeguards around auditor independence, for example through the selection and rotation of auditors. This is mandated practice in the EU, especially for public interest entities (Table 3.6). Such processes ensure that no relations exist between the auditor and large shareholders or the upper management of an SOE being audited. Most non-EU establish rotation requirements for the external auditor through arms-length bodies or ministries.
Roles of the Auditor-General
In New Zealand, the Auditor-General has two key roles with respect to the corporate governance of SOEs.
It issues good practice advice to SOE boards about the management of conflicts of interests and the Cabinet Office Manual sets out requirements for the management of ministers’ conflicts of interests.
It is the statutory auditor of all SOEs and their subsidiaries, and is responsible for the annual audit and other aspects of the Auditor-General’s mandate provided for by the Public Audit Act 2001.
Process for conducting the annual audit of SOEs
Each SOE and its subsidiary SOEs are considered public entities, with the Auditor-General appointed as their auditor. The Auditor-General holds the position of an Officer of Parliament, and the duties and obligations are outlined in the Public Audit Act 2001.
For the annual financial audits of SOEs, the Auditor-General appoints auditors using an allocation system, though occasionally a tender process may be employed. These appointed auditors are selected from a pool of audit service providers, including the Auditor-General’s own unit, Audit New Zealand, as well as the four major chartered accountancy firms, and various medium-sized and smaller audit firms.
The Auditor-General establishes auditing standards that impose limitations on appointed auditors. These standards dictate that an appointed auditor may not conduct the same audit for more than six cumulative years and must abstain from any involvement with the audited organisation until two consecutive annual audits have passed. Moreover, appointed auditors are prohibited from having personal or financial connections with the audited organisation and from providing non-assurance services such as conducting valuations.
Source: Public Audit Act 2001 (2023[6]) and information provided by the competent authorities of New Zealand in 2022/2023.
What are the requirements concerning the selection and rotation of independent auditors?
Note: For EU Member States, as far as Public Interest Entities are concerned, an obligation to rotate externally after 10 years derives directly from EU law - for internal rotation after five years. Member States may be able to extend the 10-year maximum duration of an audit engagement through public tendering or joint audits. Under Swiss law, the person who is leading/conducting the audit must be rotated and not the auditing enterprise.
Source: OECD Working Party on State Ownership and Privatisation Practices.
References
[5] Governance Coordination Centre (2023), Annual Report State-Owned Enterprises in Lithuania, https://governance.lt/wp-content/uploads/2023/11/VKC-VVI-Metine-Ataskaita_2023_EN_.pdf.
[6] New Zealand’s Treasury (2023), Public Audit Act 2001, https://www.legislation.govt.nz/act/public/2001/0010/latest/whole.html#DLM88541.
[1] OECD (2024), OECD Guidelines on Corporate Governance of State-Owned Enterprises 2024, OECD Publishing, Paris, https://doi.org/10.1787/18a24f43-en.
[3] OECD (2023), OECD Corporate Governance Factbook 2023, OECD Publishing, https://doi.org/10.1787/6d912314-en.
[4] OECD (2023), OECD Review of the Corporate Governance of State-Owned Enterprises in Romania, OECD Publishing, Paris, https://doi.org/10.1787/fabf20a8-en.
[2] OECD-EU (2023), Monitoring Implementation of Chapters VI and VII of the OECD Guidelines on Corporate Governance of SOEs.
← 1. Partial disclosure can mean that disclosure requirements are limited to large or listed SOEs, or that jurisdictions do not clarify how SOE objectives are identified and whether all objectives are subject to disclosure.
← 2. SOEs report on an annual basis to the line ministries/the Ministry of Finance about the fulfilment of their strategic objectives. These reports reflect the perspective of the SOEs and are not available to the public. They serve as preliminary dataset for the ownership entity to elaborate the reports on the fulfilment of the strategic objectives, which are publicly available.
← 3. Chapter 2.4 includes an analysis of national practices on the financing of SOE public service obligations. It explains the importance of accurate identification and disclosure of activities that relate to non-commercial objectives for maintaining a level playing field between SOEs and non-SOEs.
← 4. Supreme Audit Institutions (SAIs) are the main public sector audit organisation in a country. Their principal task is to examine whether public funds are spent economically, efficiently and effectively in compliance with existing rules and regulations.