Safeguarding State-Owned Enterprises from Undue Influence

3. Protecting state ownership entities’ integrity and decision making

Abstract

The ACI Guidelines promote active and informed ownership, whereby the state owner fulfils its core responsibilities. Primary among those is promoting transparency around objectives and the objective-setting process, in part to make it harder for illicit interests to change SOE directions at will. In addition, the state has a role in ensuring that nominations to SOE boards are merit-based and professional, which helps to limit the likelihood of patronage, nepotism, and cronyism in appointments. This chapter focuses on national practices in protecting state ownership entities’ integrity and decision making that can help to mitigate the risk of undue influence in SOEs.

The ownership entity, responsible for exercising ownership on behalf of the state, acts as the state’s main point of contact with the SOEs.1 The ownership entity is assigned key roles and responsibilities that are integral to the well-functioning of SOEs under their portfolios. Citizens as the ultimate owner of SOEs should have assurance that the ownership entity and its employees serve as an example of integrity and, at a minimum, do not act as a conduit for political interest that extends beyond their ownership activities or for political interference in the companies they oversee. The same applies to any state representatives, whether from the ownership entity or other, sitting on the boards of SOEs. This is not only about adherence to the rule of law, but about a culture of integrity. This requires that state officials are sufficiently aware of their responsibilities, including responsibilities for integrity, and are able to discern when fellow representatives of state are not adhering to them or have been stripped of them. The ACI Guidelines establish provisions that can help to protect the integrity and decision-making of state ownership entities. Primary among those covered in the following sub-sections:

• First, the ownership function should be set up in a way that facilitates integrity in the SOE sector. Good practice holds that adherents centralise the ownership function, or as a second option ensure that entities exercising ownership have appropriate walls from regulatory or other functions.

• Second, ownership representatives should have the tools to adhere to high standards of conduct, including to manage conflicts of interest at the ownership level and reporting channels.2

• Third, responsibilities of the ownership entity should be clear, and it should have the capacity and autonomy to fulfil its mandate with limited opportunity for illicit influence in their key decisions. There are two activities of the state ownership entity that are particularly susceptible to undue interference, which, when done well, help to reduce the risk of irregular instructions misaligned with pre‑determined objectives, as well as to reduce the risk of patronage in SOEs:

  (i) objectives setting and monitoring

  (ii) nomination of boards and appointments of executive management.

3.1. Separating ownership from other government functions

It is good practice for ownership functions to be separate from state regulatory functions that affect the operations of SOEs and the markets in which they operate. Separation helps to avoid situations which give rise to conflicts between government functions – for instance, when government ministries held accountable for the financial performance of SOEs are at the same time responsible for setting the tariffs of these enterprises.

The SOE Guidelines have been a driving force in encouraging countries to work towards separating state functions – now making it core to what is considered internationally as appropriate for the state’s ownership and governance arrangements. The ACI Guidelines echo the call, in stating that “Ownership arrangements should be conducive to integrity, which implies separating ownership from other government functions to minimise conflict of interest, and opportunities for political intervention (non-strategic or operational in nature) and other undue influence by the state, serving politicians or politically-connected third parties in SOEs. Where ownership functions are vested in ministries with other functions related to SOEs, adequate measures should be taken to separate the two (II.5.ii)”.

An efficient way (though not the only way) of ensuring the separation of the exercise of the ownership function from other potentially conflicting activities performed by the state is to centralise the ownership function. Full centralisation is likely to automatically achieve separation of functions, as there is little chance that a government committed to such a reform would pick an ownership agency that holds strong regulatory powers. A possible exception is when such powers are vested in the Ministry of Finance that, in a significant number of countries, combine ownership of financial institutions with elements of market regulation.

Table 3.1 provides an overview of the degree of centralisation of various ownership models in 54 jurisdictions. OECD has gathered anecdotal evidence implying that most states have chosen to adopt a centralised ownership model (with or without exceptions) precisely because they wanted to achieve a separation between the state’s ownership function and “regulatory functions”, particularly with regard to market regulation such as anti-trust, as well as sectoral rulemaking and enforcement. In Finland, the key purpose in centralising ownership in the Prime Minister’s Office was to form a unit independent from regulatory functions. In France, the role of the government Shareholding Agency is distinguished from a regulatory role carried out by independent authorities established by state or the EU. Within the EU, activities of these SOEs are controlled by competition law and broader European authorities. In Chile, its ownership entity, Public Enterprise System, does not exercise regulatory functions and all SOEs are under the regulatory oversight of the Superintendency of Securities and Insurance and of the Office of the Comptroller.

In the Netherlands – one of the specific goals of the centralised model is to “split ownership, policy/law making and supervising”. In the new policy memorandum, the ownership sticks to this important pillar as it stimulates checks and balances. Commercial banks that were nationalised in the financial crisis are managed by an external ownership entity, to stimulate a pragmatic, non-political management, and a credible exit strategy. In the new policy memorandum, the COE at Ministry of Finance focuses more on the explicit arrangements with line ministries about the different controlling rights afforded to the COE.

Table 3.1. Types of ownership models in 52 jurisdictions

Model	Countries
Centralised model: One Government institution carries out the mission as shareholder in all companies and organisations controlled by the state (with or without exceptions). This institution can either be a specialised ownership agency or a designated government ministry. Financial targets, technical and operational issues, and the process of monitoring SOE performance are all conducted by the central body. Board members are appointed in different ways, but essential input comes from the central unit.	Austria, Chile, China, Colombia, Finland, France, Greece, Hungary, Iceland, Israel, Italy, Korea, the Netherlands, New Zealand, Norway, Peru, Russia, Slovenia, South Africa, Spain, Sweden
A co‑ordinating agency/department with non-trivial powers over SOEs formally held by other ministries (and institutions). For example, a co‑ordinating department or specialised unit acting in an advisory capacity to shareholding ministries on technical and operational issues, in addition to being responsible for performance monitoring.	Bulgaria, Costa Rica, Estonia, India, Ireland, Latvia, Lithuania, Morocco, Philippines, Poland, United Kingdom
Twin Track Model: Two different government institutions exclusively exercise ownership functions on their respective portfolios of SOEs.	Belgium, Türkiye
Separate Track Model: A small number of ownership agencies, holding companies, privatisation agencies or similar bodies owning portfolios of SOEs separately.	Kazakhstan, Malaysia
Dual ownership: Two ministries or other high-level public institutions jointly exercise the ownership. This would be the case where different aspects of the ownership functions are allocated to different ministers – e.g. one ministry is responsible for financial performance and another for operations, or each ministry appoints a part of the board of directors.	Australia, Brazil, Croatia, the Czech Republic, Indonesia, Romania, Switzerland
Dispersed ownership: a large number of government ministries or other high-level public institutions exercise ownership rights over SOEs (in the absence of a co‑ordinating agency)	Argentina, Canada, Denmark, Germany, Japan, Mexico, Saudi Arabia, Tunisia, Ukraine

Source: OECD (2021[1]), Ownership and Governance of State‑Owned Enterprises: a compendium of national practices, https://www.oecd.org/corporate/Ownership-and-Governance-of-State-Owned-Enterprises-A-Compendium-of-National-Practices-2021.pdf.

The success of a centralised model in limiting undue influence in SOEs will depend importantly on the entity being sufficiently resourced and itself shielded from ad-hoc intervention and irregular practices. It moreover depends on the quality of overall public governance, the legal environment, the political importance assigned to the ownership function, adequate corporatisation of SOEs and competition and regulation in the marketplace. In jurisdictions with weak rule of law and risk of systemic corruption, concentrating corporate powers in a central agency can lead to risks of undue influence in the centralised entity (OECD, 2021[1]).

If ownership is decentralised – whether or not in the presence of a co‑ordination agency – then the adequate separation of functions depends on whether the line ministries that also exercise market regulation (e.g. Transport; Energy) have a strong functional separation of their exercise of the different roles, or ideally have established autonomous regulatory bodies.

3.2. Protecting key decisions of ownership entities

The state should act as an informed and active owner, and one of its prime responsibilities is to establish “well-structured, merit-based, and transparent board nomination processes (in fully or majority owned SOEs)” (II.F.2) and to “set and monitor the implementation of … objectives for SOEs” (II.F.3). Interference in an otherwise professional and transparent nomination practice can lead to the undue politicisation of the board or management, and to patronage in SOEs. Unclear SOE objectives make it easier for inappropriate instructions, and any subsequent SOE actions and decisions, to go unnoticed.

A first step in protecting the decisions of ownership entities is to ensure that ownership responsibilities – and the decision that accompany them – are clear and that entities have the capacity to fulfil them. In New Zealand, the shareholding ministers of a State enterprise are responsible to the House of Representatives for the performance of their functions under the State‑Owned Enterprises Act or the rules of the State enterprise. Ministers’ powers are set out in the legislation setting up each type of company or entity, and also in the Companies Act 1993 for companies. Their duties include developing and communicating ownership policies and expectations, appointing, and removing directors or members and assessing board performance and taking necessary remedial steps if boards fail to perform in line with expectations. In Argentina, the Law of Ministries (No. 22 520) grants powers to different organisational levels of the National Public Sector to understand, intervene, co‑ordinate, and execute policies related to majority or minority interests in companies in which the state is a shareholder. In other countries, the role of the state ownership entity is established in the ownership policy, and the mechanisms for ensuring compliance with the ownership policy should provide a degree of assurance on the correct fulfilment and delegation of roles. Box 4.1 elaborates on how Norway establishes the roles and responsibilities of the state owner (and boards) and reflects on its implications for the risk of undue influence in key decisions.

When decisions that fall under the state owner’s responsibility are instead undertaken by others, there are a few options for its representatives to seek recourse. Countries’ legislation allows for a range of approaches, from seeking to nullify or void a decision, to attempting to charge or take individuals to court. For instance, in Hungary, a decision normally owned by the ownership entity but undertaken by another can be challenged at court, which will declare the decision valid or invalid (Civil Code, Section 3:36).

The organisational structure and reporting lines of the state ownership entity can also be important. In the Slovak Republic, ownership autonomy is partly guaranteed by organisational structure of the line ministries whereby the shareholders’ rights department has a direct command line to the minister. In other cases, the ownership entity representative can submit a complaint to their superior of the civil service. Where powers and tasks can be delegated, questions about validity of decisions taken by those external to the ownership entity would require an assessment about whether a task was first eligible for delegation and second delegated in an appropriate manner. Naturally, the accountability afforded by reporting lines relies on the overall integrity of the public sector and responsible ministers, elaborated upon by recommendation II of the ACI Guidelines, as well as the adherence to rule of law more broadly. In any case, it is good practice for the ownership entity to have access to reporting channels and concerns about suspected or real illegal or irregular practices that is external to their ministry, department, or office.

The overall accountability system naturally plays a role in ensuring that the state acts as an active and informed owner and that, at the same time, other representatives involved in ownership and governance are fulfilling their roles. In Finland, the government follows closely the tasks outlined in the State Ownership Policy and the media actively controls that the Policy is followed.

Based on the responses to country questionnaires, there is not much attention placed on the different channels or recourse that state owners can pursue if a decision is taken by an external or unauthorised party. Perhaps this is because ownership entities see it as unlikely to occur. Indeed, there were no cases reported to the OECD of this occurring. However, corruption cases suggest that interference in SOEs often sidesteps the ownership entity, with individuals of the state or political arena bypassing due procedures of the ownership entity. States could raise awareness to penalties for individuals overstepping their rights and interfering in the decisions of the state owner, which would be coupled with additional administrative or criminal penalties if relevant to the situation.

Box 3.1. Clarifying roles and responsibilities of the state owner and SOE boards, and considerations for undue influence: Norway

The legal framework for the state’s exercise of ownership is first and foremost set out in the provisions of the Norwegian Constitution, and the division of roles between a company’s owner and management as set out in company law. Pursuant to Article 19 of the Norwegian Constitution, the government administers the state’s shares in private and public limited liability companies and ownership in other forms of incorporation such as state enterprises and special legislation companies. Pursuant to the Constitution Article 12 second paragraph, the administration of the ownership is delegated to various ministries. The minister administers the ownership under constitutional and parliamentary responsibility. Pursuant to Article 19, the minister must administer the state’s ownership in companies in accordance with parliamentary resolutions concerning the individual company, general statutory provisions and other parliamentary resolutions. The provision expressly authorises the Norwegian Legislature [Storting] to instruct the government in matters pertaining to state ownership. Article 19 of the Constitution does not grant the minister authority to change the size of the state’s ownership interest in a company, for example through the purchase or sale of shares, resolutions regarding or participation in capital increases or support for other transactions that change the state’s ownership interest. Such actions must be based on a parliamentary resolution whereby the minister is granted authorisation for them.

The Storting has the authority to instruct the government in matters pertaining to state ownership but has no direct authority over the SOEs. Therefore, the SOEs would not be obliged to carry out any instructions issued by the Storting. Parliamentary resolutions concerning companies with a state ownership interest must be resolved by the company’s general meeting in order to be legally binding on the company, unless the resolutions are set out in the law.

The legal basis for the minister’s authority as owner in a limited liability company is Section 5‑1 of the limited liability companies act which reads as follows: ‘Through the general meeting, the shareholders exercise supreme authority in the company’. A corresponding provision applies to public limited liability companies, state enterprises and most special legislation companies.

The provision in Section 5‑1 of the Limited Liability Companies Act means that the general meeting is superior to and may instruct the board. These instructions can be of a general nature or specific instructions on individual matters. In principle, the board is obliged to comply with such instructions. If the board disagrees with instructions and does not wish to comply, the alternative for the board members is to resign from their office.

The general meeting’s authority to issue instructions is not unlimited, however. The board is not obliged to comply with instructions that conflict with the law or the company’s articles of association. In companies with multiple shareholders, the board cannot be instructed to make decisions that violate the principle of equality or the common interest of the shareholders.

The state is cautious about instructing SOEs on individual matters. This is because it undermines the division of roles and responsibilities set out in company law. It must also be seen in conjunction with the fact that the company form is chosen to give the management freedom of action. Company law is based on the prerequisite of a relationship of trust between the shareholders and the company’s board. If the shareholders instruct the board, it can be perceived as signalling a lack of trust in the board, and the consequence may be that board members resign from their office. Active use of instructions at the general meeting may also affect the minister’s parliamentary and constitutional responsibility if the minister, through resolutions by the general meeting, makes decisions that normally rest with the company’s board. This can potentially also give rise to liability in damages in relation to third parties.

Section 5‑1 of the Limited Liability Companies Act also entails that the minister does not have authority in the company outside of the general meetings. Limited liability Companies and the other corporate forms used for companies with a state ownership interest are based on a clear division of roles between the company’s owners, on the one hand, and the company’s management, consisting of the board and the general manager, on the other. Pursuant to Sections 6‑12 and 6‑14 of the Limited Liability/Public Limited Liability Companies Act, and corresponding provisions in other company law, management of the company falls within the authority of the board and the general manager. This means that responsibility for managing the company rests with the board and the general manager. The board and the general manager shall manage the company based on the interests of the company and the owners and in line with the company’s articles of association and other resolutions made by the general meeting.

Civil servants and senior officials employed in a ministry or in other central government administrative bodies that regularly considers matters of material importance to certain companies or industries are not eligible for election to the board of such companies.

The recourse for the ownership entity in cases where a company body should undertake decisions or responsibilities that should be taken by the ownership entity, must be read in light of the above. In cases where the company body has undertaken decisions or responsibilities that should be taken by the general meeting according to law that decision would in many cases be void and/or the state would in many cases have the right to compensation if such decision has led to a loss. In other cases, the ownership entity could take actions to remove the board of directors.

Source: Based on Norway’s response to the 2021 Questionnaire.

3.2.1. Setting, monitoring, and changing SOE objectives

One of the main activities of an “active and informed” state owner is the development of broad mandates and objectives (financial and non-financial) for SOEs. Communicating clear, specific objectives (as opposed to only broader mandates) helps to avoid the situation where SOEs are given excessive autonomy in setting their own objectives or in defining the nature and extent of their public service obligations (SOE Guidelines, annotations). Opaque or altogether absent objectives can increase individuals’ discretion and reduce SOE accountability, leaving ‘room’ for illicit intervention in SOE operations. One SOE‑related corruption case showed how non-transparent changes to the SOE’s objectives, motivated by private and political interests, spurred certain SOE representatives to engage in corrupt activity to compensate for the unexpected financial losses associated with the revised objectives.

While it may sometimes be necessary to review and subsequently modify an SOE’s objectives, the state should “clearly specify SOE objectives and avoid redefining these objectives in a non-transparent manner. The state’s broad mandates and objectives for SOEs should be revised only in cases where there has been a fundamental change of mission” (III.2). Setting objectives is a responsibility of the state owner as per the SOE Guidelines, and the ACI Guidelines reiterate its importance to avoid change of operational direction for illicit purposes. Objectives should be clear from inception to avoid confusion later.

Countries take various approaches to setting and monitoring SOE objectives, which may be written down in a formal letter, in an annual management plan or agreement between the state and company. At least financial objectives are commonly used as criteria to evaluate SOE performance, and in certain cases are integrated into IT systems to allow for more precise monitoring.

• Brazil: the “SOE Statute” (Law 13.303/2016) requires SOEs’ boards to publish an annual letter publicising its public policy objectives, and those of subsidiaries, in line with the objectives that were established to justify SOEs’ creation. The letter must clearly specify the resources applied in the fulfilment of the objectives, as well as the economic and financial impacts of the pursuit of these objectives. The ownership co‑ordination unit, SEST, makes available online a model Annual Letter, along with others documents and manuals to assist and support managers of SOEs.

• Chile: The annual objectives or goals of SEP companies are established through documents signed both by representatives of the SEP and the respective company. These objectives are included in the Annual Management Plan (PGA for its acronym in Spanish) in the case of port companies or in the Programming Agreements or Goal Agreements in other cases. In the case of the PGAs, the way to determine the goals, and their evaluation methods are established in a Ministry of Transport and Telecommunications decree. In the case of the Programming and Goal Agreements, the way to determine the goals and their evaluation methods are established in the Regulations for Business Agreements of the SEP. Compliance with the PGA is assessed by an external auditor, reported by the SEP, and approved by decree of the Ministry of Transport and Telecommunications, while compliance with the Programming Agreements is reported annually to Congress. PGAs and Programming Agreements are established by law, in the case of Goals Agreements are frequent practice.

• Colombia: Colombia’s Directorate for SOE’s at the Ministry of Finance has developed IT tools to interact with SOEs and monitor their performance. Firstly, the Ministry of Finance sets specific objectives for strategic and majority-owned companies that include financial goals, public policy impact, disclosure of information regarding international standards and the prevention of corruption. The objective‑setting process is based on the Ministry’s assessment of, inter alia, valuation and financial due diligence of SOEs, KPIs, SOE annual reports and corruption prevention plans. The objectives are conveyed to boards, which must include them in the strategic plans and follow-up indicators.

• Lithuania: The Ownership Guidelines set ultimate purpose of state ownership and define the overall rationales for state ownership. The Ownership guidelines: defines requirements regarding strategic planning and setting objectives at the enterprise level (ownership entities are required to produce Letters of Expectations for each SOE), sets the rules on profitability targets, mostly expressed as Return on equity ratios, provides cases for obligatory establishment of the boards (SOEs of public interest and (or) of strategic importance are required to set up the boards) and specialised committees when necessary and determines appointment of state representatives for state owned company’s general meetings, among others.

• United Kingdom: Government departments affiliated with the relevant SOEs will develop clear objectives for the SOE, on an annual or multi-year basis, in accordance with the SOE’s business-planning cycle, which shall dictate the SOE’s strategy, operations and business plan. Government departments will also issue an annual Chair’s letter to its affiliated SOEs setting out the strategic priorities of the department and UK Government Investments (performing a co‑ordinating shareholder / ownership function for a portfolio of 22 SOEs) for the SOE for the coming year and how the Chair is expected to undertake these.

• Spain: Commercial and business objectives are always approved by each company individually with full decision-making autonomy. The objectives of every enterprise are defined in its own articles of association. The majority of SOEs have adopted commercial law and are required to operate in practice as a private company.

• Switzerland: The strategic objectives for the SOEs are a key instrument in the Confederation’s ownership policy. The Federal Council adopts strategic objectives for each SOE every four years; only in the case of the economic and safety supervision units are the strategic objectives normally adopted by the supervisory body rather than the Federal Council. In these cases, the Federal Council has a right of approval. Every year, the Federal Council issues a report regarding the achievement of the strategic objectives of each SOEs. A detailed, non-public report is submitted to parliamentarian commissions; a short version of each report is made public.

There is less clarity and information about procedures for changing SOE objectives by either the SOE or the state owner. In Korea, whenever the management goals set up are changed, the head of institutions (SOEs) shall submit the details of the change to the Minister of Economy and Finance and the head of the competent agency without delay after finalising them through resolution by the board of directors. The Minister of Economy and Finance has the power to demand that the head of an SOE (a “public enterprise”) change business goals upon consideration of the management environment, the economic situation, or the direction of national policies, among others. Other entities (competent agencies) may be able to demand changes to objectives of quasi-governmental institutions.

3.2.2. Fulfilling functions related to nominations and appointments of SOE boards

Another key role of an active and informed owner is “establishing well-structured, merit-based and transparent board nomination processes in fully- or majority-owned SOEs, actively participating in the nomination of all SOEs’ boards and contributing to board diversity” (SOE Guidelines). These well-structured, merit-based nomination processes will be facilitated if the ownership entity is given sole responsibility for organising the state’s participation in the nomination process. Nominations should be informed by board recommendations, nominations committees where useful, or specialised commissions (‘public boards’) to oversee the nominations process. Proposed nominations should be disclosed prior to the annual shareholder’s meeting (SOE Guidelines, II.F.2). Adherence to international good practice in this regard is one of the most impactful ways that the state can limit patronage, and undue influence, in SOEs.

Table 3.2 provides an overview of the involvement of state ownership entities in the nomination process of SOE board members. The OECD’s Compendium published information about whether country processes of nomination (i) involve accreditation across government and (ii) involve the ownership entity. This report adds to that data to understand if ownership entities are involved in (iii) board member succession/rotation or interim appointments, and (iv) dismissal, based on country responses for this report.

Table 3.2. Roles of the state in board nominations, appointments, rotation, and dismissal

	i) Accreditation or vetting across government	ii) Ownership entity involved in board nomination (either directly or through representation at the general meeting of shareholders)	iii) Ownership entity involved in succession/rotation and/or making interim or temporary appointments	iv) Ownership entity involved in board dismissals
Argentina	°	•	• (though SM)	• (though SM)
Brazil	•	•	° (Board role / state suggests policies)	• (though SM)
Chile	°	•	•	•
Colombia	°	•	° (Suggests policies for rotation and succession)	• (The Committee (MHCP) removes)
Croatia	°	•	•	• (though SM)
Czech Republic	°	•	° (according to company articles of association)	• State decides by specific decision signed by competent minister
Estonia	°	•	•	• Competent minister has right to remove
Finland	°	•	• Rules set by ownership steering department for SOEs to follow	• Case by case decision of owner
France	°	•	• (though SM, confirm for succession not just nomination)	• (though SM)
Greece*	°	•	•	•
Hungary	°	•	•	•
Japan	°	• (Line ministry approves)	NA	• (Line ministry approves)
Korea	°	•	Not specified in law	•
Latvia	°	•	•	•
Lithuania	•	•	• (though SM)	• (though SM for LLCs and full responsibility when a state enterprise)
Mexico	°	•	•	•
Netherlands	°	•	•	• (through SM)
New Zealand	•	•	• (shareholding ministers)	• (shareholding ministers)
Norway	°	•	•	•
Slovak Republic	°	•	•	• (minister authority, no reason required)
South Africa	°	•	•	•
Spain	°		• (though SM)	• (though SM)
Sweden	•	•	•	• (in the rare case the state calls an extraordinary general meeting to dismiss a board member before the one‑year term is up)
Switzerland	°	•	• (final say on nominations and reappointments)	• (by Federal Council)
Türkiye	•	•	•	•

Note: • = Yes; ○ = No. Blank fields indicate that information was unavailable at the time of writing. Gaps may be filled by delegates or through additional research for the next version of the report. *For Greece the positive (yes) responses refer to the involvement of the Ministry of Finance and line Ministry. For SOEs under the holding company (HCAP), board members are selected by HCAP, approved by supervisory board validated at SM.

Source: Combined responses from the OECD’s Compendium (OECD, 2021[1]) (columns i‑ii) and the 2021 Questionnaire responses (columns iii‑iv).

In most countries, the state is involved in rotation or succession of board members – namely owing to their role in approval for reappointments of board terms, or in nominations of new board members when others’ terms end. Some countries however limit involvement of rotation or succession by providing boards with guidance on how it should be handled at a company level (through legislation or policies). More work would need to be conducted to understand how states are involved, if at all, in the interim appointment of board members. Interim appointments can and have been used in some cases to intentionally insert unqualified or illegitimate members, taking advantage of reduced checks and balances that can accompany an often‑fast-tracked interim process. It may also be the case that interim appointments can be made by those not normally authorised to make official appointments following due procedure.

In all countries herein, the state owner is involved in board dismissals. At a minimum, this involvement is limited to the state’s representation at shareholder meetings if applicable. The state’s involvement may also derive from the ownership entity’s involvement in annual board evaluations when board members’ extension is up for debate. In Sweden, board members’ terms end after one year and can be extended with the input and approval of the state. In cases of termination prior to the end of the one‑year term, the state would call an extraordinary shareholder meeting.

In all countries except Mexico, the ownership entity has a role in the nominations of SOE boards, in line with the SOE Guidelines recommendation II.F.2. In a handful of countries there is accreditation or validation elsewhere in government, which can take the form of Councils or Commissions. There may be additional mechanisms that can support the integrity of the nomination process, such as use of head-hunters, pre‑established profiles, records of the appointment process on the compliance and adequacy of the candidate and even, as done in the Slovak Republic, conducting an interview in a public hearing format. To the extent that state ownership entities are responsible for the process, they might consider adding other such tools to protect the integrity of the processes and to limit the risk of individuals arresting otherwise professional nominations – without needing to compromise on autonomy, such as those used in the following countries:

• Brazil: the government body responsible for appointment is meant to provide an analysis regarding the compliance and adequacy of the candidate (Article 17, Law 13.303/2016).

• Norway: The Norwegian State’s process relating to board election is described in its ownership policy (White Paper, Chapter 12.5). According to the Norwegian State’s ten principles for good corporate governance, the state’s main consideration for composition should be the relevant expertise of potential directors. Based on the expertise needed, the State also places emphasis on the capacity and diversity of the board. One of the mechanisms to ensure compliance with this policy is that the ownership departments first establish which profile (including competence and experience) a board member should have. Thereafter the candidates are recruited based on the established profile. The ownership department has a dedicated board recruitment employee and use external recruitment (head-hunter) companies whose task it is to find suitable candidates according to the established ownership policy and competence profile.

• Slovak Republic: Nominations and appointments of SOE representatives is governed by government decree 159/2011 on selection rules, management, and remuneration of state representatives in the bodies of SOEs. Boards’ nomination process requires open tender which is conducted by HR department of the ministry or supervisory board of the company. Ownership entity sets up the requirements and number of seats to be filled. The commission is composed of head of HR, head of shareholders’ rights department and head of in matter department. Record of communications includes following tests results: legislation (Act No.513/1991 Coll. Commercial Code, in matter legislation e.g. Act No. 251/2012 Coll. on energy as amended and Act No. 250/2012 Coll. on Regulation in the Network Industries as amended; and, English language test during an interview. To ensure board diversity, the final creation of the board is up to the minister, thus the selection process ordering (sum of the points) is not strictly binding. Most recent nomination and appointment process to the Export – Import Bank of the Slovak Republic introduced a public hearing as an interview.

3.3. Giving the ownership entity tools to uphold integrity

OECD’s previous work identified a lack of integrity in the public and political spheres as the number one challenge to SOE integrity (OECD, 2018[2]). Representatives of the state, including elected officials should be held to high standards of conduct, “setting an example for conduct in SOEs and exhibiting integrity to the public as the ultimate owner” (II.2).

State ownership entity representatives could be included in the list of public officials covered by national anti-corruption and integrity legislation. In this case, the full range of corruption-prevention measures and restrictions would apply to them. Some countries may choose to go beyond, putting on the list of positions exposed to heightened risks of corruption owing to their proximity to SOEs and the sensitivity of information they are privy to, and therefore making subject to more stringent anti-corruption requirements and controls.

According to the ACI Guidelines, state owners should be “subject to conflict of interest rules that sufficiently address conflicts that may arise directly in the governance of particular SOEs or portfolios of SOEs, or that may arise as a result of activities conducted by the SOE or matters relating to the sector in which the SOE operates” (II.2.ii). All countries participating in the study reported that representatives charged with exercising ownership on behalf of the state are subject to conflict of interest rules, except South Africa.

Conflict of interest is not ipso facto corruption but can be known to facilitate corruption when it is inadequately managed. As provided for in Recommendation of the Council on OECD Guidelines for Managing Conflict of Interest in the Public Service, the goal is not to ban all private capacity interests of public officials, but to “maintain the integrity of official policy and administrative decisions, and of public management generally, recognising that an unresolved conflict of interest may result in abuse of public office”. This can generally be achieved when public bodies: (i) implement relevant policy standards; (ii) have processes for identifying and dealing with emergent conflicts of interest; (iii) have appropriate external and internal accountability mechanisms; and (iv) management approaches that aim to ensure compliance (including sanctions) (OECD, 2003[3]).

New Zealand’s Cabinet Manual establishes two useful classifications to better understand and regulate conflicts of interest of ministers (which have ultimate responsibility for the SOEs under their portfolio): (1) a conflict of interest may be pecuniary (that is, arising from the minister’s direct financial interests) or non-pecuniary (concerning, for example, a member of the minister’s family) and (2) a conflict of interest may be direct or indirect. Ministers must consider all types of interest when assessing whether any of their personal interests may conflict with, or be perceived to conflict with, their ministerial responsibilities.

According to the ACI Guidelines, state owners should also subject to provisions on handling sensitive information to mitigate risks of insider trading (II.2.iii). All countries reported that representatives charged with exercising ownership on behalf of the state are subject to rules on handling sensitive information. In the Netherlands, price sensitive information about listed SOEs is only shared on a need-to-know basis. By law, the state may not undertake any share transactions when price sensitive information is known within the organisation. A price sensitive information check is done every time transactions are done. Memos about personal/sensitive information get a specific tag. There are directives for how to classify documents. For example, “departmental classified” or “state secret”. Finally, the shareholding Ministry is also subject to the EU’s General Data Protection Regulation. However, there were little details provided by other countries, suggesting that more work could be done to assess the adequacy of state owners’ handling of sensitive information, which is important for avoiding manipulation and corruption.

Moreover, the ACI Guidelines require that “those exercising ownership on behalf of the state should … have clear rules and procedures for reporting… those reporting concerns should be protected in law and in practice” (II.2.iv). Typically, representatives of the ownership function have a reporting option within the public administration if not within their particular ministry, department or office. Countries might consider the following practices to this end:

• Chile: The Ethics Code covering representatives of the ownership entity (SEP) establishes investigation procedures for complaints. Anonymous complaints can be made through a form available on the SEP intranet that initiates an investigation procedure.

• New Zealand: Public service departments and agencies in the state services can seek advice and guidance from the Public Service Commission on matters relating to the integrity and conduct of employees within the state services. The Public Service Commission can advise on: (a) compliance with the principles of public service; and (b) the interpretation and application of the code of conduct for the state services, including advice on any particular cases of actual or potential conflict of interest.

• Peru: The Peruvian ownership entity (FONAFE) continues to implement the ‘Gap Closure Plan’ – updating the reporting hotline for anonymous complaints and facilitating access to this channel through various means, developing a complaints investigation procedure and deploying the crime‑prevention model for bribery within the ownership entity.

• Switzerland: Article 22a of the Federal Personnel Act provides that all employees shall be obliged to report all crimes or misdemeanours to be prosecuted ex officio, which they have discovered in the course of their official duties, or which have been reported to them, to the criminal prosecution authorities, their superiors, or the Swiss Federal Audit Office (SFAO). Employees are entitled to report to the SFAO (e.g., via an online platform) other irregularities that they have discovered in the course of their official duties or that have been reported to them. Anyone who reports in good faith or who has given evidence as a witness must not be disadvantaged in his professional position as a result. The Federal Office of Personnel has published a guide. The platform is open and accessible for everybody (Swiss Federal Office of Personnel, 2016[4]).

• United Kingdom: The Public Interest Disclosure Act 1998, which protects those who make certain protected disclosures from detrimental treatment by their employer, is equally applicable to staff at the state level as it is to those working within SOEs. It is best practice in the United Kingdom for organisations in the public and private sector to have their own internal whistleblowing policies. For example, UK Government Investments has its own reporting policy applicable to its staff and expects the Board of its SOEs to regularly update their own policies. In addition, the UK Government has produced guidance for employers to understand the framework, implementation, and benefits of reporting systems (UK Department for Businnes Innovation and Skills, 2015[5]).

3.4. Final commentary on the implementation of select provisions of the ACI Guidelines

Box 3.2. ACI Guidelines provisions: protecting state ownership entities’ integrity and decision making

II.2. High standards of conduct should be applied to the state, setting an example for conduct in SOEs and exhibiting integrity to the public as the ultimate owner. To this end, representatives of the ownership entity and others responsible for exercising ownership on behalf of the state should:

I. Be subject to conflict of interest rules that sufficiently address conflicts that may arise directly in the governance of particular SOEs or portfolios of SOEs, or that may arise as a result of activities conducted by the SOE or matters relating to the sector in which the SOE operates.

II. Be subject to provisions on handling sensitive information to mitigate risks of insider trading.

III. Have clear rules and procedures for reporting concerns about real or encouraged illegal or irregular practices that come to their notice in the performance of their ownership functions.

III.2. The state should clearly specify SOE objectives and avoid redefining these objectives in a non-transparent manner. The state’s broad mandates and objectives for SOEs should be revised only in cases where there has been a fundamental change of mission.

III.5. ii. Ownership arrangements should be conducive to integrity, which implies: Separating ownership from other government functions to minimise conflict of interest, and opportunities for political intervention (non-strategic or operational in nature) and other undue influence by the state, serving politicians or politically connected third parties in SOEs. Where ownership functions are vested in ministries with other functions related to SOEs, adequate measures should be taken to separate the two.

3.4.1. Commentary on recommendation II.2:

All countries participating in the study reported that representatives charged with exercising ownership on behalf of the state are subject to conflict of interest rules, except two. All countries reported that representatives charged with exercising ownership on behalf of the state are subject to rules on handling sensitive information.

It appears moreover that countries offer those responsible for exercising ownership on behalf of the state the opportunity to report concerns about real or encouraged illegal or irregular practices through existing public sector reporting channels (which may reside with anti-corruption, ombudsman, or similar bodies), though the percentage of cases reported through these channels could not be determined. Countries may consider the approach of the UK, where government entities (including the ownership entity) are encouraged to establish their own reporting policy and can access guidance prepared by the government to understand and implement the law relating to whistleblowing.

While largely meeting the letter of the recommendations, countries should continue to strive towards meeting international standards on improving a culture of integrity as well as accountability, as in many countries individuals are still fearful of using reporting channels where they exist.

3.4.2. Commentary on recommendation III.2:

States are commonly involved in setting SOE objectives, and it appears that most countries do have clear records of individual SOE objectives (letters, agreements, etc.), though the specificity varies with some setting higher-level overall mandates and others providing more prescriptive financial and non-financial targets.

There is substantially less information available or provided by state owners on the procedures for modifying SOE objectives. In countries where the executive management (and board) are able to revise objectives, the state owner should be informed in a way that allows them to react. Conversely, changes by the state owner should be well communicated to SOEs. The availability of objectives (original or revised) to the public is unclear, but this appears to change.

3.4.3. Commentary on recommendation III.5.i:

One of the greatest strides in countries’ alignment with the SOE guidelines has come with the adoption of a more centralised model of shareholding. One OECD study showed that more than half of the assessed countries have centralised functions within one entity – whether as a fully centralised entity (38% of total) or giving powers to a co‑ordinating agency (19%) (OECD, 2021[1]). This should, when well executed, mean that a sizeable number of countries have taken the steps necessary to mitigate conflicts of interest of the state owner that can lead to or be representative of influence in SOEs (for instance where ministers have agreements for kickbacks for preferential treatment afforded to SOEs under their watch). Future work might look to assess whether countries that have centralised ownership within a Ministry of Finance have adequately separated them from market regulation. This leaves almost half of the sample countries operating under other ownership models where such separation is naturally harder to come by. This report did not assess whether countries whose ministries have ownership functions related to SOEs have taken adequate measures to separate that function from others within ministries or other entities.

References

[1] OECD (2021), Ownership and Governance of State-Owned Enterprises: A Compendium of National Practices, https://www.oecd.org/corporate/Ownership-and-Governance-of-State-Owned-Enterprises-A-Compendium-of-National-Practices-2021.pdf.

[2] OECD (2018), State-Owned Enterprises and Corruption: What Are the Risks and What Can Be Done?, https://www.oecd.org/corporate/SOEs-and-corruption-what-are-the-risks-and-what-can-be-done-highlights.pdf.

[3] OECD (2003), OECD Guidelines for Managing Conflict of Interest in the Public Service, https://www.oecd.org/gov/ethics/48994419.pdf.

[4] Swiss Federal Office of Personnel (2016), Prevention of corruption and whistleblowing: Look, act, notify and react, https://www.efk.admin.ch/images/stories/efk_dokumente/whistleblowing/167_korruptionspraevention_flyer_e.pdf.

[5] UK Department for Businnes Innovation and Skills (2015), Whistleblowing: Guidance for Employers and Code of Practice, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/415175/bis-15-200-whistleblowing-guidance-for-employers-and-code-of-practice.pdf.

Notes

← 1.  The term “ownership entity” is used, while recognising that the countries herein have different ownership models and may have multiple public entities involved in oversight.

← 2.  The ACI Guidelines integrate principles of the Recommendation on Public Integrity specifically to the state as owner by requiring that the legal and regulatory framework provides, at a minimum (II.2.i‑iv): 1. transparent, merit-based human resource management, with integrity being among criteria for hiring, promotion, remuneration, and dismissal of officials of ownership entities; 2. instruments to manage and prevent conflicts of interest that arise in the governance of SOEs or portfolios of SOEs, as a result of SOE activities or related to their sector(s) of operation; 3. provisions on handling sensitive information by officials of ownership entities; 4. easily accessible and secure reporting channels, and; 5. protection of whistleblowers for officials of ownership entities.