State-Owned Enterprises and Corruption

About this report

In 2015 the OECD revised its Guidelines for Corporate Governance of State-Owned Enterprises (the “SOE Guidelines”) which supplement and complement the G20/OECD Principles of Corporate Governance (2015a). In 2016, the Working Party on State Ownership and Privatisation Practices (“Working Party”) set out to explore whether state-owned enterprises (SOEs) are exposed to unique corruption risks and consequently decided that specific standards of integrity and corporate governance should be developed.

With encouragement from the OECD and other international bodies, the Working Party set out to develop this stock-taking report with the primary objectives of:

• building an evidence base on integrity and anti-corruption risks in SOEs and good practices in countering them, and identifying corruption and integrity risks to SOEs that may either be unique or amplified by state ownership

• taking stock of existing mechanisms used by ownership entities and SOEs to prevent, detect and respond to corruption and irregular practices with the purpose of identifying good practices

• informing future work of the OECD by providing guidance for state ownership entities on the subject.

Scope and definitions

The first two chapters of the report are based on survey responses from large SOEs pursuing significant economic activity, either exclusively or together with public policy objectives. The last chapter is based on survey responses from state-ownership agencies and ministries at the level of national government. This is consistent with the approach of the SOE Guidelines, which, while in principle are applicable to any SOEs, focus mostly on economically significant and commercially-oriented companies. National state ownership entities are encouraged to ask themselves what the findings of this report might imply for the implementation of the SOE Guidelines in their jurisdictions, and to consider what additional steps may be necessary beyond the Guidelines. The SOE Guidelines’ definitions for SOE and ownership are set out below in Box 0.1.

The report covers challenges and good practices in integrity and anti-corruption at both the state-ownership and company levels – as well as in the interactions across and between levels. The work provides an SOE-specific follow-up to the OECD’s Corporate Governance and Business Integrity: A stocktaking of Corporate Practices (2015b), which focused primarily on large, privately owned or publicly listed firms, and whose analysis was framed by the G20/OECD Principles for Corporate Governance (2015c).

Box 0.1. Defining an state-owned enterprise: The OECD Guidelines on Corporate Governance of State-Owned Enterprises

SOE: The SOE Guidelines recognise that any corporate entity recognised by national law as an enterprise, and in which the state exercises ownership, should be considered as an SOE. This includes joint stock companies, limited liability companies and partnerships limited by shares. Moreover statutory corporations, with their legal personality established through specific legislation, should be considered as SOEs if their purpose and activities, or parts of their activities, are of a largely economic nature.

Ownership and control: The SOE Guidelines apply to enterprises that are under the control of the state, either by the state being the ultimate beneficiary owner of the majority of voting shares or otherwise exercising an equivalent degree of control. Examples of an equivalent degree of control would include, for instance, cases where legal stipulations or corporate articles of association ensure continued state control over an enterprise or its board of directors in which it holds a minority stake. Conversely, state influence over corporate decisions exercised via bona fide regulation would normally not be considered as control. Entities in which the government holds equity stakes of less than ten percent that do not confer control and do not necessarily imply a long-term interest in the target company, held indirectly via independent asset managers such as pension funds, would also not be considered as SOEs. For the purpose of these Guidelines, entities which are owned or controlled by a government for a limited duration arising out of bankruptcy, liquidation, conservatorship or receivership, would normally not be considered as SOEs. Different modes of exercising state control will also give rise to different governance issues. Throughout the Guidelines, the term “ownership” is understood to imply control.

Source: OECD (2015a), OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition, OECD Publishing, Paris, www.oecd.org/corporate/guidelines-corporate-governance-soes.htm.

The report is steered by use and consistent application of key terms, which makes an important distinction between corruption and other irregular practices, as shown in Figure 0.1. The focus of this report is on the inner three circles – irregular practices that are, in essence, deviations from integrity that harm SOEs and that open avenues for corruption, and specific forms of corruption, including bribery.

Figure 0.1. Defining irregular practices and corruption for the purposes of the report

Source: Regarding irregular practices: Adapted from insights in Corporate Governance and Business Integrity: a Stocktaking of Corporate Practices (OECD, 2015b). Regarding corruption: while there are various definitions of the concept, this particular one is an adaptation from the OECD’s (2008) “Corruption: A Glossary of International Standards in Criminal Law”, OECD Publishing. Other commonly cited definitions are issued by the World Bank, defined as “the abuse of public office for private gain” and by Transparency International as the “misuse of entrusted power for private gain”.

This report makes no reference to the jurisdiction in which irregular practices, corruption or bribery occurs. The report refers to OECD findings about foreign bribery where they are instructive for the broader narrative and understanding of corruption and other irregular practices in SOEs. Suggestions to improve integrity found in this report should be of concern to large, economically-significant SOEs and to their state owners – regardless of the jurisdictions in which they operate.

Responsible business conduct is a key pillar of the SOE Guidelines. The topic is well covered by other OECD instruments, notably the 2011 OECD Guidelines for Multinational Enterprises, and by initiatives on responsible business conduct, and has thus been left outside the scope of this report.

This review benefits from the wealth of existing OECD work on the topic of anti-corruption and integrity, notably that which falls under the auspices of the Working Party of Senior Public Integrity Officials and the Working Party of the Leading Practitioners on Public Procurement of the OECD’s Public Governance Committee, and the Working Group on Bribery in International Business Transactions responsible for the monitoring and implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention).

Methodological approach

The report is based on two surveys – of SOEs and of state ownership entities – together totalling participation of 37 different countries. Respondent characteristics are presented in Annex A.

• The confidential, online SOE survey was filled in by 347 anonymous SOE representatives from 213 SOEs in 34 countries. With 58 questions in the SOE survey (Annex B), the database totals over 20,000 data points, making it one of the largest SOE-specific perceptions survey in the international community. The respondents are board members, executive managers and those in charge of legal, audit, risk or compliance, representing the more than 16 sectors listed in Annex A. The SOE data in this report are either presented as individual respondent perceptions about their companies, or are presented at the company level where possible, depending on the question. In some cases, there were multiple responses per company.

• The ownership survey was filled in by 28 state ownership or co-ordination agencies exercising the ownership on behalf of the state – 25 of which are OECD member countries.

Given the variance in sample sizes of respondents and companies (see Annex A), the report does not claim to be representative of the global situation of anti-corruption and integrity in SOEs. The database does not include responses from 10 companies in each OECD member country that were originally sought. There may be respondent bias insofar as company representatives that opted to participate in the survey, which was voluntary, may have been more aware of the need for integrity and more attuned to the related challenges – whether resulting from a scandal or from demonstrable success in promoting integrity in the company, industry or country. The report does, however, provide evidence of common challenges and solutions across SOEs, and state-owned entities that should not be ignored, but instead considered vis-à-vis the individual risk profile of a company and the ownership structure of a country.

Structure of report

The report is structured in three parts. The first two chapters are primarily informed by the confidential survey of SOE respondents, while Chapter 3 is primarily informed by the state responses to the ownership questionnaire:

Chapter 1: exploration of experiences with and perceptions about corruption and other irregular practices in SOEs, assessment of corruption-related risks and elaboration of specific high-risk areas;

Chapter 2: elaboration of key elements of anti-corruption and integrity mechanisms or programmes, and existing obstacles to their effective implementation;

Chapter 3: discussion on what the state as owner can and should do to promote integrity, given existing OECD recommendations to act as an active and informed owner, but avoiding hands-on intervention in individual SOEs.