Corporate Governance of State-Owned Enterprises Corporate Governance of State-Owned Enterprises A Toolkit © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 17 16 15 14 This work is a product of the staff of The World Bank with external contributions. The findings, inter- pretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. ISBN (paper): 978-1-4648-0222-5 ISBN (electronic): 978-1-4648-0229-4 DOI: 10.1596/978-1-4648-0222-5 Cover design: Debra Naylor, Naylor Design, Inc. Library of Congress Cataloging-in-Publication Data Corporate governance of state-owned enterprises : A Toolkit / The World Bank. pages cm Includes bibliographical references and index. ISBN 978-1-4648-0222-5 (alk. paper) — ISBN 978-1-4648-0229-4 (electronic : alk. paper) 1. Government business enterprises.2. Government ownership.3. Corporate governance.I. World Bank. HD62.35.C67 2014 352.2’66—dc23 2014026058 CONTENTS Acknowledgments xi Abbreviations xiii Introduction to the Toolkit xv Executive Summary xxi 1. Context and Overview 1 Past SOE Reforms 1 Role and Importance of SOEs 3 SOE Performance and Impacts 9 Corporate Governance Challenges in SOEs 12 The Benefi ts of Good Corporate Governance 16 Framework for Corporate Governance Reform 18 2. Legal and Regulatory Framework 25 Key Concepts and Defi nitions 26 Overview of SOE Legal Forms and Frameworks 28 Key Issues in the SOE Legal Framework 31 Harmonizing SOE Frameworks with Private Sector Frameworks 33 Developing a State Ownership Framework for SOEs 45 3. State Ownership Arrangements 69 Key Concepts and Defi nitions 70 Overview of Ownership Arrangements 70 Improving Traditional Ownership Arrangements 71 Creating Advisory or Coordinating Bodies 75 Centralizing the State’s Ownership Functions 78 Ensuring the Effectiveness of Ownership Arrangements 93 v 4. Performance Monitoring 101 Key Concepts and Defi nitions 102 Objectives of a Performance-Monitoring System 102 Obtaining Baseline Information 104 Setting Mandates, Strategies, and Objectives 106 Structuring Performance Agreements 109 Developing Performance Indicators and Targets 117 5. Financial and Fiscal Discipline 133 Key Concepts and Defi nitions 134 Reducing Preferential Access to Financing 134 Identifying and Separating Out Public Service Obligations 138 Managing the Fiscal Burden and Fiscal Risk of SOEs 143 6. Board of Directors 159 Key Concepts and Defi nitions 160 Professionalizing Board Composition 162 Defi ning and Implementing Board Responsibilities 179 Enhancing Board Professionalism 189 Setting Board Remuneration and Evaluation 196 Providing Board Director Training 203 7. Transparency, Disclosure, and Controls 215 Key Concepts and Defi nitions 216 Guiding Principles 217 Improving SOE Reporting and Disclosure 220 Improving the Control Environment 228 Undertaking an Independent External Audit 235 8. Special Issues in Mixed- Ownership Companies 243 Key Concepts and Defi nitions 244 Overview of Issues in Mixed Ownership Companies 244 Overseeing State Minority Shares 246 Protecting the Basic Rights of Minority Shareholders 248 Promoting Shareholder Participation 250 9. Implementing Reform 257 Contextualizing Reform 258 Paying Attention to the Reform Process 261 Appendix A Country-Level Tools: Instruction Sheet 277 vi Corporate Governance of State-Owned Enterprises: A Toolkit Appendix B Country-Level Tools: Assessment Questionnaire 281 Introduction 281 Glossary of Key Terms 282 Appendix C Country-Level Tools: Sample Survey Instrument 317 Company Identifi cation Data 318 Survey 319 Appendix D Company-Level Tools: Instruction Sheet 335 Appendix E Company-Level Tools: State-Owned Enterprise Progression Matrix 337 Appendix F Company-Level Tools: Information Request List and Interview Guide 343 Financial Discipline 343 Board of Directors 344 Transparency, Disclosure, and Controls 346 Treatment of Minority Shareholders 351 Commitment to Corporate Governance 352 Appendix G Company Level Tools: Sample Company-Level Corporate Governance Improvement Program 355 State-Owned Enterprise Company 356 Annexes 4A Examples of Key Performance Indicators for the Water Sector 129 6A IFC–World Bank Progression Matrix for State-Owned Enterprises: Structure and Functioning of the Board 206 6B Guidelines for Centralized Management of the Board Nomination Process 207 6C Advantages and Disadvantages of Different Approaches to Board Evaluation 210 7A IFC–World Bank Progression Matrix for SOEs: Transparency, Disclosure, Control Environment 240 8A IFC–World Bank Progression Matrix for State-Owned Enterprises: Shareholder Rights 254 9A IFC–World Bank Progression Matrix for SOEs: Commitment to Corporate Governance 276 Contents vii Boxes 1.1 The Still Substantial Role of SOEs in Major Emerging Market Economies 5 1.2 Expanded State Ownership through Nationalization and Acquisition 8 1.3 Summary of the OECD’s Guidelines on Corporate Governance of SOEs 19 2.1 Varied Defi nitions of SOEs and the Parastatal Sector 26 2.2 Application of Constitutional and Supranational Law 29 2.3 Countries with General Public Enterprise or SOE Laws 30 2.4 Countries with SOEs under Company Legislation 31 2.5 Employee Outcomes during Corporatization in France 39 2.6 New Zealand Rail: From Civil Servants to Private Employees 40 2.7 The United Kingdom’s Principles of Competitive Neutrality in Procurement Processes for Custodial Services 42 2.8 The Listing of Petrobras on the Brazilian Stock Exchange 44 2.9 Examples of Countries with Modernized State Ownership Laws 46 2.10 The Philippines Government-Owned and Controlled Corporation Governance Act 48 2.11 Decree for Improving the Governance of State-Owned Banks in Tunisia 50 2.12 New Legal Framework for Chile’s Codelco 52 2.13 Summary of Norway’s Ownership Policy 55 2.14 Summary of Bhutan’s Ownership Policy 57 2.15 Corporate Governance Scorecard in the Philippines 63 2.16 Steps in Developing an SOE Governance Code 64 3.1 Challenges and Constraints of Advisory Bodies in India and the United Kingdom 77 3.2 Separation of Ownership and Regulation 79 3.3 A Separate Ministry for State-Owned Enterprises in Indonesia 83 3.4 The Mission of the French Government Shareholding Agency 85 3.5 A Specialized Ownership Agency in China 86 3.6 A State Holding Company in Hungary 89 3.7 An Investment Company in Malaysia 90 3.8 A Sovereign Wealth Fund in Bahrain 92 3.9 Key Lessons from GCC Countries in Achieving Political Insulation 94 4.1 Mandates in State-Owned Development Banks 107 4.2 Past Experience with Performance Contracts 110 4.3 Using Task Forces to Help in Performance Management in India 114 viii Corporate Governance of State-Owned Enterprises: A Toolkit 4.4 Guidelines for Performance Agreements and Indicators in New Zealand 118 4.5 Measuring Economic