Introduction 1.Factors that Prompted the Studies

3.Problems Specific to the Governance of SOEs

This paper does not offer a statistical analysis of the link between SOE governance and performance in the countries under review. Rather, it illustrates how corporate governance of SOEs impacts their performance through a number of case studies. These case studies describe how weak governance practices of certain SOEs have led to decisions that are directly detrimental to the SOE, to its shareholders (including the state) and generally to the public. The paper also includes case studies where changes in governance have induced better performance.

Unlike their private sector counterparts, SOEs are typically required to pursue both financial and social objectives. This mix of objectives often requires tradeoffs that result in inconsistent or un-economic decision making. Another difficulty SOEs face is that the costs of the social policies they are supposed to achieve are not fully recognized either by their financial disclosures or in the state budgets. The real costs of providing some social services are often difficult to calculate or go uncounted. Even when costs are well understood, fair compensation is not always forthcoming.

Furthermore, the close link to the state tends to subject the SOE to political influence. Political influence may sometimes work in the SOE’s favor. However, more typically, political influence makes business objectives play a secondary role to political goals. This tends to lead to economic inefficiencies that, in turn, impede the achievement of social objectives. Inefficiencies often accumulate and resist resolution. Eventually they lead to financial problems and frequently bankruptcy.

In principle, state-ownership need not yield worse results than private owners so long as SOEs operate on a commercial basis. In practice, however, private sector incentives are difficult to copy and even enlightened state ownership tends to be associated with under performance. The recognition of this problem is at the origin of the privatization waves that occurred in Europe in the 1980s, and later the large scale privatizations in formerly centrally controlled economies. Full or partial privatization is often viewed as the most effective measure for reforming SOE governance and enhancing SOE efficiency. However, privatization is not a panacea; and many privatizations fail when improperly conceived.

In practice, many countries use a mix of approaches to address the SOE governance problematic including widening the shareholder base, bond issues to encourage creditor oversight, performance agreements/contracts between the government and the SOE, the use of private sector management techniques and incentives, and other corporate governance practices such as emulating private sector board practices. Even then, the mixed goals make issues difficult to fully resolve.

It is important to recognize that corporate governance and SOE governance in particular are complex systems for directing and controlling an enterprise that include a large number of factors and players including the legal framework, governments, the judiciary, ministries, regulators, public opinion, management, boards, shareholders and other stakeholders. The variety of parties involved in the governance of the SOE creates a complex system of interests and incentives. Reform efforts must take into account these complex incentive structures.