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Governing SOEs: New governance standards that improve SOE performance

21 Feb 2016 5:58 PM | Administrator (Administrator)

Governments are actively working the world over, including in the Caribbean, to improve the governance within the Public Sector. The governance (SOEs) is important because they provide important services within a country and constitute a large and important part of the economy in terms of employment. 

As a part of our regional columns on corporate governance, the Caribbean Corporate Governance Institute (CCGI) is launching  a series of articles that focuses upon the governance of state owned enterprises (SOEs).  In this first article we define what an SOE is and identify some of the international standards and applicable laws and regulations that apply to SOEs in the region. 

What is an SOE?

Amongst many policy makers there has been a level of confusion as to which organisations are SOEs. The Organization for Economic Cooperation and Development (OECD) define an SOE as being any kind of enterprise where the state owns shares in it. This simple definition provides a very useful method for identifying in many cases whether an organization is an SOE or not. For example, let us take the much discussed case of CL Financial. The Government of Trinidad & Tobago provided more than TT$20billion to the company but left the ownership of the shares with the original owners.  Some people have argued that this lack of direct share ownership means that the company is not an SOE. However, we would argue that the shareholding agreement for the company gave the state the right to appoint a majority of the directors and that this indicates that there was a very significant level of state control. CL Financial should therefore be regarded as an SOE. 

International standards for SOEs

The key international governance standard for SOEs is the OECD Guidelines for State Owned Enterprises. These Guidelines were first published in 2005 and have been revised in 2015. They are fully aligned with the more general G20/OECD Principles of Corporate Governance that were also published in 2015.  Both the principles and guidelines have benefit from extensive consultations. Many of the CCGI’s partner organizations – in both developed and developing countries have been active participants. 

The OECD Guidelines outline the state’s role in an SOE as follows: 

“The state exercises the ownership of SOEs in the interest of the general public. … The members of the public whose government exercises the ownership rights are the ultimate owners of SOEs. This implies that those who exercise ownership rights over SOEs owe duties toward the public that are not unlike the fiduciary duties of a board toward the shareholders, and should act as trustees of the public interest. High standards of transparency and accountability are needed to allow the public to assure itself that the state exercises its powers in accordance with the public’s best interest.” (p.32)

The key regulations and laws relating to the governance of SOES

Jamaica

In Jamaica the key references for SOE governance are: the Public Bodies Management and Accountability Act (2001); the Companies Act (2004); the Private Sector Organisation of Jamaica (PSOJ) Code on Corporate Governance (2009); the Accountability Framework for Senior Executive Officers (Permanent Secretaries, CEOs of Executive Agencies and Public Bodies) (2010) and the Corporate Governance Framework for Public Bodies in Jamaica (2012). The Framework (2012) is currently being expanded with a Code of Conduct for Directors, a Competency Profile Instrument for Boards of Public Bodies, and a Performance Evaluation instrument. At present the PSOJ is in the final stages of revising the Code on Corporate Governance, CCGI’s comments are available on our website, and the Ministry of Finance and Planning in Jamaica is actively working on progressing the complementing components of the CGPB even during the course of the current election process under way.

Trinidad and Tobago

In Trinidad & Tobago the key references for SOEs are the Companies Act (1995); Integrity in Public Life Act (2000),  the State Enterprises Performance Monitoring Manual (2011) and the Trinidad and Tobago Corporate Governance Code (2013). 

SOEs must, of course, comply with their bye-laws, special legislation applying to them, and laws of the country and special directions in cases where they are regulated, for example, in the financial sector. All directors of SOEs should be aware of all legal requirements. At the same time they should be aware that the law is the minimum standard that needs to be complied with - it is not an indication of best practice. Many directors have found the tools developed by the Energy Chamber of Trinidad & Tobago to be very useful. These are freely available on its website (http://corpgovtt.info/). One of the tools includes a customized assessment of the current SOE legislative requirements in T&T and has four levels of maturity progression: Level 1 is the legal baseline. Specific indicators define what each level of progression means and the CCGI recommends that all SOE Boards should consider assessing their organization using this framework and using this as a basis for developing plans for improving their compliance and governance.

Probity, transparency, accountability, and assured sustained performance are four hallmarks of corporate governance for all sectors and type of organization. Many countries have adopted legislation that enables citizens to get access to information on companies that fall under its remit - in the case of Jamaica this is the Access to Information Act (2002) and in Trinidad & Tobago the Freedom of Information Act (1999). These acts should be regarded as a “back-stop” feature of corporate governance because other existing legislation in both countries already mandates disclosure of much of the information covered in these Acts. In addition, international corporate governance standards recommend high levels of disclosure and transparency. The CCGI believes that in many cases the usage of Access to Information and Freedom of Information legislation is as a result of levels of disclosure and transparency of a company being below these international best practice standards. The Freedom of and Access to Information Acts of T&T and Jamaica are, from a corporate governance perspective, only likely to be used if good corporate governance is not taking place. 

Disclosure of performance and governance information in the Caribbean is very poor (details are available on the CCGI website) The International Benchmark is that 51 items should be disclosed by public interest entities. In Trinidad & Tobago only 12 items are recommended and there is guidance on an additional 16 items. In the case of Jamaica about 35 items should be disclosed. 

Companies that demonstrate sustained commitment to high environmental, social, and governance standards have been shown to be consistently higher financial performers than their less well governed peers. This is the reason why corporate governance standards focus upon disclosure. Disclosure is so important that the OECD Guidelines for State Owned Enterprises (2015) dedicate one of its seven principles to this topic:

Principle VI: Disclosure and Transparency: State-owned enterprises should observe high standards of transparency and be subject to the same high quality accounting, disclosure, compliance and auditing standards as listed companies.

The Institute recognizes that the reform of SOEs is challenging because these organisations are very complex due to the state itself not only having a shareholder and investor role, but also being involved in regulating the very industry in which the SOE is operating. Defining the state’s role and determining effective relationships between the SOE and key stakeholders that normally include the shareholding ministry, portfolio ministry, cabinet, ministry staff, citizens, and regulators is not easy. We recommend that a starting point should be with the shareholding ministry. In all cases a Ministry should be able to demonstrate to the public that it has:

  1. developed requisite policies for the SOEs in its portfolio (including how the ministry avoids potential conflicts and market distortions associated with being policy setter, regulator and market participants),
  2. given clear and informed direction on what results are expected,
  3. reviewed and concurred with the approach the SOE has taken to achieve the results,
  4. monitored the achievement of the results in an assured way,
  5. has complied with all laws, regulations, and applied best practice standards, incl. engaging stakeholders in respect of their material interests in the organizations activities.

The application and execution of these standards would play a significant role in improving transparency, accountability, and performance of public sector organizations in the Caribbean.

The role of the Caribbean Corporate Governance Institute (CCGI) as an independent, professional, non-profit membership organization is to support individual directors, member organisations, and the markets and societies in the Caribbean. To this end our work includes the engagement of all stakeholders in the development of standards for corporate governance that are appropriate for the Caribbean. We also provide quality assured education up to Chartered Director level (we are registered as secondary or tertiary level education institution with the Accreditation Council of T&T). In addition, engaging in the public discourse on corporate governance matters is an important part of our work and to that end we publish in a column on corporate governance regionally in newspapers and online. In 2013 the CCGI, together with the Trinidad & Tobago Chamber of Industry and Commerce (TTCIC) and the Trinidad & Tobago Stock Exchange (TTSE) led a nine month drafting and consultation process resulting in the publication of the Trinidad & Tobago Corporate Governance Code (2013). The Trinidad & Tobago’s former Minister of Finance gave the feature address at the launch and continues to strongly endorse the code. Since then the Institute has been engaging governments in the region in a variety of ways in relation to SOEs. In late 2015 the CCGI decided to build on existing legislation, regulation, standards, and guidance and lead the development of a corporate governance code for SOEs.

There have been many calls on the CCGI to lead the development of such an SOE code, to conduct training for existing and potential board members of SOE boards, work with Governments and Ministries in the region. Now is an opportune time as there have been important international and regional developments in Corporate Governance that provide a good basis to build the next step on and it is critical to take those steps now.

The CCCGI works toward to the Caribbean being widely recognized and trusted as an attractive, transparent, efficient and ethical place for business. One key element towards that goal is the harmonization of corporate governance standards (for listed companies, closely-held, public bodies and SOEs, all types of Civil Society bodies) within the region, taking account of the socio-economic context in the Caribbean while still being consistent with international consensus standards.

Written on behalf of CCGI by Dr Axel Kravatzky, Chairman of CCGI, and Dr Chris Pierce, Director of Education of CCGI.  

The CCGI is a regional, independent, non-profit, professional membership organization registered with the Accreditation Council of T&T. CCGI is the award body that provides the Certificate and Diploma in Corporate Governance and the Chartered Director qualification throughout the Caribbean. The CCGI welcomes membership applications and participation in its courses and events throughout the region. +1 (868) 221-8707 www.caribbeangovernance.org

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