4. Protecting the integrity and autonomy of SOE decision makers
As established in the SOE Guidelines and elaborated upon in the ACI Guidelines, it is a prime responsibility of the state to ensure that boards have the necessary authority, diversity, competencies, and objectivity to autonomously carry out their function with integrity. This chapter focuses on national practices in protecting the integrity and autonomy of SOE decision makers that can help to mitigate the risk of undue influence in SOEs.
The board plays a central role in the governance of SOEs. It should take overall responsibility for the performance of the firm and oversee executive management. The board should act as the main interlocutor with ownership entities, and other state representatives where such engagement is permitted, providing a buffer between the state and the CEO and other members of executive management. The board should be expected to promote a corporate culture of integrity, setting the tone from the top of the company.
Professionalising boards has been a focal point of many SOE-related forms around the world over the last decade. Despite progress, the board remains susceptible to undue influence owing to its power as the ultimate decision-maker and overseer of operational matters of the company – including on the risky and lucrative opportunities of the company. Faults in the board can be representative or a predictor of broader issues in the ownership and governance of SOEs, including corruption. OECD’s data and evidence from real corruption cases has shown how board members can be pressured, initiate and, simultaneously or independently, turn a blind eye from perceived and real corruption. At the same time, most concluded cases of foreign bribery became known through self-reporting by the company and often thanks to the board (OECD, 2017[1]).
Similarly, executive management are key decision-makers of the company and execute the strategic plans and operations of the company. The CEO and their management team can wield a considerable degree of influence, evidently within the company, but potentially in the sector or economy more broadly when in charge of monopolies or in sectors of strategic interest to the state (e.g. oil and gas). OECD’s report showed that senior management were said to be involved in 25% of the irregularities or corrupt acts that SOE respondents had witnessed in their company in recent years (OECD, 2018[2]). The employees they are meant to oversee were perceived to be involved in 69% of irregularities or corrupt acts. Concluded cases of corruption have also shown how undue influence in the appointments or activities of executive management can facilitate or represent nefarious activities. All four executives referenced in the United States’ Department of Justice Non-Prosecution Agreement with Petróleo Brasileiro S.A. (Petrobras) were “appointed to his position under the influence of a political party”, and the one manager cited in the Agreement was subordinate to one of the politically appointed executives (United States Department of Justice, 2018[3]).
The ACI Guidelines work as a companion to the SOE Guidelines, making clear the expectations for board’s professionalism and integrity and, albeit to a lesser extent, that of executive management. The below sub-sections explore select national practices in protecting the autonomy and integrity of boards and executive management to limit the opportunities for undue influence in SOE operations.
4.1.1. Board composition and state representation on boards
It is a prime responsibility of the state to ensure that boards have the necessary authority, diversity, competencies, and objectivity to autonomously carry out their function with integrity. Board composition is very important to its professionalism and autonomy. The OECD’s survey of 367 SOE leaders around the world showed that respondents in companies with a higher average proportion of independent board members (and a lower proportion of political or other state figures) foresaw a lower risk of undue influence in decision-making and of influence in appointments (OECD, 2018[2]). Contrarily, a high concentration of state representatives on an SOE board can tilt the balance and risk the board prioritising interests other than those in the best interest of the enterprise. In one country, there is a party membership fee or “party taxation” whereby political party members are appointed to higher position in SOEs and pay a part of their revenues to the party’s funds. Indeed, corruption risks owning to board ineffectiveness of a lack of integrity can and often are closely linked to both patronage and political party financing. State representation on boards can also be linked to electoral cycles, whereby incoming national or sub-national governments replace boards or members with ‘their own’. At minimum, this makes it challenging for board effectiveness and to benefit on institutional memory. At worst, it is representative of nefarious acts or intentions to use SOEs for illicit purposes.
The ACI Guidelines promote composing boards in a way that facilitates integrity. This means limiting, or in more advanced practices banning, state representation on SOE boards. It also means having an adequate presence of independent board members (that is, non-state and non-executive). Table 4.1 provides an overview of allowances for independent membership on SOE boards for 37 jurisdictions. In addition, Table 4.2 outlines which type of state representatives are legally permitted to sit on boards. While legally possible, it does not mean that it is a common practice.
Most countries require the presence of independent board members, with some setting minimums (in terms of numbers or proportion) and thereby aligning closely with the ACI Guidelines’ request to require an adequate presence of independent board members. While some countries apply an outright ban to any state representative sitting on SOE boards (Australia, Chile, Denmark, Italy, Korea, New Zealand, the Netherlands), civil servants commonly serve on boards in most other countries. Former politicians are generally permitted on boards too, with some countries implementing “cooling off periods” to manage potential conflicts of interest or transfer of sensitive information. In the Netherlands, there is currently a proposal to introduce a cooling off period of two years, in which former members of parliament must ask the advice of an independent committee before they accept any new position. Finally, a small number of countries allow sitting politicians to serve on SOE boards – whether from the legislative branch (Czech Republic and Spain) or the executive branch (Argentina, Brazil, the Slovak Republic and Türkiye) – but they may be subject to specific criteria or circumstance. For instance, Brazil prohibits from boards: “representatives of a regulatory body to which the state-owned or the state-controlled enterprises are subject, Ministers of State, Secretaries of State, Municipal Secretaries, holders of a position without a permanent relationship with civil service or of a special nature, executive or high advisory position in the government, statutory head of a political party and a person holding a term in the Legislative Power of any entity of the federation, even if on a leave from office”. In Sweden there are no formal limitations on sitting politicians, but in practice they are not appointed.
While such information can be used to understand board compositions within a country in principle, each individual country context would warrant a specific assessment to better understand the degree of public sector or political influence on boards in a way that is beyond the scope of this report. As just one example, Viet Nam, that did not participate in this study, claim to have a ban on state representatives sitting on boards. While this seems to align with best practice on paper, it is not aligned in practice: they simply do not classify representatives of the ownership co-ordination body as ‘civil servants’. A second example comes from Croatia’s recent past, where the term “independent board member” referred only to non-executive representatives but included members representing the state, though pending legislation will bring Croatia’s definition for “independence” more in line with that used by the OECD.
4.1.2. Board qualifications and criteria
Recommendations on appointment criteria for board positions are found in the SOE Guidelines. The ACI Guidelines add to this good practice by additionally suggesting that board members are “selected on the basis of personal integrity and professional qualifications, using a clear, consistent and predetermined set of criteria for the board as a whole, for individual board positions and for the chair, and subject to transparent procedures that should include diversity, background checks and, as appropriate, mechanisms aimed at preventing future potential conflicts of interest (e.g. use of asset declarations)” (IV.9.v).
This could be best facilitated by mandating that this criterion be taken into consideration when SOE board members are selected. To further promote its practical implementation, the state through its ownership entity or its anti-corruption institution or both can provide guidance on how personal integrity can be effectively evaluated, and what checks can be made by, for instance, consulting with national registers of officials held liable for corruption. It could also be considered a good criterion for appointment of top management and other members of the executive management of the SOE, and thus the state could encourage SOE boards to use similar rules and procedures within the company.
A recent OECD study showed that just over half of surveyed governments (55%) reported having established minimum qualification criteria for board members. The other 45% did not. Criteria most commonly relate to candidates’ education and professional backgrounds and are developed to promote more balanced board composition and streamline the assessment process (OECD, 2021[4]). However, some countries establish criteria that help to get personal integrity as well. Multiple examples are provided below:
Brazil: Brazilian SOEs are required through the “SOE Statute” (Law 13.303/2016) to establish Committees of Eligibility (nomination committees). This committee is mandated to issue a formal opinion on the compliance of appointments for management positions, members of the boards and fiscal counsel with regards to the requirements and prohibitions contained in the Law concerning these nominations (OECD, 2021[4]).
Canada: The process by which members are appointed to the boards of SOEs (Crown corporations) aims to ensure both independence of the board and to equip the board with sufficient capacity to assess and address corruption and integrity risks. Crown corporation board members are appointed by the Governor in Council (Governor General on the advice of the Queen’s Privy Council, as represented by Cabinet) following an open, transparent, and merit-based selection process. Board profiles are developed by the Crown corporations and validated by the Privy Council Office to ensure they accurately reflect the appointment process and/or the relevant appointment provisions. Board profiles ensure an appropriate range of skill sets and qualifications required in a particular organisation. Compliance with the Conflict of Interest Act is a condition of employment. The board is required to have an independent audit committee that reports to the board, with mandatory level of financial literacy. The Privy Council Office and other agencies provide ongoing support to appointees on questions that arise from board members of an ethical nature (OECD, 2021[4]).
Chile: The regulations for the appointment of directors of SEP’s related companies requires a professional or technical title of a career lasting at least four years, in addition to work experience in management positions or senior executives of at least three years. People convicted of the crimes of embezzlement of public funds, tax fraud, incompatible negotiation, bribery of public employees or illegal levy, have the penalty of permanent or temporary disqualification from holding positions in SOEs (OECD, 2021[4]).
Croatia: In accordance with Article 38, paragraph 1 of the Credit Institutions Act, the president or member of the management board of a credit institution may be a person who meets the conditions of “good reputation”, “appropriate professional knowledge, ability and experience necessary…”, “not in a conflict of interest in relation to the credit institution, shareholders, members of the supervisory board, holders of key functions and senior management of the credit institution” and who, upon reasonable conclusion from previous experience, “will perform the duties of a member of the management board of a credit institution fairly and conscientiously” among others.
Finland: Key criteria in proposing candidates for the boards include experience and expertise, assurance of the capacity for co-operation, gender diversity and diversity of competence. It is, of course, the owner(s) who elect(s) these members of boards. In this respect, every member should be aware of state owner’s expectations on his/hers work on the board. All members of boards nominated by the state ownership entity are independent of the SOE in question; e.g. CEOs or any other officers of a SOE in question cannot be elected as members of the boards. Most of the board members should even be independent from the state as an owner. People appointed to boards are experienced board members with high proven ethical standards; should an unusual case occur with a doubt or concern of any corruption or any other illegality, the company could always recruit professional (legal) advisers to assist the board in assessing those issues in more detail (OECD, 2021[4]).
Israel: The Israeli state ownership co-ordinating agency, the government Companies Agency (GCA) launched “The Directors Team” initiative aimed to transform the SOE Supervisory Board members’ nomination process by creating a competitive public procedure for identifying high quality SOE Board members. The programme was launched in 2013 and has since been held in three rounds. As a result, 500 candidates with the highest scores on the various profiles were included in the pool of 500 recommended Supervisory Board members by the GCA, out of which each minister can choose to nominate Board members for the SOEs that he or she is responsible for. Once a minister nominates a candidate, the nomination has to be approved by a public committee, chaired by a retired judge (OECD, 2021[4]).
Latvia: The Law on Governance of Capital Shares of a Public Person and Capital companies sets the reputation as one of criteria for appointment as board member. The main criterion for selection of candidates is the professionalism and appropriateness of their talents and qualities for taking particular position. An ‘unimpeachable reputation’ is one of criteria that is to be evaluated by the nomination committee – that is, there is no proof to the contrary and there is no cause for any justified doubt on unimpeachable reputation. There have been three nomination processes where some candidates were not progressed in the evaluation process because of doubt on unimpeachable reputation. In addition, there are minimum requirements for education and work experience both for Supervisory Board members and Management Board members.
Lithuania: According to the Law on the Management, Use and Disposal of State and Municipal Assets all board members must comply with a various appointment criterion, including impeccable reputation, no relations that would cause a conflict of interest, the right to hold the relevant office has not been revoked or restricted, must not have been removed from the office due to improper performance of duties and holding a university degree. The other criteria regarding competences and technical expertise are set by the appointing body (obligation to set special criteria in the public announcement).
Mexico: Mexico has a National Digital Platform that registers public servants and individuals that have been sanctioned. Through this system, it is possible to prevent the appointment or hiring of public servants who were sanctioned according to a final resolution. The General Law on Administrative Responsibilities (Ley General de Responsabilidades Administrativas) establishes that the sanctions for public servants must be registered and imposes the obligation on all public bodies to consult the system and verify the status of the person prior to the hiring (OECD, 2021[4]).
New Zealand: Section 5 of the State-Owned Enterprises Act 1986 provides that the directors of a State enterprise shall be persons who, in the opinion of those appointing them, will assist the State enterprise to achieve its principal objective. Section 151(2) of the Companies Act sets out who is disqualified but there are no prescribed qualifications for appointment. In supporting Ministers to make appointments, the Treasury currently advises candidates (see “What we look for” at treasury.govt.nz as follows: “Board directors are selected and appointed based on their skills and the needs of a particular entity’s board. It is important that the board comprises a balance of skills and experience that matches the strategic direction and needs of the entity. The emphasis is on appointing the best qualified person for each position and achieving diversity on boards. A best-qualified Crown director is generally defined as the candidate whose skills and experience best meet the Ministers’ assessment of the skill profile for the director vacancy. There are, however, some basic competencies that all directors must have, that include “common sense, integrity and a strong sense of ethics”.
Switzerland: The model profile for a board includes the following criteria, among others: Impeccable reputation and personal integrity, ability to work in a team and resolve conflicts, discretion, and independence from vested interests that prevent the formation of unbiased opinions.
Türkiye: According to 3rd article of 3 numbered Presidential Decree, the directors of boards are required to have administrative and occupational proficiency regarding the activity area of SOEs. Additionally, SOEs are expected to be managed autonomously and according to the principles and conditions of economy (DL.233). Although there is not a clear statement for being sufficiently independent to adequately assess and address risks, this provision takes the necessary steps to ensure the criteria is fulfilled satisfactorily. Another qualification criteria requires having no criminal record which causes imprisonment for one or more years even if sentenced or pardoned. These crimes include embezzlement, extortion, bribery, theft, fraud, and forgery, abuse of trust, fraudulent bankruptcy, bid rigging and acting against the security of the state or the Constitutional order.
4.1.3. Board responsibilities and obligations in the interest of the firm
Ensuring SOE boards have integrity and autonomy needed to fulfil their functions relies largely on setting clear responsibilities and assigning the legal obligation to do so in a way that is in the best interest of the firm, where “the best interest of the firm” inherently includes the concept of adherence to the rule of law (and not only in the financial interest of the SOE).
Vagueness in the roles and responsibilities of the board can provide discretion that could ultimately be seen as an opportunity for political financing or enrichment. However, as the OECD’s 2021 Compendium showed, “one-fourth of the reporting governments do not have a clear distinction between the respective roles of the board and the ownership function, which potentially hampers independence and autonomy of boards. In particular, in jurisdictions with a rather decentralised state enterprise function, the ownership entities or line ministries play a more direct role in strategic management, as well as in the appointment of the CEO and succession planning and executive remuneration and incentive schemes. According to good practice, most of these responsibilities should be exercised by the board” (OECD, 2021[4]).
Interference in SOEs can manifest when boards are bypassed or stripped of their responsibilities or ability to oversee management and the operations of the company. A handful of countries said their boards have a few channels for recourse if the decisions explicitly assigned to the board are taken by others. Namely, boards can resign in protest, take a case to court to challenge the merit of the decision or bring it to the attention of the media, or dismiss or aim to change representatives of executive management when relevant. In the Netherlands, decisions or responsibilities assumed by others that run contrary to the divisions of powers as laid down in the articles of association, are either null or voidable. Depending on the circumstances of the case, these protections also have external effects towards third parties. Should there be more discussion on the limits of powers invested in the board or shareholder, boards (or other actors within the company) can file a claim at the Enterprise Chamber (Ondernemingskamer) at the Amsterdam court of appeal.
Table 4.3 sheds more light on how countries classify board member actions to be in the best interest of the firm. It provides details on the legal obligations imposed on board members in participating countries. Countries commonly require board members to enact a duty of diligence, care and/or loyalty. Obligations of duty and loyalty to the company is an important prerequisite for professionalism and performance, but there are considerations to be made around the concept of ‘loyalty’ in the context of patronage and undue influence. There may be more competition for the ‘loyalty’ of board members owing to their proximity to the public and political spheres than private firms’ face from shareholders. Known corruption cases have shown how board positions can both be used (i) as a reward for loyalty (political or otherwise), and (ii) as a means of incentivising illicit action when loyalty to others will continue to be financially profitable or otherwise beneficial for those currying favour. The concept of loyalty can and has been used to pressure individuals, as loyalty can also be invoked for an individuals’ political leanings (or party) or towards the state owner particularly when, but not only when, the board member is a state representative. Loyalty can also be abused, whereby those in power demand loyalty in the best interest of the state, political party or personal or related party. Conflicts of interest management, explored in more detail below, is a key tool for companies to help ensure that board members retain a duty of care and loyalty to the company by managing competition for priorities. However, conflict of interest management is not the only tool. Countries may find it useful to make it clear that board members should also act with honesty or integrity, comply with laws, behave with respect, and maintain confidentiality when needed – for which prospective board members can be, and often are, vetted in the nominations process.
4.1.4. Managing conflicts of interest
One of the most common concerns about integrity in SOEs regards real or perceived conflicts of interest that can exist at the board level, particularly but not only in the presence of politicians or public officials on boards whose other functions or relationships may present different or competing priorities. Unlike the board members of most private firms, board representatives of SOEs can wield a power and authority over the direction of a specific sector or even market or easily tap into the formal and informal networks of those who do.
Conflicts of interest at the board can be damaging because the accompanying power over operations, for instance to sign off on large contracts, can make it easier to direct or redirect operations in a way that serves political, personal, or related-party interests. There have been numerous cases of unresolved conflicts of interest that led to corruption in which SOE board members were involved. In other cases, board members were not directly involved but took no action to stop or report known or suspected violations of conflicts of interest provisions. On the flipside, other cases yet have been brought to the authorities by the board. The board has a critical role to play in ensuring there is no real or perceived competition to the individual acting in the best interest of the firm and in compliance with the law.
Conflict of interest rules are commonly applied to SOEs in two ways, which may not be mutually exclusive. First, public sector conflict of interest rules cover board members and executive managers of SOEs as falling into the category of positions exposed to heightened risks of corruption. Second, conflict of interest provisions can be incorporated into legislation regulating SOEs, whether statutory regulation or sector-wide SOE legislation. Table 4.4 provides an overview of national approaches to regulating conflict of interest in SOEs – whether done through legislation for the public sector or company/SOE-specific law, and whether supported by good practice or other documentation.
SOEs should be expected to set up mechanisms to comply with requirements surrounding conflicts of interest. The most common mechanism is a declaration of conflict of interest. The ACI Guidelines encourage that members of SOE boards and executive management to “make declarations to the relevant bodies regarding their investments, activities, employment, and benefits from which a potential conflict of interest could arise. Potentially conflicting interests should be declared at the time of appointment and the declarations should be kept up to date during board tenure” (IV.9.iv).
Asset declarations are an important tool for managing conflicts of interest at the board level, and the next version of this report will look into this in more detail. However, it should be seen as one of multiple tools to manage conflict of interest. Despite the great emphasis that companies (and states) place on declarations, it is not enough on its own. OECD’s comparative and in-country work has shown that conflict of interest declarations have their drawbacks. They can be falsified, not kept up to date and not monitored by the receiving entity (which may be outside of the company).
In addition to declarations of conflicts of interest (relatedly, asset or income declarations), SOEs should have corporate controls that companies establish to manage potential or real conflicts of interest and that make it harder to unduly influence due procedure. In France, if the managing director, one of the deputy managing directors or one of the directors of the company is the owner, partner with unlimited liability, manager, director, member of the supervisory board or otherwise be in general a manager of a company, a decision must be subject to the prior authorisation of the Board of Directors wherein the directors directly or indirectly interested may not take part in the deliberations or in the vote relating to the said agreements (in accordance with Articles L.225-38 and following of the Commercial Code). This comes in addition to the requirement for SOEs subject to the Corporate Governance Code, that directors are required to declare to the company any situation of real or potential conflict of interest, which must be reflected in their internal regulations adopted by the Board. Lithuania’s Law on the Adjustment of Public and Private Interest requires board members and executives of SOEs (as well as other employees who are subject to the Law) to follow the provisions of withdrawal (e.g. withdrawal when official duties are connected with private interests) or principles of gifts or services (e.g. a person cannot accept gifts or services if it is related to the official position or official duties).
4.1.5. Reporting and protection of reporting persons
The ACI Guidelines ask the state owner to encourage “appropriate channels for oversight and reporting at the enterprise level…”, including the establishment of clear rules and procedures for employees or other reporting persons to raise concerns to the board level (or designated individual or unit) about real or encouraged illegal or irregular practices in or concerning SOEs (including subsidiaries or business partners). Reporting “channels” can also be used to seek advice on integrity-related matters. These channels should be employed, for example, “when representatives of government, including those of the ownership entity, give instructions that appear to be irregular” (III.3). Similarly, if decisions belonging to the board are taken by another individual or body, board members should have such a channel to report it. The ACI Guidelines’ Implementation Guide elaborates on the various models on how to make integrity and anti-corruption advice, or provide reporting opportunities, within an SOE.
“State-Owned Enterprises and Corruption: what are the risks and what can be done” showed that almost half of surveyed SOEs (213) reported to have online internal and external reporting mechanisms in place. On average, reports or claims are sent individuals within the company usually within compliance, risk or audit functions, and 60% of SOEs classify claims as confidential (30%, anonymous). As regards internal channels, most complaints flow to those in charge of risk, audit, or compliance, but almost 38% of SOEs have information channelled to the CEO or President, and 33% to the board. Despite these mechanisms being in place, more than one-third of SOEs felt that ineffective reporting channels were a challenge to their company’s integrity. This highlights among other things the importance of allowing SOEs to access existing or specifically established external reporting channels, so board members have an alternative to reporting to peers or state representatives directly involved in ownership.
If corporate mechanisms for reporting cannot provide needed advice or sufficient protection for those willing to report irregularities, either an anti-corruption body (or similar) should in principle be the next place to seek such advice. Regardless of the approach that the state takes, the channels and relevant procedures of seeking advice and reporting should be made well known to the representatives of SOEs.
A challenge when it comes to whistleblower protection for SOEs is the fact that dedicated public sector whistleblower protection plans, where they exist, may not provide protection for employees or groups of individuals within an SOE corporate hierarchy. Indeed, employees of SOEs can often be excluded from laws regulating whistleblowing in the public service (OECD, 2016[5]). Thus, countries should enact strong and effective legal and institutional frameworks to protect reporting persons working in the private or public sector with no exceptions.
Countries should also encourage SOEs, including through company law or corporate governance codes to establish reporting channels. Table 4.5 provides a preliminary assessment of which countries require SOEs to establish reporting (whistleblowing) channels and shares details on related requirements, based on state owners’ responses to the questionnaire underpinning this report and supplementary research. However, it does not reflect recent changes from the transposition of the EU Directive on the protection of persons who report breaches of Union law in EU countries, which requires that legal entities in the private and public sector establish channels and procedures for internal reporting and for follow-up. This may suggest that in these countries the state owner may not be aware of the requirement, or that there is not yet full transposition of the EU Directive.
Based on the information available, it appears that 54% of participating governments require SOEs to establish internal channels for whistleblowing or reporting. In the majority of those that do not, SOE employees may access whistleblowing channels established by the state. In other countries, there are some procedures established whereby individuals can report suspected or real wrongdoing, but this may not amount to a formalised structure. In all cases, the existence of a whistleblower mechanism does not guarantee that good practice of protecting whistleblowers is adhered to.
Some countries have introduced incentives for individuals to come forward given the daunting undertaking and potential for loss and stigmatisation that can accompany reporting on colleagues and contacts. Incentives can take the form of tokens of recognition to financial rewards. While these are often considered as incentives, financial payments to whistleblowers can also provide financial support, for example living and legal expenses, following retaliation (OECD, 2016[5]).
As promoted in the SOE Guidelines, “SOE boards should effectively carry out their functions of setting strategy and supervising management, based on broad mandates and objectives set by the government. They should have the power to appoint and remove the CEO” (VII.B). The ACI Guidelines add that “the state should express an expectation that the board apply high standards for hiring and conduct of top management and other members of the executive management, who should be appointed based on professional criteria. Special attention should be given to managing conflict of interest and, relatedly, movement of actors between public and private sectors (also known as “revolving door” practices)” (IV.10).
This sub-section offers a preliminary assessment of country practices in appointing and removing the CEO, and in boards’ oversight of executive management, that will allow for future assessment of how certain practices can protect the integrity and autonomy of SOE executive management.
4.2.1. Appointing and removing the CEO
It bears repeating that it should be a board responsibility to appoint and remove the CEO because, in practice, this is often not the case. States continue to play a role of varying degrees. Table 4.6 explores the distribution of responsibilities between the board and the state in nominating, appointing or removing the CEO. In a handful of countries (Argentina, Chile, Estonia, Finland, New Zealand, Norway, Sweden, and Switzerland), the state has no role in the nomination, appointment or removal of the CEO. In others, the state may participate indirectly via General Shareholders’ Meetings, or via representation on SOE boards making the decision. In a more involved manner, states may nominate individuals or offer candidates from a pool of pre-approved individuals, leaving approval to the board (or General Shareholders’ Meeting). In other countries the state will be yet more involved, where the board may nominate but the state retains the ultimate decision on who will be appointed. A final approach finds the state may appointing the CEO after consultation with the board, or, where heads of state are involved in the appointment, making the decision without any consultation of the board. There are often exceptions to the general rule. Exceptions or rights of the state to directly appoint are often reserved for large state-owned groups or SOEs that are of special interest to the state.
Exceptions and direct appointments run contrary to the spirit of the SOE and ACI Guidelines, and countries should offer clear and valid justification for such approaches. When SOE boards and states share responsibility for the appointment of the CEO, care must be taken to ensure that the appropriate balance is struck and respected within the arrangement. Anecdotal evidence from OECD’s country work has shown how requirements to at least consult or leave appointment decisions to the board are often flouted, or how boards never veto or refuse a nomination made by the state.
4.2.2. Board mechanisms for oversight of executive management
Most state owners participating in this study reported that SOE executive management are held to account namely through their (i) liabilities – at minimum, liability for losses to the company related to non-compliance or fraud – as well as for criminal liability; (ii) their management duties, including the duty of loyalty or to report, comply or disclose; and (iii) clear grounds for dismissal to assess potential or real irregularities.
Internal and external audits are also said to play a role in oversight insofar as they form part of the system of checks and balances notably through compliance audits, or assessment of the effectiveness of individual controls involving executive management.
As it is a board responsibility to supervise executive management, the board might consider more proactive means than relying on managements’ adherence to the law and the existing checks and balances. At minimum, the board should ensure that information from internal checks and balances provides the board the information it needs to adequately oversee management. Boards might also use evaluations of management (as in Hungary) that includes metrics and assessments of not only performance but also conduct (Viet Nam), or relatedly to offer financial incentives (South Africa). Countries provided very few examples of additional practices, which could be explored in a later version of this report.
IV.5. iv. Encouraging the establishment of clear rules and procedures for employees or other reporting persons to report concerns to the board about real or encouraged illegal or irregular practices in or concerning SOEs (including subsidiaries or business partners). In the absence of timely remedial action or in the face of a reasonable risk of negative employment action, employees are encouraged to report to the competent authorities. They should be protected in law and practice against all types of unjustified treatments as a result of reporting concerns.
IV.9. It is a prime responsibility of the state to ensure that boards have the necessary authority, diversity, competencies, and objectivity to autonomously carry out their function with integrity. The corporate governance framework should ensure the board is accountable to the company and to the shareholders and, where legislated, subject to parliamentary control, recognising citizens as the ultimate shareholder. This includes, inter alia, that:
i. Politicians who are in a position to influence materially the operating conditions of SOEs should not serve on their boards. Civil servants and other public officials can serve on boards under the condition that qualification and conflict of interest requirements apply to them. A predetermined “cooling-off” period should as a general rule be applied to former politicians.
ii. An appropriate number of independent members – non-state and nonexecutive – should be on each board and sit on specialised board committees.
iii. Any collective and individual liabilities of board members should be clearly defined. All board members should have a legal obligation to act in the best interest of the enterprise, cognisant of the objectives of the shareholder. All board members should have to disclose any personal ownership they have in the SOE and follow the relevant insider trading regulation.
iv. Members of SOE boards and executive management should make declarations to the relevant bodies regarding their investments, activities, employment, and benefits from which a potential conflict of interest could arise.
v. Board members should be selected on the basis of personal integrity and professional qualifications, using a clear, consistent and predetermined set of criteria for the board as a whole, for individual board positions and for the chair, and subject to transparent procedures that should include diversity, background checks and, as appropriate, mechanisms aimed at preventing future potential conflicts of interest (e.g. use of asset declarations).
vi. Mechanisms should exist to manage conflicts of interest that may prevent board members from carrying out their duties in the company’s interest, and to limit political interference in board processes. Potentially conflicting interests should be declared at the time of appointment and the declarations should be kept up to date during board tenure.
vii. Mechanisms to evaluate and maintain the effectiveness of board performance and independence should be in place. These may include, amongst others, limits on the term of any continuous appointment or the permitted number of reappointments to the board, as well as resources to enable the board to access independent information or expertise.
IV.10. The state should express an expectation that the board apply high standards for hiring and conduct of top management and other members of the executive management, who should be appointed based on professional criteria. Special attention should be given to managing conflict of interest and, relatedly, movement of actors between public and private sectors (also known as “revolving door” practices).
4.3.1. Commentary on recommendation IV.2. iv
The OECD’s “State-Owned Enterprises and Corruption: what are the risks and what can be done” showed that almost half of 213 surveyed SOEs reported to have online internal and external reporting mechanisms in place. Despite these mechanisms being in place, more than one-third of SOEs felt that ineffective reporting channels were a challenge to their company’s integrity. Based on the information provided by state ownership entities, this report estimates that in 54% of countries, SOEs are required to establish a reporting or whistleblowing channel. Thus, it appears that in about half of participating countries’ SOEs have some form of mechanism to enable concerned SOE employees to come forward and it is expected that the number will increase with the transposition of the EU Directive underway.
At the same time, it appears that many countries rely on SOE access to universal whistleblowing channels, run for instance by the state, for sufficiency where internal reporting channels do not exist. However, theoretical access to a separate universal reporting channel should not replace, but complement, appropriate and trustworthy procedures within the company itself. Future monitoring activities of the ACI Guidelines could seek to track any evolutions in this area, as well as look into the protection for reporting persons within SOEs, which was not covered in this report.
4.3.2. Commentary on recommendation IV.9:
Taken together, participating countries have a range of mechanisms that can help to promote authority, diversity, competencies, and objectivity of boards. One of the strongest tools at the state’s disposal and in use is the requirement for SOEs to have independent board members. Eighty-three percent of countries participating in this study require independent board members to sit on SOE boards of at least large companies. Similarly, a bigger OECD study found that 33 of 38 countries allowed for independent board members to sit on boards (87%) (OECD, 2021[4]). Future assessment could delve into individual country uses of the term “independence” to uncover whether independence is assured in practice, considering various definitions and varied applications depending on the form of the SOE.
Generally, it appears that countries are largely following the spirit of the recommendation insofar as it aims to limit presence of politicians or at minimum hold them to equal standards. Participating countries in this study reported to allow or require the following representatives to sit on SOE boards of at least certain SOEs:
All allow former politicians; a predetermined “cooling-off” period should as a general rule be applied to former politicians, and some countries reported having this in place, but information was not available to determine the percentage adhering to that standard
It could not be determined whether those individuals still permitted on boards are in a position to materially influence operations or not. This would be on a more subjective basis. Moreover, respondents unanimously reported that all the state representatives are subject to the same requirements as other board members, but verification was outside of the scope of this report.
In terms of criteria for hiring, just over half of surveyed governments (55%) reported having established minimum qualification criteria for board members. The other 45% did not. Criteria most commonly relate to candidates’ education and professional backgrounds, and some countries have established criteria that help to elucidate personal integrity as well that brings them more in line with the ACI Guidelines. Countries are encouraged to consider establishing minimum qualification criteria where it doesn’t yet exist and adding those that allow board members to be appointed based on personal integrity and professional criteria in a consistent manner.
What is less clear is the effectiveness of this range of measures. All components of recommendation IV.9. need to work together – that is, independent board members should be sufficient counterweight to the presence of representatives of the state. All board members should have the opportunity to report wrongdoing that arises in the carry out of their duties – including knowing where a conflict is present or where an individual is neglecting their duty to act in the best interest of the company. Countries are invited to consider whether they are meeting the spirit of recommendation IV.9. by having a variety of mechanisms that provide assurance on the overall authority, diversity, competencies, and objectivity of boards.
4.3.3. Commentary on recommendation IV.10:
Together, the SOE and ACI Guidelines make boards responsible for appointing the CEO and adhering to high standards when hiring for that post and other members of executive management. The OECD has previously tracked implementation of the SOE guidelines’ provision on CEO appointments, showing that in the source study less than half (43%) allow for the board to appoint the CEO, at least for certain SOEs. Most countries see the state involved, at least to some degree either through shareholder meetings, approving board nominations or by direct appointment. It cannot be determined at this time whether executive management is held to a high standard and appointed based on clearly determined criteria. However, the variance in responsibility between the state owner and the board, even within some countries according to the form of SOE, makes it less likely that clear and consistent criteria are applied. The state owner wish to pay attention to ensuring that at least CEOs of SOEs under its ownership are being appointed based on consistent criteria.
Special attention should be given to managing conflict of interest and, relatedly, movement of actors between public and private sectors (also known as “revolving door” practices), more attention should be paid to inconsistencies that might arise in determining whether an individual is suitable for the post. The report is unable to conclude on raises concern about a lack of criteria that would deem an individual “incompatible” for the job.
References
[4] 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.
[1] OECD (2017), The Detection of Foreign Bribery, https://www.oecd.org/corruption/anti-bribery/The-Detection-of-Foreign-Bribery-ENG.pdf.
[5] OECD (2016), Committing to Effective Whistleblower Protection, https://doi.org/10.1787/9789264252639-en.
[3] United States Department of Justice (2018), Petróleo Brasileiro S.A. – Petrobras Agrees to Pay More Than $850 Million for FCPA Violations, https://www.justice.gov/opa/pr/petr-leo-brasileiro-sa-petrobras-agrees-pay-more-850-million-fcpa-violations.