State-owned enterprise governance

A state-owned enterprise (SOE) is a company in which the state has significant control through full, majority or significant minority ownership. Governing it well means answering questions that private shareholders answer through markets: what is the firm for, who chooses its board and managers, how is performance judged, and who pays when it loses money. Because the state is also lawmaker, regulator, tax collector and sometimes customer, SOE governance is largely about managing the state's conflicts of interest.

• Separation of ownership and regulation. The OECD guidelines state that there should be a clear separation between the state's ownership function and other state functions that may influence the conditions for SOEs, particularly market regulation.
• Centralised or coordinated ownership entity. One agency or holding company exercises ownership, rather than the line ministry that also makes sector policy.
• Clear mandates and compensated public-service obligations. Non-commercial tasks are defined, costed and paid for transparently, in separate accounts, so that they do not become hidden subsidies.
• Professional boards. Appointment by merit, with independent members and protection from day-to-day political instructions.
• Competitive neutrality. SOEs face the same tax, credit and bankruptcy rules as private competitors.
• Disclosure. Audited accounts and annual aggregate reports by the ownership entity.

The case for these rules comes from agency theory and from Kornai's analysis of soft budget constraints: a firm that expects to be rescued, or to be protected by its owner-regulator, has weaker incentives to control costs. Separation of functions is meant to make the state's commitments credible. Thurber, Hults and Heller (2011) studied the "Norwegian model" of separating policy (ministry), regulation (a petroleum directorate) and commercial operation (the national oil company); they concluded that the separation helped Norway but is not necessary or sufficient elsewhere, because it depends on the capacity of the institutions involved.

• Norway assigns petroleum policy, regulation and commercial operation to different bodies (a ministry, a petroleum directorate and the majority state-owned oil company), the model Thurber and colleagues analyse.
• Many OECD members have moved ownership from line ministries to central ownership units.
• China's State-owned Assets Supervision and Administration Commission centralises ownership of central SOEs, while the Communist Party's organisation department controls senior appointments.

The guidelines assume a state that can bind itself. Where courts and audit offices are not independent, formal separation can coexist with informal control. Critics on the left argue that commercial mandates strip SOEs of the public purposes that justified them; critics on the right argue that good SOE governance is a second-best substitute for privatisation.

The guidelines are widely used as a benchmark in OECD reviews and World Bank programmes. OECD reviews report that separation of ownership and regulatory functions is still incomplete in many countries where ownership is dispersed across ministries. Evidence linking specific governance reforms to SOE performance is mostly case-based.