Fourthly, because the Boards of Directors are regarded as representative of ministries and they may have authority in their role as government officials to approve the SOE's budget or to procure its products, management often withhold infonnation from them and try to avoid giving this person too detailed data, fearing the infonnation gained will be used in the negotiations on prices paid by the ministry.
Corporate Governance Principles
As previously discussed in Chapter 2, there are certain principles to ensure good corporate governance practices. These principles are accountability, transparency, and independence. Being publicly owned, SOEs are expected to be operating in accordance with government policy and accountable to both the government acting as the shareholders and the public as the stakeholders. In addition, SOEs are also expected to disclose publicly details of operations and financial conditions. Mako and Zhang (2004,) in their study on Chinese SOEs, argue that since SOEs are owned by all citizens they should be treated by SOEs in the same way as public limited liability companies treat their shareholders, in tenns of infonnation disclosure and transparency. With this respect, the OECD calls on governments to improve transparency by strengthening internal controls, carrying out independent, external audits based on international standards, disclosing any finanCial assistance from the government and producing aggregate perfonnance reports.
However, implementing such principles in practice can be problematic. Accountability, for example, can be judged by different criteria (Bottomley, 2000) . Firstly, an SOE might be said to be accountable if it provides accurate infonnation about its financial activities (and possibly its perfonnance) when it is required to do so. However, the demands of accountability and transparency may conflict with commercialisation because an SOE may want to keep commercially sensitive information confidential rather than disclosing it to the public or in a Parliamentary forum. This problem is worsened if, on a stronger view of accountability, an SOE is required to explain or justify its business
plans to Parliament. Secondly, privatised SOEs have an obligation to fulfil the varying requirements of different accountability audiences even if the people involved are the same. For example, if the shareholder of the SOE is a Minister and the Board of Directors and the executives of the SOE are government officials; their accountability to the Minister may be similar to that of other government officials to the Minister. It means that no separate accountability obligations should be applied. However, the fact remains that the director occupies dual roles
with
each role attracting different accountability issues. Thirdly, there is an issue as to when the accountability requirements should apply. Different accountability timeframes will apply depending upon who the accountability audience is, and on the method by which that accountability is conveyed. For example, accountability of SOEs to the public will be after the event, while accountability to the portfolio Minister will require disclosures of poliCies before they are implemented by SOEs.According to Bottomley (2000) ' one of the principal methods for ensuring the accountability of SOEs has been to place them
withi..'1
the general structure of ministerial responsibility to Parliament. In simple terms, this means that staff of a SOE is accountable to management who are in turn accountable to the Board of Directors. The directors are accountable to the relevant portfolio minister who, in turn, is accountable to Parliament for the performance of SOEs in that portfolio. Problems can arise at different pOints along this accountability chain. For example, if a director is appointed from the Minister's department, conflicts may arise between the director's autonomous duty to the company and his or her obligations to the department.Summary
This chapter discussed several aspects of SOEs including the concepts, objectives , roles, performance, and corporate governance systems. As discussed above, an SOE has two features, the 'publicness' and the 'enterprise'. The 'publicness' demands SOEs to pursue social objectives while the 'enterprise' requires SOEs to operate like private enterprises, i.e. , in an efficient manner so that they are able to gain profits for the benefit of
the shareholders. These two features in practice can create problems especially if the government does not provide clear objectives to SOEs. The Board and management can always find ways to get away from bad performance, for example, by blaming the unclear objectives.
The literature documents that the performance of SOEs is mostly poor. The reasons are varied from having to pursue multiple and conflicting objectives without clear performance measurement, to lack of authority and accountability. To overcome these problems, many governments privatise SOEs. Privatisation is selling public assets to the private sector. There are pros and cons of privatisation. People who support privatisation argue that privatised SOEs will be better managed and financed and will result in a substantial increase in government revenue. Consequently, it will increase public wealth. Therefore, some argue that privatisation should be the only solution to overcome problems in the SOEs.For those who are against privatisation, they argue that privatisation will lead to foreign and multinational companies dominating the country's economic development, which may not be beneficial to the society at large. In addition, the findings of studies that show private companyies to have better performance than SOEs are inconclusive.
The enterprise nature of SOEs results in governance structures similar to that of private enterprises. The governing bodies of SOEs can consist of the Board of Directors and the Board of Management. Since the government is the only owner of the SOs, it may be perceived that there are no corporate governance problems in SOEs or if there are, the problems are very little. The fact is corporate governance systems in SOEs are more complex because SOEs are loose coalitions of different groups who have different interests. A political party may see SOEs as its source of cash to fmance their political campaigns. Boards of Directors and management may use SOEs for their own benefits, to become richer. The
government needs SOEs for their taxes and dividends to support
government budgets. The public needs SOEs to provide quality goods and services that are cheap. With so many interests that the SOEs have to serve and without clear objectives, the Board of Directors and the
management will find it difficult to run SOEs and it will result in poor performance and loss of accountability.