Corporate governance for state enterprises

In spite of extensive privatization over the last two decades, state-owned enterprises (SOEs) are still a mainstay in many developing economies. China, India, Russia and South Africa are just a few countries where wholly or partly government-owned SOEs remain productive and influential.

Good corporate governance is crucial for SOEs in emerging markets, because they face even more governance challenges than private companies do. Unlike a widely-held private company, an SOE usually cannot have its board or management changed via a takeover or proxy contest, and they usually cannot go bankrupt. In addition, they may have "free" equity and a very low cost of subsidized loans. Thus, the incentives for board members and managers to maximize the value of the company and keep costs in check are reduced. Accountability and performance may also be hindered by political interference, poorly defined non-commercial objectives, and an absence of transparency. Strong internal controls, good disclosure, independent boards of directors, and other corporate governance tools can help state-owned enterprises perform well and act in the best interests of citizens and other shareholders.

A new World Bank paper from David Robinett discusses corporate governance of SOEs in emerging markets and makes recommendations for reform.