At the Launch of the 2015 World Economic Forum’s Global Competitiveness Report on October 1st , 2015 Minister of Planning, Camille Robinson-Regis, noted Trinidad and Tobago’s ranking at position 89 out of 144 countries, for the second consecutive year. Trinidad and Tobago’s unchanged ranking in the Index, tells only part of the story. Among the factors that are the subject of the ranking are: ethics and corruption, undue influence, including favouritism in decisions of public officials and public sector performance, including wastefulness of government spending.
State-owned enterprises (SOEs) face unique challenges when adopting corporate governance principles that have been traditionally designed for business entities. This article is part of a two-part series that highlights some of these unique challenges faced by SOEs, initiatives that have been taken to address them, and why it is so important that the state plays a lead role in the adoption of the highest standards of corporate governance. Numerous studies have established the correlation between listed companies adopting good corporate governance practices and improved organisational performance. However, it is even more essential that good corporate governance is adopted and consistently practised by the state sector.
Development of OECD Corporate Governance Principles
Originally, the corporate governance principles developed in 1999 by the Organisation of Economic Co-operation and Development (OECD, 2004), focused on five core areas: (1) the rights of shareholders and key ownership structures; (2) equitable treatment of shareholders; (3) the role of stakeholders; (4) disclosure and transparency; and (5) the responsibilities of the board. While retaining these core areas of focus, the revision of the original principles in 2004 (OECD, 2004), included recognition of the importance of regulatory and supervisory entities. Specifically, it reiterated the need for “ensuring the basis for an effective corporate governance framework” and underlines that “the corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities”. This position is endorsed by the International Centre for Private Enterprise (CIPE) (Sullivan & Nadgrodkiewicz, 2013), which stated that “this (additional) principle now makes it explicit that the existence of good public governance and market institutions cannot be assumed and should be enhanced through reforms where needed”.
The original OECD principles were drafted from the perspective of developed countries, where businesses benefited from access to mature capital markets, and well-honed corporate structures. Although, they did not make business entities immune to either corporate scandal or failure, the successful implementation of, system-wide, corporate governance programmes depends on a country’s overall institutional environment, not just on a company’s internal practices.
Unique Challenges faced by State Owned Enterprises
In 2005 the OECD developed guidelines specifically for SOEs, in recognition of the unique challenges they face. These guidelines were designed to: (i) professionalise the state as an owner; (ii) make SOEs operate with similar efficiency, transparency and accountability as good practice private enterprises; and (iii) ensure that competition between SOEs and private enterprises, where such occurs, is conducted on a level playing field. The Energy Chamber’s Corporate Governance Maturity Framework recognises the unique challenges that SOEs may face as they advance through the four tiers of governance maturity.
These challenges were very succinctly outlined by the OECD, which cited the most critical as being: (1) at one extreme, the possibility of undue hands-on and politically motivated ownership interference, (2) the potential for lines of responsibility to be clouded, and for accountability to be unclear, resulting in the increased possibility of inefficiencies in corporate operations; and (3) at the other extreme distant or non-existent state oversight, ‘the absent owner’, reduces the ability of the state to assure itself that decisions are being made in the best interest of the enterprise and in a manner that considers the interest of the general public, the ultimate shareholder.
In addition, the management of an SOE operates in a context that makes the two most potent sanctions, in the business sector, for poor performance, takeover and bankruptcy, practically non-existent.
The benefits of both state and private entities adopting good corporate governance practices have been detailed at length in many articles, readers can access the Energy Chamber’s dedicated website www. corpgov.energy.tt, for additional information. Available at the website are a number of tutorials and publications designed to improve the practice of corporate governance in Trinidad and Tobago. Particularly useful are: (a) the Corporate Governance Maturity Guide, developed to help enterprises, across all sectors, determine how well their current corporate governance processes and procedures measure up to best practice. This Guide was designed with the needs of Trinidad and Tobago Listed and Closely Held companies, SMEs and State Enterprises in mind; (b) the Legislative Framework for corporate governance which draws on local, regional and international laws; and (c) some of the most Frequently Asked Questions (FAQs), captured from the training participants and seminar attendees. In summary, the site includes all the material a novice and experienced practitioner needs to assess their organisation’s current corporate governance maturity, identify their key areas for development, and create a structured improvement plan.