Strict guidelines for SOEs: They will reap what they sow

The Finance Ministry this week cracked the whip on state- owned enterprises (SOEs), requiring boards of directors to be held accountable for their decisions and actions, laying down strict guidelines for recruitment and payments, and demanding performance targets to be met across all institutions.

The instructions targeting 400-odd institutions became effective on Wednesday. They were accompanied by a circular issued by Treasury Secretary S.R. Attygalle “in line with the overarching objective of improving the performance of SOEs while providing them with the required autonomy

facilitating the efficient and effective decision-making capacities”.

The ‘ Guidelines on Corporate Governance for State- Owned Enterprises’ ( CG) are meant to “ensure transparency, fairness, accountability and responsibility in line with international best practices,” the circular said.

A separate ‘ Operational Manual’ ( OM) gives directions on the conduct of business within SOEs, placing “an importance on inculcating a performance- driven culture”. Neither document directly addresses the continuing politicisation and interference in the running of public enterprises. But SOEs are required to align their operations with the Gover nment’s policy framework.

Presenting the budget recently, Finance Minister Basil Rajapaksa vowed to transform the public sector into an efficient and approachable service with courteous and client-centric institutions. He proposed an appraisal system based on client satisfaction and key performance indicators ( KPIs). SOE Director Boards have now been asked to formulate clearly-defined KPIs and hold periodic performance reviews to ensure targets are met.

The CG has been called a “framework of discipline”. It states that directors should be held accountable for their decisions and actions. Each Board is required to enter into “a performance contract” with the respective SOE’s Chief Executive Officer “against which the CEO’s performances must be evaluated annually and the incentives including bonuses must be decided”.

“Directors of the Board must self- regulate their actions and voluntarily recuse themselves when required in making decisions that fall within the ambit of related party transactions,” the guidelines state.

They also require “disclosure of maximum information of both financial and non-financial nature to its stakeholders, without compromising any statutory or operational requirements, through the entity’s website”.

The CG prescribes rules for managing relationships with subsidiary companies. For instance, the Board of the parent SOE should regularly review the performance of subsidiaries as well as “closely monitor intercompany transactions among subsidiary companies”.

Directors must individually declare their relationships to the Board Secretary. These include close family and material business ties with the SOE, other Directors and employees, if any; names of any other entity including another SOE in which he or she is employed or serves on the Board; number or percentage of Board meetings and sub-committee meetings he or she has attended during the financial year; details on related- party transactions.

A section on ethics for Board members and management commands integrity, objectivity (“to not allow bias, conflict of interest or undue influence of others to override business judgments”), competence and due care, confidentiality and ethical behaviour.

Meanwhile, the OM holds secretaries to line ministries responsible for ensuring SOEs under their purview adhere to applicable legal and Government policy frameworks. It encourages institutions to invest in technologies to improve productivity and effectiveness. It calls on SOEs to have their own systems, processes and protocols clearly defined in manuals covering all major operations; these are to be reviewed and updated at least every five years.

There are strict guidelines on recruitment, incentives and remuneration. Boards are mandated to introduce “an effective performance appraisal system” based on strategic, business and action plans. KPIs as agreed between employee and management should be in place. The productivity of each employee must be assessed by the immediate supervisor and sectional head annually and recorded properly in the personal file, to be considered for promotions.