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Governance of State Owned Enterprises: A case of Lithuania

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Governance of State Owned Enterprises: A case of Lithuania
Governance of state owned
enterprises: a case of
Lithuania
September, 2011
Content
1
SOE economy in Lithuania
2
Current SOE governance framework
3
The recent and ongoing SOE reform efforts
2
SOE Economy in Lithuania
3
The size and the sectoral distribution of the
SOE economy
The estimated equity value of SOEs amounted to EUR 4.1 billion in 2010 (14% of
GDP)
Other
Forestry
8%
22%
33%
EUR
4.1
billion
Energy
37%
Transportation
SOE economy in Lithuania
Current SOE governance
framework
The recent and ongoing SOE
reform efforts
4
SOE economy
SOE economy
Revenues (mEUR)
1,882
Assets (mEUR)
7,304
Equity (mEUR)
5,437
Dividends (mEUR)
45
Employees
44,520
Companies operating in monopolistic market
60%*
Listed companies
23%*
*In terms of estimated equity value
SOE economy in Lithuania
Current SOE governance
framework
The recent and ongoing SOE
reform efforts
5
Current SOE governance
framework
6
Organization of the state ownership
function for SOEs
Institution
Function
Holds shares of SOEs
State
Government
Decides on which particular institution should
represent the State in exercising ownership
function. Decides on privatisation of SOEs.
Line ministry
Holds shares of a SOE under the right of trust and
implements ownership function
State property fund
Institution responsible for privatisation of SOEs
Recently implemented changes
Ministry of Finance
Ministry of Economy
SOE economy in Lithuania
Current SOE governance
framework
Coordinates procedure for setting financial and
operational goals
Responsible for writing the ownership policy, separation
of commercial and non-commercial activities and
implementation of transparency guidelines
The recent and ongoing SOE
reform efforts
7
Corporate governance structure of limited
liability companies
1
3
General meeting
Ownership level
2
Supervisory
council
Steering level
4
Board
Decision-making level
CEO
Executive level
•Strategic planning
Board members, who are
usually public servants, are
responsible for aligning strategic
goals of the government with
strategic goals of SOEs.
(Shareholder directives are not
practised).
•Board nomination Members
of the supervisory council and
the board are nominated by a
line ministry. Currently, no
qualification requirements
exists. Representation mainly
by civil servants.
•Compensation
Members of the supervisory
council and the board are not
compensated.
SOE economy in Lithuania
Current SOE governance
framework
The recent and ongoing SOE
reform efforts
8
Organization of the state ownership
function for SOEs

The current organisation of the State ownership function.

An advantage:


Line ministries can swiftly implement their sectoral policy objectives.
The disadvantage:

A potential for conflicting objectives of the shareholder (the State) and an
institution which implements ownership function (a line ministry).

Line ministries end up having their own treasures which they use to finance
special obligations without consultation with the Ministry of Finance. Thus, the
Government provides social obligations which are off balance. The amount of
these special obligation is usually unknown.
SOE economy in Lithuania
Current SOE governance
framework
The recent and ongoing SOE
reform efforts
9
Challenges to be addressed
1
Unclear objectives, low standards of strategic planning
2
Lack of performance evaluation from a stand point of shareholders
3
Lack of transparency (already addressed)
4
Inadequate boards
5
Poor supervisory function
6
Poor motivation system
SOE economy in Lithuania
Current SOE governance
framework
The recent and ongoing SOE
reform efforts
10
The recent and ongoing SOE
reform efforts
11
Tools of the reform
Challenges
Tools
Unclear
objectives
Performance
evaluation
Transparency
Quality of
boards
Supervisory
function
Motivation
system
Change of the nomination
procedure and the
compensation policy
-
-
-



Assessment and financial
disclosure of special
obligations



-
-
-
Publication of SOEs annual
reports and aggregated
reports on the SOE economy
publicly
-


-

-
Introduction of goal setting
and performance evaluation
system


-
-
-
-
SOE economy in Lithuania
Current SOE governance
framework
The recent and ongoing SOE
reform efforts
12
Performance evaluation system of SOEs
Activities
Measures
Benchmark / expected result
Segment information
Segment information
Segment information
Monopolistic
Return on capital (subject to
tariff set by the regulator), unit
cost
Rate of return on capital and
unit cots set by the regulator
Special obligations
(public services, social services, etc)
Unit cost (economy), quality
measures
Service level with optimised
value for money
Commercial
Return on capital
Commercial rate of return on
capital
Segment information
Segment information
Segment information
SOE economy in Lithuania
Current SOE governance
framework
The recent and ongoing SOE
reform efforts
13
Compensation system
Average annual compensation level for
CEOs of large companies in Lithuania
115 thousand EUR
Fixed &
variable
parts
SOE economy in Lithuania
Principles of a new compensation system

Boards have enough flexibility to set various
structures of compensation

Competitive compensation, however the level
of compensation can not be higher than
market average of comparable* companies.

Pay-for-performance

Fixed part of compensation should be
sufficient, so that the variable part could not
be paid.

The disbursement of a part of variable part
should be delayed for 1-3 years.
48 thousand EUR
Fixed &
variable
parts
Private

State
(according government
resolution)
Current SOE governance
framework
* Revenue, total assets and number of employees
The recent and ongoing SOE
reform efforts
14
“A happy man is one who earns a 100 dollars more than his wife's sister’s husband.”
15
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