State-owned and controlled enterprises and economic development

PHILIPPINE government-owned and -controlled corporations (GOCCS) have recently been in the limelight on the issue of the compensation of their respective boards and management who are largely appointed by the incumbent administration and the measures of their performance.  By the term “government-owned or -controlled corporation,” straightaway there are many issues that come to the fore in comparing them with a private corporation.  A GOCC would most likely be a monopoly or funded by contributions from mandatory membership or by government funds or guarantees.  In most instances, these mean that they enjoy certain advantages and privileges over privately owned enterprises, but oftentimes they also have “missionary” mandates.  In this article, we will discuss briefly the developmental implications of GOCCs or globally referred to as “state-owned enterprises” (SOEs) and the necessary connections between the appointing powers, board and senior management, rank and file, and the “stockholders” and other stakeholders of GOCCs.

World Bank policy report

A World Bank policy report published in 1995 (“Bureaucrats in Business: The Economics and Politics of Government Ownership”) indicated that among the countries that it studied, the poorer a country was, the bigger was the share of SOEs in the gross domestic product of that country.  This fact by itself does not indicate a cause-and-effect relationship between SOEs and economic development.  However, the study also indicated that the SOEs of the poorer countries required proportionately greater government subsidies and, in general, a bigger drain on the government’s fiscal accounts.

Naturally, the report suggested SOE reform in order for the less-developed countries to develop faster.  Among the reform measures was privatization.  The report identified three key variables for success in the reform of SOEs: political desirability, political feasibility and credibility.   The Philippines was among the countries studied and it had “mixed” results as of 1995.  In other words, some successes, but more could have been done.  The main stumbling block was political feasibility.  While the desire for reform was strong in the change from the Marcos regime to the restoration of democracy under President Cory Aquino, “the slow pace of  [SOE] reform in the Philippines is likely related to condition II, political feasibility and also again as in Ghana, to the tendency of the government to use state-owned enterprises that were not privatized to increase political support” (page 220).

Stockholders, stakeholders’ appointing powers, the board and senior management of SOEs

When President Benigno Aquino III told the Filipino people that “they are his boss” in his inaugural address, this had a very deep implication on the dynamics of the relationships between the boards and senior management of SOEs and their stakeholders.  Who are their bosses and who are they accountable to?  Is it also the same bosses as their appointing power, the taxpayer or the members who provide the funds for their enterprise or agency?  Who rewards them if their performance is good and who votes them out of office if their performance is bad?  In private enterprise, this relationship is very clear: It is the stockholder who is usually represented in the board in actuality and by proxy.

There is another important element in the relationship of the board and senior management of an SOE, and that is with the officership and rank and, file of the SOE.  As citizens and members of the government pension system, they are the boss of their nominating power and tenured civil servants who “cannot be removed without cause.”   There is a different relationship of accountabilities and responsibilities in this situation than the normal relationships between the management and rank and file of a private enterprise.

The World Bank Report has a section on how Management contracts can improve SOE performance.  Management contracts define the responsibilities and accountabilities of management-performance measurements and compensation and incentives.  Management contracts would be a viable alternative to privatization in instances where the institution cannot be privatized.  A regulatory body like a central bank or the Bureau of Internal Revenue cannot be privatized.  But the management function and processes can be made to function like a private enterprise.

A system for management contracts will probably take legislation.  It has to be crafted very carefully.  It will certainly be clearer and more focused in objectives than mere exemptions from the salary-standardization law.

Governance, management, fiduciary responsibilities and ethics

Having touched on the subject of SOEs and the statement of the new President of the country that the people are his bosses, it would be easier to reduce the static and heat of discussion in SOE reform if we revisit the definition of four words:

• Governance: the system or manner of government.

• Management: Managers and employers considered collectively, especially the directors and executives of a business or organization.

• Fiduciary: Relating to or based on a trust.

• Ethics: a system of moral principles governing the appropriate conduct for a person or group. –Val Araneta / Free Enterprise, Businessmirror