Governance of municipally owned enterprises shows more gaps than in the state-owned sector
Municipalities and the enterprises they own are making significant efforts to strengthen their governance by applying good governance practices in their operations; however, assessments by the Governance Coordination Centre (GCC) show that gaps still remain in the sector of municipally owned enterprises (MOEs).
GCC representatives discussed these trends, their causes, and possible solutions with municipal mayors, vice-mayors, and heads of administrations, presenting good governance practices and the benefits they bring in the state-owned enterprise sector.
Information collected by GCC on MOE governance indicates that governance gaps in this sector are observed across various areas, particularly in the selection of independent collegial body members, executive bonus procedures, information disclosure and transparency, strategic planning, and management.
According to Jurgita Bagdonienė, Acting Head of GCC, some of these differences are driven by the existing regulatory framework, which for municipally owned enterprises is more often recommendatory rather than mandatory. This is reflected in both accountability and transparency practices, which are not applied uniformly across all municipalities.
The practices used by municipalities in selecting independent board members also raise well-founded concerns, according to Bagdonienė.
“Although municipalities comply with the requirement that at least half of board members be independent, in some municipalities it is observed that such members are in one way or another linked to the municipality. In addition, over the past five years, the number of municipally owned enterprises with established boards has significantly decreased. While five years ago boards operated in 137 enterprises, in 2024 only 43 remained. This trend raises questions regarding the depoliticization and professionalism of governance in municipally owned enterprises,” Bagdonienė notes.
According to GCC, gaps are also evident in remuneration practices for board work. Some municipally owned enterprises apply only symbolic remuneration for board members, for example, around EUR 50 per month. Such remuneration amounts to only a few percent of the company director’s salary, despite existing regulation stipulating that board member remuneration should be no less than one quarter of the director’s average salary.
Practices for preparing strategies in municipally owned enterprises also need improvement. GCC seeks to introduce in this sector the practice of annually reviewing and updating strategic activity plans—not necessarily changing them fundamentally, but updating financial projections and other contextual information that has changed. It is also observed that expectation letters prepared by shareholders are often too generic and insufficiently tailored to specific enterprises; in some cases, the same template is used, changing only the company name and activity description while leaving identical expectations.
Although governance gaps in the MOE sector persist, according to Acting Head of GCC J. Bagdonienė, municipalities are making considerable efforts to comply with existing regulation.
“The gaps we observe are not systemic, meaning they do not appear in all municipalities, but only in some of them. At present, it is encouraging that municipalities are purposefully seeking to improve enterprise governance and, to the extent possible, are implementing governance measures in their companies. The quality of MOE governance is significantly influenced by the fact that most enterprises in the MOE portfolio are small and do not always have sufficient resources to meet the requirements. In many cases, a qualitative leap in governance can only be achieved by consolidating enterprises and combining the management of companies engaged in similar activities,” says Bagdonienė.
In light of the identified governance gaps in the MOE sector, municipalities and municipally owned enterprises have been recommended to strengthen good governance practices by following the high standards applied in the SOE sector. The recommendations include preparing high-quality and timely expectation letters, setting key performance indicators (KPIs) for owned enterprises and monitoring their implementation, ensuring the preparation and annual updating of strategic activity plans, adhering to independence criteria in the selection of collegial body members, applying remuneration principles, ensuring accountability and proper disclosure, and ensuring high-quality identification and accounting of special obligations.
