The governance of state-owned enterprises is significantly improving: the number of companies receiving the highest ratings has increased

Currently, 84% of state-owned enterprises (SOEs) have their governance rated positively. This result is almost one-third better than two years ago and nearly 10% better than last year, according to the latest Good Governance Index for SOEs presented by the Governance Coordination Center (GCC). For the second consecutive year, the overall SOE governance indicator is positive. This time, the most positive feedback was received by SOEs’ collegial bodies, while the weakest area in governance remains the application of international sanctions.

This year, a total of nineteen state-owned enterprises were rated with the highest good governance indicator, with three of them receiving this rating for the first time.

Among those receiving the highest governance rating for the first time were large companies such as the State Forest Enterprise and ‘KN Energies’, as well as the medium-sized state enterprise ‘Turto Bankas’.

In assessing the achievements of companies in specific areas of good governance, AB ‘Lietuvos Geležinkeliai’ was awarded for its progress in governance, especially in transparency and the work of collegial bodies. AB ‘Smiltynės Perkėla’ was recognized for the best strategic planning, having received the highest strategic plan quality ratings for several years now. The Governance Leader award was given to AB ‘Ignitis Group’, which has remained a leader in governance for several years.

“It is great to see the significant progress that state-owned enterprises have made in recent years. Looking at the data from several years, it is clear that the level of governance is steadily increasing with the implementation of best practices. Since 2021, the positive ratings have increased by nearly a third. The strengthened governance of SOEs has brought tangible stability and resilience – the SOE sector has weathered huge challenges related to the COVID pandemic and the ongoing war in Ukraine while maintaining its commitments to the state – in the form of dividends – and to its citizens by ensuring the availability and continuity of services,” says Iveta Paludnevičiūtė, Chancellor of the Ministry of Economy and Innovation.

Vidas Danielius, the Director of the Governance Coordination Center, highlights that the increase in the number of SOEs rated with the highest governance indicator in the Good Governance Index is a strong indication that the changes in enterprise governance are moving in the right direction.

“These results are due to the collective work and focus of the government, the GCC, and the entire SOE community. The main reasons for the recent improvements in SOE governance are primarily the awareness of the companies – the maturity of governance allows companies to understand the real benefits of implementing best practices. The efforts to continue striving for professionalism in governance lead to a much higher level of SOE accountability, both to shareholders and to society, while competent members of collegial bodies are able to strategically guide the company to set and achieve ambitious goals that best suit the specific nature of its operations,” says the GCC director.

However, as noted by V. Danielius, despite the annual improvement in SOE governance, as was the case in last year’s SOE governance assessment, there remains a significant gap between large and small companies.

“If the governance of large SOEs meets good practices and requirements and is rated with the highest positive evaluation, and the medium-sized enterprises category shows positive progress, the governance of small enterprises is still quite low, mostly receiving only average ratings. This is because small enterprises have very limited resources for implementing governance principles,” emphasizes V. Danielius.

The weakest area of governance in this year’s SOE Good Governance Index was the application of international sanctions, but it is worth noting that the practices of SOEs in applying international sanctions were evaluated for the first time. The assessment revealed that only part of the companies has effective internal control systems and processes to implement sanctions, which poses a risk of violating international sanctions.

Meanwhile, although more and more companies recognize the importance of sustainability, implement measures to achieve it, and apply international standards, SOEs in Lithuania still lag behind the best global practices. Therefore, SOE sustainability reports have remained among the weakest areas of governance for several years.

“These gaps arise because state-owned enterprises often face limited financial and human resources, which are essential for preparing sustainability reports. Also, in recent years, sustainability topics have become of utmost importance in many areas, and the requirements and standards are constantly evolving – making it difficult for operating companies to dynamically respond to all expectations related to sustainable activities,” explains GCC Director V. Danielius.

The annually compiled SOE Good Governance Index is designed to assess and measure how each state-owned enterprise and the state-representing institution implements the main good governance practices, which include the recommendations of the Organisation for Economic Co-operation and Development (OECD), Ownership Guidelines, Transparency Guidelines, Selection Guidelines, and other documents regulating SOE activities and best global practices.

Currently, the SOE Good Governance Index is the most comprehensive tool for assessing the quality of governance across all SOEs.

The SOE Index assessment is particularly important and is often included in the shareholder’s expectation letters and later into strategic goals and objectives maps. Therefore, the comments and recommendations provided by the GCC to all SOEs along with individual assessments help SOEs better understand governance gaps and improve them.

The 2023/24 Index includes only SOEs that were operational at the time of its compilation. A total of 32 SOEs were included in the latest Index.

You can find more detailed information on the latest results of the SOE Good Governance Index on the Governance Coordination Center’s website https://governance.lt/valdysenos-indeksas/#indekso-rezultatai