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Governance index

SOE GOOD CORPORATE GOVERNANCE INDEX

Following global principles of good corporate governance, the State, being a shareholder of the enterprises and fulfilling extremely significant functions for the residents of the country through these enterprises, must ensure that the enterprises it owns should operate adhering to the highest standards of governance. To achieve this goal the State has adopted the policy of governance of state-owned enterprises, which all state-owned enterprises and institutions representing the state have to follow. The established policy is based on the Guidelines on Corporate Governance of State-Owned Enterprises developed by the Organisation for Economic Co-operation and Development (OECD), which establish the basic principles of good governance of SOEs. The OECD Guidelines are recognised as the most progressive in respect of the issues of SOE governance. Seeking to ensure that the policy of SOE governance should be followed, the State has authorised the Governance Coordination Centre (GCC) to carry out regular monitoring of governance of SOEs. To facilitate the evaluation of the quality of SOE governance, the Governance Coordination Centre has created an evaluation tool – the SOE Good Corporate Governance Index.

The purpose of the SOE Good Governance Index is to evaluate and measure how the state-owned enterprises and the institutions representing the state implement main practices of good governance, which encompass  recommendations formulated by the Organisation for Economic Cooperation and Development (OECD), the provisions of the Ownership Guidelines, Transparency Guidelines and Nomination Guidelines, as well as other policies and global best practices. At the present time this is the only tool on the basis of which the quality of governance of all SOEs and their subsidiaries, as well as their compliance with the provisions of legal acts, are evaluated.

Taking into consideration changes that take place in SOE governance and actual performance results of SOEs themselves, the SOE Good Corporate Governance Index has been updated every year since 2012. As of 2016 the Index is issued as a separate governance report where aggregated results of SOE governance are presented. The report is publicly accessible on the website of the Governance Coordination Centre.

Since 2019 the evaluation of governance of SOE subsidiaries has been included in the SOE Good Corporate Governance Index. The principles of the evaluation are almost similar as for SOEs, the same principles of governance are followed, with the exception of cases when certain practices for subsidiaries are not formalised in the SOE governance policy or are not relevant to them.

Principles of the Index composition

The OECD principles of corporate governance and the SOE governance policy adopted on their basis, which consists of four main legal acts, provide a basis for the SOE Good Corporate Governance Index. These legal acts are as follows: the Republic of Lithuania Law on Management, Use and Disposal of State and Municipal Assets,  the Procedures for the Implementation of State Property and Non-property Rights in State-owned Enterprises (Ownership Guidelines),  the Guidelines for Ensuring Transparency of State-owned Enterprises (Transparency Guidelines) and the Procedures for the Nomination of Candidates to the Collegial Supervisory or Management Body of a State or Municipal Enterprise, to the State Owned or Municipally Owned Enterprise or its Subsidiary (Nomination Guidelines). Areas of governance regulated by these legal acts are also reflected in the structure of the Index: Transparency (accountability), Collegial Bodies and Ownership Functions. All three areas of governance include the following keystone aspects of SOE management:

  • The formation of independent, depoliticised and competent SOE boards, seeking to ensure the clear separation between the state’s ownership function and other state functions as a market regulator.
  • Setting SOE objectives and the supervision of their implementation, seeking to ensure the effective performance of SOEs.
  • Transparency of SOE activities, seeking to ensure transparency of SOEs and their accountability to the stakeholders.

After the evaluation of the compliance of SOEs with the provisions of legal acts, the Index is also supplemented with the evaluation of other global principles of good corporate governance, for example, the evaluation of the sustainability (corporate social responsibility) or anti-corruption practices. These practices are not regulated closely in the national SOE governance policy; however, they are very important and necessary seeking to evaluate state-owned enterprises fully.

Key documents and guidelines, which the Index relies upon:

In order for the Index to give an accurate reflection of the specific nature of the company’s business and the criteria with the greatest impact on its governance, when compiling the Index the SOE specificity of its activities are taken into consideration. Some part of the requirements laid down in the Index differs depending on the size of a company (smaller companies are subject to less stringent requirements), on the business objectives (contrary to the companies fulfilling functions of social purposes, companies engaged in commercial activities are subject to the requirements of profitability) or on other specific activities carried out by the companies.

The Index methodology is reviewed and updated on an annual basis both seeking to respond to the amendments made in the legislation governing the SOE activities or evolving governance practices and seeking to reinforce the reliability and capacity of the Index to accurately reflect SOE governance in a high quality manner.

Data for evaluation of companies

Data of the SOE Good Corporate Governance Index are collected in two ways: by annual analytical evaluations carried out by the Governance Coordination Centre and by the SOE Good Corporate Governance Index questionnaires filled in by the institution representing the State or SOE, in which the SOE itself or the institution representing the State indicates how governance practices are being implemented. The following analytical evaluations carried out by the Governance Coordination Centre are included in the Index:

  • Evaluation of SOE annual reports (annual activity reports).
  • Evaluation of SOE sustainability (corporate responsibility) reports.
  • Evaluation of SOE data distribution on company websites.
  • Evaluation of the independent audit of SOE financial statements and international financial reporting standards implementation.
  • Evaluation of the fulfilment of SOE special obligations.
  • Evaluation on of the quality of strategic plans of SOEs.
  • Evaluation of the implementation of SOE strategies.
  • Evaluation of the implementation of the indicators of return on equity of SOE.
  • Evaluation of financial sustainability of SOE.

Methodology

The SOE Good Corporate Governance Index methodology is based on the OECD governance principles, the laws and the Resolutions of the Government defining SOE governance in Lithuania. Seeking for a comprehensive evaluation of SOEs, the Index methodology is supplemented with other global governance practices, which are not necessarily laid down in national legal acts, for example, sustainability (corporate social responsibility). For this reason, methodology of the SOE Good Corporate Governance Index is much broader than just the evaluation of compliance with the national SOE governance policy.

The Governance Coordination Centre is responsible for establishment of the Index methodology. The Index methodology is reviewed and updated on an annual basis both seeking to respond to the amendments made in the legislation governing the SOE activities or evolving governance practices and seeking to reinforce the reliability and capacity of the Index to accurately reflect SOE governance in a high quality manner.

The SOE Good Corporate Governance Index methodology is public and is annually updated according to the changes that have taken place.  The latest Index methodology is available in the document below (in the Lithuanian language).

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SOE Good Governance Index methodology 2023/24

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Methodology for Corruption Prevention Evaluation

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Ratings of the Index

This year marks the 12th year of the Index’s existence. The level of governance in state-owned enterprises (SOEs) continues to grow steadily, and for the second consecutive year, the overall assessment of the entire SOE portfolio is positive.

The transparency dimension has also been positively evaluated for the second year in a row (with an A rating). Significant progress has been made over the past year, especially in the area of accountability. Annual reports/annual performance reports are one of the main forms of accountability, and the information disclosed in them receives special attention, with 88% of companies’ annual reports/performance reports being rated positively. Disclosure of data on SOE websites is also improving. This positive change is due to the intensive oversight by the Governance Coordination Centre (VKC), consultations provided, and the clearer formulation of SOE accountability principles. All SOEs audit their annual financial statements, and none received a modified audit opinion. SOEs also regularly rotate independent auditors. This year’s Index shows progress in the preparation of Sustainability Reports. While only 17 SOEs received positive evaluations for their reports in previous years, this year 21 reports were rated positively, and six SOEs earned the highest possible score for their Sustainability Reports. However, sustainability reporting criteria still lag behind overall. Most SOEs are still far behind best global practices, with many initiatives lacking clear direction and not being aligned with the company’s major impacts. There is also a lack of a systematic approach and integration of sustainability initiatives into business strategy and daily operations.

In the area of special obligations, progress is also noticeable, and this criterion received the highest rating (A+) in the history of the Index for the first time. The positive change is due to VKC’s regular review of special obligations, which has allowed for a clearer identification of ongoing obligations, optimization, and a reduction in areas open to interpretation. Of all the Index criteria, the assessment of International Sanctions lags the most, receiving only a mid-level B rating. The evaluation showed that only a portion of companies have effective internal control systems and processes in place to implement sanctions, raising the risk of violations of international sanctions.

The dimension of Collegiate Bodies was rated with the highest positive score (A+) for the first time in the history of the Index. For the first time, five criteria in the collegiate bodies dimension—independence/composition, competencies, selection, functions, and committees—were all rated A+. One of the key elements of professional governance is the establishment and selection of autonomous and competent boards. Currently, all SOEs have formed boards where the majority or at least half of the members are independent, and only one company has a civil servant of political trust on its board. To further depoliticize SOE boards, it is essential to ensure that no state politicians or civil servants of political trust are part of the collegiate bodies. The recruitment of independent members has helped improve the evaluation of other criteria: board involvement in company oversight has increased (board performance evaluations are now regularly and universally applied, annual board work plans are drawn up, and all boards operate under an approved work regulation). All large SOEs (except one) have audit committees that meet the criteria for independence and professionalism. The evaluation of boards is also influenced by the fact that good practices, such as the use of board competency matrices, were not applied in all companies, reducing the quality of selection processes and limiting the possibility of forming the most competent bodies. Ensuring continuity of board work is also a significant challenge, as only 23 boards had at least one member from the previous term. Companies with the legal form of state enterprises are also worth mentioning. The functions of these companies’ boards are significantly constrained by existing legal restrictions and do not meet universally recognized principles of good governance.

The dimension of Strategic Planning and Implementation was also rated positively (A rating). No significant governance changes were observed in this dimension over the past year. The quality of SOE strategic plans remains positively evaluated in most cases (29 SOEs), which is the result of long-term collaboration between VKC and SOEs. All companies have received Letters of Expectations from the institutions representing the state, which, for all but one company, have been aligned with VKC, and some of these letters were reviewed and updated in 2023-2024. VKC has created a concept for measuring SOE performance, which is based on the aim to reflect the best practices of OECD countries and to create and implement a more effective and precise performance evaluation system. Since 2022, each company is required to set three long-term financial indicators, approved by the Government, whose target values are assessed by VKC. These include long-term profitability, optimal capital structure, and dividend and profit contribution indicators, which are incorporated into the SOE’s strategic business plan. Less than half of the SOEs successfully implemented all three key financial indicators. 74% of SOEs achieved long-term profitability, 64% achieved optimal capital structure, and the majority—96%—met the dividend and profit contribution indicators.

There are still problematic areas in strategic planning and implementation practices, as only 23 companies apply systematic strategic planning and implementation procedures. In addition, companies do not always optimally integrate prepared strategic objectives into their daily operations, raising concerns about how well the company’s strategic goals have been discussed. Financial sustainability was rated positively (A rating). When assessing the financial sustainability of companies, it was noted that some SOEs have accumulated significant working capital reserves and are financing business expansion in a particularly conservative manner. Some of these companies have excess assets that are not fully utilized.

Although SOE governance practices have not been rated with the highest scores, it is worth noting that companies are often held to the highest governance standards, which are not always easy to implement immediately. It is also important that the governance of the largest SOEs is currently rated positively, and these companies are managed transparently and according to the highest governance standards. However, the gap between very well and poorly rated SOEs is widening. The overall governance score for the entire SOE sector is often lowered by smaller companies, which often do not have strategic significance and whose ability to meet expectations is very limited.

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SOE Good Governance Index 2023/24

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Company-specific reports

Since 2018, Governance Coordination Centre introduced company-specific good corporate governance reports for state-owned enterprises. Based on the SOE Good Corporate Governance Index methodology, these reports highlights governance areas there SOE do not fully comply with the established SOE governance policy and outlines recommendations to improve them.

Company-specific governance reports are devoted only to the institution representing the State and a state-owned enterprise. To find more information about the preparation of such reports or about individual grade of the SOE governance, please contact:

VMU
ltg
RC
LP
TB
IGN
KN
IAE
EPSO