Governance of state owned enterprises: a case of Lithuania

1. Governance of state owned enterprises: a case of Lithuania September, 2011

2. Content 1 SOE economy in Lithuania 2 Current SOE governance framework 3 The recent and ongoing SOE reform efforts

3. SOE Economy in Lithuania

4. 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% EUR 4.1 billion 33% Energy 37% Transportation SOE economy in Lithuania Current SOE governance framework The recent and ongoing SOE reform efforts

5. SOE economy *In terms of estimated equity value SOE economy in Lithuania Current SOE governance framework The recent and ongoing SOE reform efforts

6. Current SOE governance framework

7. Organization of the state ownership function for SOEs Institution Function Holds shares of SOEs State Decides on which particular institution should represent the State in exercising ownership function. Decides on privatisation of SOEs. Government Holds shares of a SOE under the right of trust and implements ownership function Line ministry Institution responsible for privatisation of SOEs State property fund Recently implemented changes Coordinates procedure for setting financial and operational goals Ministry of Finance Responsible for writing the ownership policy, separation of commercial and non-commercial activities and implementation of transparency guidelines Ministry of Economy SOE economy in Lithuania Current SOE governance framework The recent and ongoing SOE reform efforts

8. Corporate governance structure of limited liability companies • 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. 1 3 General meeting Ownership level 2 Supervisory council Steering level 4 Board Decision-making level CEO Executive level SOE economy in Lithuania Current SOE governance framework The recent and ongoing SOE reform efforts

9. 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

10. 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

11. The recent and ongoing SOE reform efforts

12. Tools of the reform SOE economy in Lithuania Current SOE governance framework The recent and ongoing SOE reform efforts

13. 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

14. Compensation system • 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. Average annual compensation level for CEOs of large companies in Lithuania 115 thousand EUR 48 thousand EUR Fixed & variable parts Fixed & variable parts Private State (according government resolution) * Revenue, total assets and number of employees SOE economy in Lithuania Current SOE governance framework The recent and ongoing SOE reform efforts

15. “A happy man isone who earns a 100 dollars more than his wife's sister’s husband.”