Strengthening the governance and performance of state-owned financial institutions

Topic :

State-owned financial institutions are still a controversial topic – loved by many politicians, criticized by most economists. One of the key problems is the lack of competence and proper incentives for bureaucrats in banking. Proper corporate governance structures might go a long way in alleviating this problem. Corporate governance arrangements define the responsibilities, authorities and accountabilities of owners, boards of directors, and executive managers of a company. This is as important for state financial institutions as for private sector companies.

The author of this paper recognizes that governance of state financial institutions – especially development-oriented ones – is more challenging than the governance of private companies, as they are too much exposed to political intervention and not enough to market discipline. However, based on numerous good examples, he goes on to lay out a number of principles which would strengthen the corporate governance of state financial institutions, ranging from setting performance criteria over the appointment and role of board members to a proper auditing process. In his recommendations the author takes full account of the guidelines recently published by the OECD and the Basel Committee for Banking Supervision which provide a comprehensive corporate governance evaluation framework relevant to state-owned commercial and development finance institutions.

The paper concludes with a case study of the Development Bank of South Africa which exemplifies many of the principles. The key challenge, as always, is in the practical implementation of principles, especially in weak institutional environments.

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