Drivers of organizational performance in state owned enterprises

The purpose of this paper is to examine empirical evidence on factors that influence performance of state owned enterprises (SOEs). With a focus on power utilities, the paper investigates how such several factors interact with each other to influence ultimate performance.

Data on the SOEs constituting the sample is predominantly obtained from the audited annual financial statements and other publicized reports of entities for a 20-year period spanning from 1994 to 2013. The audited annual financial statements provide quantitative data whilst the rest of qualitative information is available from narratives in the annual reports. The study takes liquidity, board strength, extent of stakeholder presentation on board and government’s involvement in pricing as proxy variables for resource-based agency, stakeholder and public choice theories, respectively. Using performance as the dependent variable, the study variables are modeled in a regression model.

The paper finds that good SOE performance could be explained in terms of the agency and resource-based theories, where the authors found strong boards and good liquidity profiles to be positively related to good performance. A wider stakeholder representation on SOE boards correlates negatively with performance. Similarly, the higher the level of government involvement in the tariff setting process the weaker the performance results. Based on the results, the paper concludes that SOEs performance is underpinned by a plethora of organizational issues: agency, public policy, stakeholder and resource-based issues. These issues must therefore inform the appointment of SOE management and also their performance contracts.

The study suggests that SOE governance structures should be centered around four main unifying themes; agency, stakeholders, resources and shareholder engagement. From an agency perspective, board appointments should first be based on merit and stakeholder representation comes in as a subset. Resources availability should be paired with objective imperatives and engagement with political leadership should be limited to matters of policy through a regulatory and legal framework.

This study provides some practical insights from both an administration and policy perspective. First, it reveals the importance of and a linkage between both adequate resources and strong boards, but also the need to find the right balance in managing stakeholder interests SOEs face. The study does not necessarily support the popular view of completely eliminating government interference in SOE affairs, but rather advances optimal political influence through regulatory and legal frameworks without giving up ownership rights.