State-owned enterprises are facing major corporate governance challenges that are eroding the efficiency of state assets management. Political interference in the management of companies, often insufficiently trained board members, formalism, lack of independent board members are just a few examples that go against the principles of good governance. So far, the institutionalisation of good governance instruments has been slow and fragmented, but the current context calls for efforts to be mobilised. The Government's commitments with development partners, in particular the EU and the IMF, foresee strengthening the management of state-owned enterprises. The management of state-owned enterprises can be improved by adopting and implementing properly codes of governance, adopting regulations that foresee competitive procedures for the selection of boards’ members and set up a clear evaluation framework, aimed at enhancing the accountability and motivating boards.

 

The role of good governance is to facilitate effective management that can ensure a long-term success of the company. According to the principles of corporate governance developed by the Organisation for Economic Co-operation and Development (OECD) , state has to ensure that the governance of state-owned enterprises takes place in a transparent and accountable manner, with a high degree of professionalism, integrity and effectiveness. To this end, the state must have in place mechanisms that would guarantee an objective and transparent selection of executive management and boards, to ensure that these positions are held by persons with appropriate professional training, while holding governing bodies accountable for their decisions, and offering transparency to the public.

The state-owned enterprises sector of the Republic of Moldova faces many problems in terms of good governance, which have been repeatedly highlighted by World Bank  and IMF reports . Thus, the main constraints in this respect are the following:

• Non-compliance with the national regulatory framework on corporate governance, namely the National Commission for Financial Markets Decision approving the Corporate Governance Code . According to this decision, adopting Governance Codes is mandatory for entities of public interest, including large state-owned enterprises, and recommended for other companies. However, many of the state-owned enterprises subject to this provision have not adopted Governance Codes. 
• Even where a Governance Code has been adopted, in many cases companies do not follow and apply Codes’ provision. Companies have not continued with the development of secondary reporting tools to demonstrate how corporate governance is adjusted to the provisions of the Code and to what extent it complies. Thus, in the absence of a firm commitment coming from the Board to enforce the implementation of  good governance principles, the adoption of the codes is largely limited to a ‘tick-box exercise’ and is seen as a formality rather than a strict compliance framework.
• The national legislation does not stipulate any formal procedures for selecting board members of state-owned enterprises, which would establish clear selection criteria, therefore decision-making is characterised by an acute lack of transparency. At the same time, this opens the door to appointing members by political criteria or favouritism to the detriment of meritocracy. 
• Board membership is made up almost exclusively of state representatives, with no procedure for co-opting independent members. 
• There is a conflict of interest triggered by the overlapping of assets ownership and policy making function, which arises when state representatives on boards have direct responsibility for policy making in the sector where state-owned enterprise operate.
• There is no clear and comprehensive framework for board performance evaluation linked to a remuneration mechanism, which on the one hand would make board members more accountable and on the other encourage attracting qualified individuals.

Although attempts have been made in the past to introduce a regulation on organising competitions to select and appoint board members, they have not been successful and the problem has been perpetuated over the years. At the same time, the adoption of governance codes is slow and fragmented. But the current context calls for firm and irrevocable actions on this dimension. Thus, one of the conditionalities attached to the EU  pre-accession process relates to comprehensive reform of state-owned enterprises, specifying in particular (i) the development of a state-ownership policy and (ii) the improvement of the regulatory framework for the governance of state-owned entities in line with OECD principles. At the same time, improving the corporate governance of state-owned enterprises is also an objective assumed by the Government in its Letter of Intent to the International Monetary Fund . An important step in this regard has already been taken. At the end of 2022, the Strategy on the state property management in state-owned enterprises and companies with full or majority state capital for 2022-2030  was adopted. It sets out the state's strategic and coherent vision for the state-owned enterprise sector and establishes clear indicators for its monitoring and evaluation. Thus, three measures are set for enhancing the accountability and professionalism of boards, namely:

• approve Corporate Governance Codes in state-owned enterprises;
• approve regulations on nominating, evaluating and dismissing board members of state-owned enterprises;
• adjust the legal framework to allow delegating other individuals than representatives of public servants as board members;

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The commentary was produced by the Expert-Grup Independent Think-Tank as part of ‘Strengthening the competitiveness of state-owned enterprises by fostering corporate governance’ project with the support of the Soros Foundation Moldova.