Improving performance at state-owned enterprises: Clarify objectives and secure an explicit mandate
Too often, state-owned enterprises operate behind a curtain, revealing little information beyond their general mandate. One reason may be that their objectives are unclear or conflicting, but the lack of transparency can also be traced to political expediency, a desire to avoid comparisons with the private sector, or inexperience with clear, concise corporate communications.
In practice, that kind of transparency involves explicitly establishing financial objectives as the primary goal and setting both aspirational targets and minimum expectations, such as covering the cost of capital.
Communicating the new financial targets and the moves that will be used to achieve them offers three significant benefits which are: 1) transparency helps to create accountability, which can force government officials to keep their commitments, particularly if problems arise. 2), it can boost public support for the changes, which is especially important if political support is tenuous.
3) State enterprises must not only focus their portfolios of social, non-financial initiatives in order to deliver meaningful results to key stakeholders but also communicate those results. Unless CEOs of state-owned enterprises meet the core needs of the public and other critical stakeholders, they risk a political backlash that could undermine their efforts and the powers they have won.
Focus scarce resources for highest financial impact
Even with transparent agreements, state-owned enterprises tread on shaky ground. Public scrutiny—and therefore the pressure to deliver quick results and avoid missteps—is intense. Wholesale changes can upset workers and raise the level of political risk. Leadership talent is scarce, and few people have experience executing change programmes.
As a result, judicious state-owned enterprises tend to begin their change programmes by concentrating on a few areas that promise to have the greatest financial impact rather than embarking on a broad agenda that could fail for lack of resources.
This focus also limits the possibility that divergent, and possibly conflicting, stakeholder interests will distract a company’s leaders from their core tasks.
Executives must choose their targets carefully. To emphasize urgency and plough through the bureaucratic inertia that’s common in state enterprises, it will often be necessary to establish special, CEO-sponsored teams that can bypass unnecessary management layers.
To help focus on high-priority areas, leaders at state companies must also examine non-core activities and assets and, wherever possible, terminate, franchise, outsource, or shed them.
Redefining the talent proposition
State companies find it difficult to attract talented people and to motivate the high performers they already have because the environment is perceived as staid, hierarchical, and bureaucratic.
Since career progression is often based on tenure rather than performance, employees with leadership skills may see little reason to shine. Redefining the talent proposition can influence these attitudes.
State-owned enterprises must promote the unique opportunities they provide talented people, offer competitive compensation, and intensify their efforts to manage performance.
To bring in outside talent, state-owned companies should make their case stronger. After all, they offer exciting challenges in nation building, opportunities to work on projects with a much broader impact than those available in the private sector, and the possibility of pursuing careers in a vast network of public and private companies.
Another critical element for developing and retaining talented leaders is to intensify performance management. Meaningful rewards and consequences must be based on merit, not tenure. Many state companies have only a superficial performance culture—formal evaluation processes, for instance.
State enterprises must also be more open to hiring talented foreigners, who can bring needed skills, especially in areas (such as finance and marketing) that have taken a back seat to technical skills.
Since many state enterprises are prohibited from hiring foreigners, especially for senior positions, their leaders should work to ease such restrictions in areas in which they are significantly behind the private sector.
Despite the obstacles, state-owned enterprises can match the private sector’s performance standards and even become world-class players. A clear mandate, an intense focus, and a workable talent strategy can bring quick results. Chief executives at these companies don’t have to wait for governments to take the lead.
They already have the tools at their fingertips. I therefore call all state boards to agree with prisoner’s dilemma too.