# **1. Introduction**

The contributions of state-owned enterprises (SOEs) to the national economy are significant in both developed and developing countries. SOEs contributed 20 percent of global investment and 5 percent of employment in 2006 (World Bank 2014). In less developed countries, the importance of SOEs is greater. In the Middle East and North Africa, SOEs contribute 20–50 percent of economic value added and account for about 30 percent of total employment (OECD 2012). More than 10 percent of the world’s largest firms are state-owned (World Bank 2014). SOEs are also central to the delivery of essential public services to citizens in important economic sectors such as utilities, finance, and natural resources.

SOEs, however, often face important financial and service delivery performance challenges. Due to principal-agent issues, soft budget constraints, lack of competition, and multiple competing objectives, SOEs can suffer from inefficiency and poor performance compared to some private sector companies. The underperformance of some SOEs can impede competitiveness and growth and translate into a fiscal burden and a source of fiscal risk for the state.

As a response to these challenges, many countries and international organizations have recently taken measures to increase the efficiency and performance of SOEs by strengthening corporate governance. Many governments have undertaken SOE reforms using a variety of corporate governance related policy instruments, including mechanisms for performance monitoring and evaluation. The World Bank is also emphasizing the importance of SOEs for growth and good governance through the IDA18 agenda, in which it has identified SOE issues as one of the crosscutting priorities for improving governance institutions in International Development Association (IDA) countries. Key principles of good corporate governance are laid out in the _Guidelines on the Corporate Governance of SOEs_ (OECD 2005; revised in 2015.

Despite the growing interest in SOE corporate governance, only a few empirical studies have looked into the relationship between corporate governance and SOE performance. Most studies analyzing the effects of corporate governance on performance have focused on publicly traded companies, owing to the limited availability of data. Moreover, in most cases, those studies did not distinguish between private companies and SOEs in their analysis. A few studies have obtained SOE-specific data from a limited number of countries, such as China (Fan, Wong, and Zhang 2007), Italy (Menozzi, Gutiérrez Urtiaga, and Vannoni 2011), Lithuania (Curi, Gedvilas, and Lozano-Vivas 2016; Jurkonis and Petrusauskaitė 2014), Kenya (Miring’u and Muoria 2011), and countries in the Latin America and Caribbean region (Andrés, Guasch, and Lopéz Azumendi 2011; Andrés, Schwartz, and Guasch 2013).

This study aims to contribute to the existing literature on the topic by investigating two key questions: First, can good corporate governance lead to better SOE performance? Second, what are the specific aspects of corporate governance that have a significant relationship with SOE performance? Using data from SOEs in the Republic of Korea, the study examines the effects of corporate governance on various measures of SOE performance, including performance evaluation results, customer satisfaction, and financial performance.

The study is organized as follows. Section 2 reviews studies regarding the relationship between corporate governance and performance of SOEs. Section 3 provides an overview of SOEs in Korea 2