# **4.3 Conceptual Framework**

Using a multivariate regression model, this study aims to investigate the effect of various aspects of corporate governance on the performance of SOEs. The main research question addressed in this study is to identify the relationship between corporate governance and SOE performance. The simple model for testing this question can be written as follows:

# **Firm Performance i = α + βFirm Governance i + γControls i + ε i**

where **α** is the constant, **β** is the coefficient for each variable of corporate governance, **γ** is the coefficient for control variables, and **ε** is the error term. To capture various objectives of SOEs, three types of performance measures are adopted in the model: financial performance, performance evaluation grade, and customer satisfaction survey score.

Financial performance is measured using the ROA and debt ratio. Financial performance is the most frequently used measure for capturing SOE performance in previous studies. ROA and debt ratio data are available for most SOEs. Since the stocks of only a few SOEs in Korea are publicly traded in the market, data on market value or stock price are not available for most SOEs. It should be noted, however, that not all SOEs in Korea are commercially oriented. Many SOEs work more like parastatal institutions in that they deliver public policy. Even many commercial SOEs have social objectives in addition to economic goals. Therefore, financial performance alone does not accurately represent the overall performance of SOEs in Korea.

To consider both financial and nonfinancial performance, performance evaluation results and customer satisfaction survey scores are also adopted as performance variables. Performance evaluations aim to assess the comprehensive performance of SOEs, including both financial and nonfinancial achievements. Performance evaluations, established by the Act on the Management of Public Institutions, are conducted annually by the MoSF for all PCs and QGIs. Performance evaluations assess performance in two areas: business management and core business performance. Business management is examined by assessing the managerial aspects of the subject organization, business strategy, social responsibility, business process efficiency, human resources management, and financial management, remuneration, and employee benefits. Achievements on core business performance are assessed according to planning and strategy, resource mobilization, implementation, outcomes, and feedback processes. Annual performance in each category is assessed and compared with preset indicators based on stated performance goals. The evaluation outputs are graded into six levels: S (Outstanding), A (Very Good), B (Good), C (Satisfactory), D (Poor), and E (Very Poor) after aggregating the scores of each performance indicator.

The customer satisfaction survey measures the SOE’s performance from the perspective of customers who directly use the services or goods it provides. Customer satisfaction surveys are conducted annually by the MoSF for all SOEs that have direct customers. The survey selects a sample of individuals or firms that have received or purchased a good or service from each SOE and then asks about their level of satisfaction regarding the quality and the delivery of the service or good. Most surveys are conducted via phone interview, but for customers who are not available for phone interviews, face-to-face interviews or online surveys are conducted. Scores for individual questionnaires are aggregated, and total scores are announced at the end of the survey.

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