mandate. In this note, all three types of institution (SCB, SDB, DFI) are referred to collectively as _state financial institutions_ (SFI), a class of state-owned enterprise (SOE).

Effective corporate governance arrangements for SFIs are built upon sound legal, regulatory and institutional foundations. Relevant laws and regulations can include the company law, securities laws (e.g., governing the issuance and sale of securities to the public), laws governing auditing and accounting, SOEs, and public financial management, as well as institution-specific founding/organic legislation and, in the case of deposittakers, general commercial banking law and prudential regulation.<sup>7</sup> Relevant institutional foundations include policies and practices governing the state’s exercise of ownership in SOEs or SFIs generally. They also include policies and practices applicable to the board and management of each SFI, including as prescribed in its internal statutes (e.g., articles of incorporation or association, charter, by-laws, etc.), and as prescribed by the owner and the board of directors.

This note draws extensively upon several recently published authoritative sources, including the OECD _Principles of Corporate Governance_ (2004), the OECD _Guidelines on Corporate Governance of State-owned Enterprises_ (2005), and the Basel Committee on Banking Supervision’s _Enhancing the Corporate Governance for Banking Organizations_ (2006). It cites recent developments in a number of countries, including Australia, Canada, Finland, New Zealand, Norway, South Africa, Sweden **.** It also draws upon a detailed case study assessment of one SFI considered to be well advanced in its corporate governance practices, the Development Bank of Southern Africa, that was undertaken for the purposes of illustrating the corporate governance arrangement advocated in this note.

The goal of the note is to contribute to work undertaken with the World Bank Group geared toward helping client government’s improve the effectiveness of state interventions in finance. Proactive policies to promote financial sector development in the context of overall economic development and growth strategies often involve the direct provision of financial services by the state, and state financial institutions are a means commonly used for this purpose. Improving the performance of such institutions in many dimensions is important to overall financial sector development. This work by the Financial Systems Department is a complement to initiatives focusing more comprehensively on corporate governance matters undertaken within the World Bank Group by the Corporate Governance and Capital Markets Department (CCGDR).

# **Why Does SFI Governance Matter?**

Many of the problems commonly recognized to afflict SFIs can be associated with, if not attributed directly to, weaknesses in corporate governance. Some examples:

- Government officials acting in the capacity of owners (the minister to whom the SFI is accountable, or other individuals) directly intervene in day-to-day operational decisions, such as to whom to lend, on what terms to lend, and when to forgive indebtedness.

> 7 In addition, contract law, labor law, bankruptcy law and tax law may be relevant.

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