The State as a Shareholder: Case Finland

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The State as a Shareholder Case Finland

• A presentation for Policy Dialogue on
• Corporate Governance in China
• 25.2.2004
•  
• Pekka Timonen
• Doctor of Laws, Chief Counsellor
• Ministry of Trade and Industry/State Shareholding
  Unit
• Finland

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1. INTRODUCTORY REMARKS

• Institutional environment is essential no one
  size fits all approach
• Essential institutional facts and institutional
  arrangements for Finnish model are
• Small and open economy is absolutely dependent on
  international markets (as we cannot beat them we
  have had to join them and make the best out of
  it)
• Competitive environment means constant pressure
  from market participants (only the strongest will
  survive)
• International competition means a level playing
  field as well in domestic as in international
  markets (we cannot trust on domestic markets or
  any other such illusions)

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1. INTRODUCTORY REMARKS

1. Stock market capitalisation means constant
   pressure from financial markets and institutions
   which requires maximum amount of transparency
   (there are plenty of others to take those
   investors money if we cannot keep them
   satisfied) a d together ensure that neither
   companies nor owners can afford inefficiencies
   and that owners cannot tolerate bad management
2. In a market economy business decisions must be
   made by business professionals, not by
   politicians or by civil servants (professional
   management is absolutely needed)
3. In a limited liability company there are clearly
   defined roles and responsibilities for owners,
   for management and for a body between them, the
   board (separation of ownership and control is
   absolutely needed and independent, professional
   board members are essential to make this system
   work)

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1. INTRODUCTORY REMARKS

• It is widely recognized that Finland is one of
  the most competitive economies in the world.
  According to standard economic theory there
  should be a contradiction between competitiveness
  and state ownership as state ownership protects
  inefficiencies and hinders competition. As this
  is not a case we must have done something well,
  be it accidentally or purposeful. 
• In fact these points e and f together have made
  it possible for the state to remain a significant
  owner and to create a successful market economy.
• State has created special ownership functions to
  carry on the tasks of the owner and left the
  management for business professionals. Boards
  have as well supervisory as decision-making
  functions and they are composed mainly of
  independent professionals. State does not
  interfere in the day-to-day management.

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GENERAL PRINCIPLES FOR STATE OWNERSHIP

• There is an essential difference between
  companies that carry out special assignments
  closely related to State administration and
  companies that are involved in purely
  market-based business.
• Special assignments are mainly related to some
  special half commercial, half administrative
  tasks like retail alcohol monopoly, national
  gambling and lottery monopoly, public
  broadcasting and so on. It is not at all clear if
  all these really are special assignments from
  international viewpoint or if they do or do not
  operate on market terms but this is how we define
  and justify them.
• A company operates on market terms if it carries
  out business in even a partly competitive
  operating environment and aims for profit in its
  operations.

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GENERAL PRINCIPLES FOR STATE OWNERSHIP

• When a company operates on market terms, the
  ownership steering of such companies must be kept
  separate from regulation and official duties to
  ensure that the companies economy and operations
  are transparent and that the owner does not
  disturb the markets in which the companies
  operate.
• The first and most important general principle of
  ownership policy states that regulatory duties
  and ownership steering shall be effectively
  separated so that, for companies operating on
  market terms, the States shareholder duties
  shall be accomplished in an independent and
  consistent manner so that they are clearly
  separated from regulatory tasks.
• A major point to keep in mind is that the entry
  of just one minority shareholder in a limited
  liability company essentially changes the basis
  for ownership steering.

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GENERAL PRINCIPLES FOR STATE OWNERSHIP

• If a company has other shareholders apart from
  the State, the equality of owners and creditor
  protection prevent the company from being saddled
  with costs or obligations serving the interests
  of a single owner.
• The second general principle states that the
  State in its capacity as shareholder shall act in
  accordance with the Finnish Companies Act and the
  Securities Market Act, exercise its shareholder
  power trough Shareholders Meetings and not
  require or demand exemptions or rights that other
  shareholders do not have.
• To make this work, a clear distribution of
  authority between Parliament and the Government
  is required. State ownership in general is a
  parliamentary question, details of ownership
  policy or owners decisions are not.

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GENERAL PRINCIPLES FOR STATE OWNERSHIP

• The third general principle is that the roles of
  Parliament and the Government shall be specified.
  
• It is not however only a distribution of
  authority between state actors that matters but
  also and primarily a distribution of powers
  between owner and company organs. It must be
  clear that authorities are responsible for
  ownership policy, not for business decisions.
• The fourth general principle states that there
  shall be a clear division of labour between the
  shareholders in a company and the company
  executives the decision-making relating to
  shareholder policy is the responsibility of the
  State, and the decision-making on business
  operations falls under the mandate of company
  organs.

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GENERAL PRINCIPLES FOR STATE OWNERSHIP

• State ownership relies heavily on good corporate
  governance State (as owner) leaves the decision
  making to independent boards and to professional
  management. State owned companies do not have any
  special requirements for their accounts and their
  auditing and companies comply with all regular
  listing requirements and corporate governance
  standards of Helsinki Stock Exchange (HEX).
• These four principles are the heart and the
  backbone of state ownership in Finland. They are
  partly targets or ideal models, partly a
  description of our current policy.

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PRACTICAL ISSUES

• 3.1. What is the owners role in good corporate
  governance?
• all owners are not equal only blockholders have
  real power but small investors only have nominal
  power (or group power if they are able to unite)
• separation of ownership and control has its
  risks if there is a power vacuum the management
  will most certainly fill it active ownership
  is required
• a majority owner or the biggest blockholder is
  the apparent choice to control the company organs
  and to evaluate them
• all publicly owned companies are subject to the
  same accounting rules and disclosure practices as
  other companies this has been enough to ensure
  accountability even at the political level

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PRACTICAL ISSUES

• 3.1. What is the owners role in good corporate
  governance?
• it is not enough to evaluate boards and
  management yearly but there has to be some formal
  or informal channel to change information and
  bring out owners opinions and interests
• There is a need to find a balance and probably
  always a need to make some compromises. Finnish
  concept is a mix of two crosswise goals be an
  active and responsible owner but do not interfere
  in the day-to-day management. This is carried out
  by
• (a) continuous evaluation based on public
  information and combined with analysis of market
  environment and competitors
• (b) company specific targets and indicators for
  performance and for distributions

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PRACTICAL ISSUES

• 3.1. What is the owners role in good corporate
  governance?
• (c ) active participation in board nominations
  with one (but only one) state representative in
  boards
• (d) informal contacts with chairmans of the board
  and with managing directors.
• (e) active participation in restructuring
  processes and negotiations if they are likely to
  require shareholders approval. If not state does
  not participate.
• (f) open minded and positive attitude on
  value-creating structural arrangements
• (g) an overall trust in civil and company law
  institutions with clearly defined
  responsibilities for company organs.

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PRACTICAL ISSUES

• 3.1. What is the owners role in good corporate
  governance?
• Despite all beautiful principles and statements
  it is not always easy for the state not to get
  involved. In Finland especially employment issues
  are sensitive and easily bring out claims that
  owners should stop rationalisations or
  terminations. As state does not interfere in
  business decisions, this usually brings out some
  critics afterwards.

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PRACTICAL ISSUES

• 3.2. Separation of ownership steering and
  regulation
• As already stated, this separation is the most
  important general principle of ownership policy.
  It is however also the most difficult to carry
  out.
• In Finland ownership functions are currently
  carried out by 9 ministries, 3 of which have a
  significant role in ownership steering. In fact
  all these ministries have regulatory functions as
  well. These functions are kept separate inside
  the ministries but this is not a reliable and
  stable solution.

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PRACTICAL ISSUES

• 3.2. Separation of ownership steering and
  regulation
• There is a pending proposal to create a
  centralized ownership function which should have
  no connections with regulatory functions. A
  strong resistance prevails, as this would mean a
  redistribution of powers between ministries,
  between civil servants and between politicians.
  As there are no real alternatives it should only
  be a question of time and perhaps of suitable
  political coalition.
• In Finland it is not realistic to create an
  autonomous ownership function. It will be under
  political control whatever the administrative
  solution will be. If a centralized unit will be
  founded it must be independent from regulatory
  functions but state shareholding cannot be
  independent from neither national economy nor
  political control.

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PRACTICAL ISSUES

• 3.3. Promoting competitive neutrality
• State promotes competitive neutrality in all its
  ownership functions
• There are no policies or practices related to
  subsidies to public ownership or to investments.
  It should be noted that there has not been even
  indications of any distorting effects for years.
• There is no special regulation in place for
  publicly-owned firms to secure competitive
  neutrality and a level playing field and this is
  in Finland not a question of regulation but of
  practices.
• When firms are active in competitive environment
  there are no priviledges or special arrangements.
  This means that market mechanisms are enough to
  secure level playing field. When companies have
  special privileges (like alcohol monopoly and
  gambling monopoly) they do not have competitors
  and the issue of competitive neutrality is not
  relevant.

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PRACTICAL ISSUES

• 3.4. Attitude on privatisation
• There was a kind of wave of privatisation from
  late 1980s to late 1990s. The tide has turned
  and privatisation has slowed down.
• Ownership has its grounds in our economic history
  and state was a strong driving force in our
  industrialisation process after second world war.
  State ownership is widely accepted and seen as a
  stabilising factor in a small national economy.
• People - and not only labour unions - think that
  our economic independence is partly guaranteed by
  national ownership. State seems to be the only
  option as there has not been an overflow of
  domestic capital and other domestic owners
  available. Therefore a realistic alternative for
  state ownership is an increasing foreign
  ownership and there is no political support for
  wide and / or rapid privatisation plans etc.

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IN CONCLUSION

• Separation of ownership and control is essential.
  Corporate governance only becomes relevant when
  this separation has been implemented.
• Preconditions for Finnish corporate governance
  -model and for Finnish state ownership -model are
  institutional arrangements that define roles,
  responsibilities and accountability. If there is
  any lesson to learn or any model to adopt, there
  has to be some mix of similar institutional
  arrangements in place. Otherwise it most
  certainly will not work.

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