The State as a Shareholder: Case Finland

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 V/kalvot/eng/esitys/China PTi 04 STATE SHAREHOLDINGS UNIT

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) STATE SHAREHOLDINGS UNIT

1. INTRODUCTORY REMARKS • 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 • In a market economy business decisions must be made by business professionals, not by politicians or by civil servants (professional management is absolutely needed) • 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) STATE SHAREHOLDINGS UNIT

1. INTRODUCTORY REMARKS It is widely recognized that Finland is one of the mostcompetitive 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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

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 State’s 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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

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 STATE SHAREHOLDINGS UNIT

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; STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

PRACTICAL ISSUES 3.4. Attitude on privatisation • There was a kind of wave of privatisation from late 1980’s to late 1990’s. 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. STATE SHAREHOLDINGS UNIT

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. STATE SHAREHOLDINGS UNIT

The State as a Shareholder: Case Finland