Lecture 9 - state owened enterprises

Question 1

State-Owned Enterprises definition

Answer 1

OECD: enterprises where the state has control, through full, majority or significant minority ownership.
SOEs are different from privately-owned firms:
o Not necessarily profit maximizers
o May have goals that conflict with those
of their de facto owners (taxpayers)
o Do not necessarily seek to maximize shareholder value
o May be on an unlevel playing field

Question 2

Government Participation - no ownership interest (what can the government do to affect the performance of the corporation?)

Answer 2

o Subsidies/Tax incentives

o Government sponsorship/ Guarantees

Question 3

Government Participation - Partially-owned (mixed ownership)

Answer 3

oStake retained post-privatization
♣ Note: Golden share arrangements
oTemporary assistance/bailouts*

Question 4

Government Participation - Wholly-owned by State

Answer 4

o Upon creation

o Following nationalization

Question 5

State as Shareholder - Why study?

Answer 5

♣ Significant potential for horizontal conflicts with other shareholders
♣ Significant alteration of corporate governance incentives may affect overall economic efficiency and competitiveness
♣ SOEs may enjoy competitive advantages over private companies
♣ Government as shareholder and law- maker may affect the shape of corporate law

Question 6

Govt Influence - Principles (I)

Answer 6

• Ensure equitable treatment and not abuse control position
• High degree of transparency towards all shareholders
• Active policy of communication and consultation with all shareholders
• Facilitate participation of minority shareholders in shareholder meetings

Question 7

Govt Influence - Principles (II)

Answer 7

• Clear legal form
• No involvement in day-to-day management
• Boardindependence
• Clearidentification of who in the State will exercise ownership rights
• Accountability to people through representative bodies – SOE should report to some body that will represent the taxpayers.
• Exercise ownership rights avoiding undue political interference and passive ownership

Question 8

Internal controls lacking in SOEs:

Answer 8

o Manager ownership and performance- based pay

o Board oversight

Question 9

External controls lacking in SOEs:

Answer 9

o Market for corporate control 
o Market for managers/reputation 
o Equity
o Debt
o Bankruptcy overhang

Question 10

Competition and SOEs

Answer 10

“…managerial slack is less likely in competitive industries. Competition, therefore, can be a substitute for good corporate governance.”

Question 11

Competitive Neutrality

Answer 11

Competitive neutrality means that state-owned and private businesses compete on a level playing field. (OECD)

Question 12

Corporate Law and SOEs

Answer 12

Regulatory Opportunism: State may shape corporate law to benefit itself:
♣ Increase difficulty of creating private entities
(access to corporate charters)
• Creates barriers to entry for potential competitors protecting mixed or wholly-owned state entities
♣ Weaker protections for minority shareholders
• Allows state as majority shareholder to abuse minority
♣ Managerialist structure to maximize profits
• The state extracts is financial benefit from taxes not from dividends – allow the corporations to earn as much as possible. You do that by giving managers more scope to make money.