When you’re the chairman of a listed company that is majority-owned by a state entity, your role is essentially the same as in any standard listed company. Essentially — but not exactly. As in most companies, you need to establish good governance and the right strategy in order to create value for all stakeholders: customers, employees, your majority shareholder and other investors alike. Yet as your company is partially owned by the state, you have the added mission of serving the public interest — which can have several implications. Reconciling value creation for both shareholders and other stakeholders is no mean feat, and can be quite an interesting challenge.
Not that long ago, companies that were partially owned by state entities — such as Switzerland’s cantons — were considered old-fashioned. But in recent years they have proven their worth. Partially-state-owned enterprises now make up more than 5% of the companies listed on the SIX Swiss Exchange, and most of these are cantonal banks. Seats on the boards of those companies are now seen as a challenge fit even for the most seasoned director.
So what is it that sets these companies apart? Well, to begin with, they are not private-sector companies in the strictest sense; they are not entirely free to set goals and outline their own strategies, and they cannot simply do whatever it takes to boost profits, for example. And yet they are not public services either. They fall somewhere in between: while they operate in competitive free markets in order to maintain sound corporate finances, they also have a specific mission to benefit the greater community. That mission can be stated in many different ways — it could be laid down by law, set forth in the company’s articles of association, or summarised in a mission statement. But whatever form it takes, that mission is steadfast and serves to guide the companies’ corporate governance.
Keeping the majority shareholder in the loop
In terms of corporate governance, majority-state-owned companies do not differ dramatically from run-of-the-mill listed companies either. Loyalty and due diligence — not to mention good management and solid profit margins — are just as important. The main — and most obvious — difference stems from the very nature of the majority shareholder and its representatives, who are often elected officials and therefore in the political limelight. They are not interested only in the bottom line — they also care about the impact the company has on the environment, economy and local community. So corporate social responsibility plays an essential role.
What’s more, majority shareholders and their representatives may be called upon by fellow politicians or the press to discuss their company’s strategy and even defend its choices, which is not something shareholders normally have to do. That means that any decision taken by the company could reflect poorly on the majority shareholder, so partially-public companies must ensure that their strategies are perfectly aligned with their mission. To ensure that the government does not come under fire, the company must be financially stable and have a squeaky-clean reputation. And to make sure that government representatives don’t get wrong-footed, they need to be fully informed of all important aspects of the company’s operations in a timely manner. The risk of insider trading here is minimal, since state entities rarely engage in trading, if at all.
To help foster dialogue between the company’s management and its majority state shareholder, an information-sharing agreement could be used to clearly set out the obligations of each party and ensure that they are on the same page. In my experience as chairman of Banque Cantonal Vaudoise (BCV), the cantonal bank majority-owned by the Canton of Vaud, such an agreement can be a real asset for building long-term trust, if it is properly thought out and discussed between the parties.
A loyal, long-term shareholder
In return for the service they provide to the community, partially-state-owned companies get a loyal shareholder that is in it for the long term. Given today’s volatile financial markets, that’s a serious advantage, not to mention the stability it provides in times of crisis. Of course, there’s always a risk of excessive shareholder interference. But that can be true with large private shareholders as well. Having a state entity as majority shareholder is not incompatible with independent decision-making, but that independence must be managed responsibly.
A majority state shareholder can also make customers (who are also taxpayers, of course) feel emotionally bound to the company — they feel it is “their” company. And those ties can be a boon for business development, particularly in terms of market share. But the flip side is that there are additional costs, and certain types of investments may not be allowed. Swiss cantonal banks, for example, must maintain a relatively dense branch network, accept lower profit margins on some businesses while keeping their finances sound, and be actively involved in the cultural, sporting and social life of their canton through sponsoring initiatives and donations.
Striking the right balance
In the end, it’s difficult to say whether the costs associated with majority state ownership — i.e., not being able to pursue certain profit drivers — are bigger or smaller than the benefit of increased customer loyalty. However, serving the public interest is by no means a burden for any conscientious company. With the right strategy, effective cost control and efficient operations, it’s perfectly possible to fulfil your mission, be a responsible corporate citizen and remain attractive to investors.
Because of their special status, partially-state-owned companies have to factor serving the community into the trade-off between growth and earnings. A company’s management and board must strike the right balance between these three elements, while at the same time keeping all stakeholders happy. Developing a strategy that achieves this is not always easy, given the additional economic and political constraints. At BCV, for instance, each business line undergoes a scrupulous review, looking at its usefulness, growth potential, risks, and required capital. In addition, expanding into new regions can entail risks that the majority shareholder is not willing to take. So growth must often be concentrated in the local market, with the possibility of developing certain niche businesses elsewhere.
The resulting strategy should allow the company to fulfil its mission while at the same time creating value. This can and is being done — just look at how popular Switzerland’s cantonal banks are with both customers and investors. State involvement does not mean that value creation is off the cards — a company can only fulfil its mission if it is financially sound. As a “community asset”, partially-state-owned enterprises must increase, or at least preserve, their value. And it goes without saying that a company will not find loyal shareholders unless it can provide a reasonable return on equity.
Don’t forget your minority shareholders
In all this, minority shareholders, who usually have more financially oriented objectives, mustn't be left by the wayside. Since a state majority shareholder does not, or does so only rarely, engage in trading, the company’s share price will depend on the buy or sell orders of minority shareholders. And that share price is an important signal for the public, which interprets it — rightly or wrongly — as a sign of the company’s health.
A partially-state-owned company therefore has to attract minority shareholders whose interests are aligned with those of the majority shareholder, and should take the needs of both types of investors fully into account. Aiming to be a growth stock is not realistic. But positioning the company as a value stock that offers long-term sustainable growth, stable earnings and a high payout ratio is a good way to reconcile the interests of both public- and private-sector shareholders. A high dividend, for example, will attract a large number of investors and bolster the government’s revenues at the same time.
In addition, the board of directors can play a key role in facilitating a constructive dialogue between the company’s management, the majority shareholder and other investors. That’s why it’s important to ensure that both majority and minority shareholders are fairly represented on the board, and that board members appointed by the state shareholder have the right background and experience to make a value-enhancing contribution.
All of this is in everybody’s interest. And it’s not an impossible square to circle.
Olivier Steimer is chairman of the board of directors of Banque Cantonale Vaudoise, vice chairman of the Bank Council of the Swiss National Bank, and member of the boards of directors of Allreal Holding AG and ACE Limited.
This article first appeared in the Switzerland 2015 Board Index.