Our approach to engagement is rooted in the belief that environmental, social and governance (ESG) factors contribute to the creation of long-term value. This is also the belief of our clients, the majority of whom are pension funds. It may be natural to assume that the interests of nation states that own shares in companies are aligned with those of institutional shareholders. However, while states can have a positive influence on how companies are run, they often find themselves in a complex situation as expectations for the state to deliver on multiple stakeholder agendas are high.
The assets under management of states – which currently stand at above $5 trillion, including those of sovereign funds – are set to rise. State ownership of companies can take on various forms. States can use it to monitor strategic assets, support industrial policies or underpin their finances. In times of crisis, even jurisdictions that previously took a clear stance against direct state ownership have at times changed their behaviour. The UK government, for example, invested £50 billion in its financial system between 2008 and 2009 to save it from collapse and to date still owns 79% of total share capital in Royal Bank of Scotland. At the time, the US Treasury took stakes in major financial institutions such as Goldman Sachs, Citigroup and Bank of America. In other countries, such as Germany, local authorities have long-established financial holdings in companies operating there.
The state may look like a natural ally for long-term investors. They have a similar investment horizon, a common focus on sustainable performance and share a holistic approach with ESG at the heart of resilient value creation for companies and the economies on which they depend.
Yet potential market distortions as a result of state ownership are well documented, such as privileged and cheaper access to credit for state-owned companies or even potentially greater access to public contracts. Furthermore, the state itself can face multiple, sometimes contradictory issues that weigh on the management of companies and hinder strategic focus and performance.
For example, does state-control of utilities act as a short-term financing tool through dividends? Is it aimed at supporting long-term investment in a core economic sector or at protecting strategic assets? Is the ability to adapt and restructure limited by the social weight of a significant employer? How does the company balance its pricing power with maintaining the buying power of consumers? In the automotive industry, how can industry regulation and controls be reconciled with the interests of the state as a significant shareholder and board member? The recent negative news regarding EDF, Renault and Volkswagen have acutely raised these questions and informed our dialogue with these types of companies.
In the worst case scenario, state ownership can lead to the wrong kind of influence or even corruption. The ongoing criminal investigation at Brazilian extractives company Petroleo Brasileiro, also known as Petrobras, has shed light on political meddling at the company and had a negative impact on its reputation and performance.
All these risks call for a clear and transparent framework to support the positive and active role states can play as company owners. Recognising this, the OECD updated in 2015 its guidelines on the corporate governance of state-owned enterprise to help them manage better their responsibilities as company owners, thus helping them to become more competitive, efficient and transparent.
Engagement with state-controlled companies can similarly help address the issues they face. For instance, the equal treatment of shareholders has consistently featured high on our engagement agenda, at the company as well as at the public policy level. In the context of state-ownership, this could mean encouraging the streamlining of special provisions set out in a company’s by-laws, such as veto rights or board composition to limit the prerogatives of the state. In South East Asia and continental Europe, state-controlled companies can lack robust independent representation at the board level, thus preventing a fair representation of minority shareholders. In our engagement, we have challenged the skills and experience of nominees proposed by the state for the board and requested enhanced transparency on the selection process.
Our public policy engagement has also tried to challenge the influence of the state, where it is not in the best interest of the company and other shareholders, to promote a level playing field. For example in France in 2015, we opposed the implementation of double voting rights promoted by the state, as in our view, it entrenched the dominant shareholders and unduly favours local investors, thus obstructing market efficiency. It is a fair question to ask why France imposed double voting rights on Renault, going even against the will of management. Was France seeking to maintain its influence without having to pay the price?
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