Meld. St. 27 (2013-2014)

Diverse and value-creating ownership

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1 Introduction and summary

1.1 Background to the report

One of the government’s most important priority areas is to boost competitiveness in Norwegian business and industry, to create more secure jobs and strengthen the financing of the welfare schemes.

Our competitiveness is influenced by how efficiently we utilise the country’s resources, and our ability to innovate and restructure. The government aims to implement a broad set of measures to strengthen competitiveness and increase overall value creation in Norway. One of these measures is to facilitate diverse and value-creating ownership. Good ownership, by both the private and public sectors, is important. Our competitiveness and value creation depend on the establishment, development and operation of profitable enterprises, and the restructuring or phasing out of unprofitable ones. Good management and good ownership are key contributors to this aspiration. Diverse, well-developed and competent owner communities are a prerequisite for national competitiveness and value creation.

The government will shape the policy to make it possible for everyone to save and invest and, through their ownership, participate directly in and reap the rewards of the value creation that takes place in Norway. The objective is increased competitiveness, value creation and more secure and productive jobs. Against this background, the government will strengthen private ownership in Norway.

The government believes that there are a number of good reasons why the state should exercise ownership in different companies. These will vary from company to company, from an initial premise that state ownership may help provide economic and social safeguards. Accordingly, for the foreseeable future, Norway will have considerable state ownership.

At the same time, state ownership in Norwegian business and industry is currently very extensive. In order to contribute to a more diverse and productive ownership, and to reduce the potential challenges entailed by extensive state ownership, the government wishes over time to reduce direct state ownership.

The government believes that it is crucial for state ownership to be administered professionally and predictably, and the government will conduct its state ownership policy in a responsible manner that provides space for both diversity of ownership and value creation as a contribution to boosting Norwegian competitiveness.

Against this background and based on its political platform, the government is submitting a report to the Storting on ownership in Norwegian business and industry, with a main emphasis on the framework and policies relating to the state’s direct ownership.

Part I of the report is a presentation of how ownership and different types of owners can contribute to value creation; part II outlines the principle direction of the government’s policies for promoting diverse ownership in Norwegian business and industry; and part III, the main section of the report, presents the government’s policy for direct state ownership.

The presentation in chapters 2 and 3 of the report and parts of chapter 8 are based on work performed for the Ministry of Trade, Industry and Fisheries by the McKinsey & Company consultancy firm.

1.2 Summary

1.2.1 Ownership – significance for value creation

Ownership can be highly significant for companies’ competitiveness and value creation. Owners and investors have a fundamental role in facilitating profitable business activity by contributing risk capital for the establishment of new companies or for expanding established companies. What constitutes a good composition of enterprises and owners will vary in line with market trends, with an enterprise’s development and nature, and with the owners’ prerequisites and attitudes to risk. A diversity of owners, owner types and owner communities will therefore be able to enhance the combination of enterprises and owners, prompt desirable restructuring and innovation, and hence increase competitiveness.

An increased rate of change in business and industry means that the importance of enterprises’ ability to adapt and innovate is increasing. This places greater demands on the owners, who set policies for the companies’ activities, and make critical decisions in the event of major changes in the companies. For example, this would relate to restructuring, investments, business start-ups and to the acquisition, divestment and winding up of businesses. In such a business climate, competent owners, with the ability to understand markets and a company’s situation and opportunities, are important for realising the company’s potential for value creation.

In the capital market, those who want to save are connected with those who want to lend and invest. In this way, capital is channelled to potentially profitable investments, and risk is distributed between the participants. As a result, the capital market streamlines the use of resources in the economy.

Ownership is important for how companies are governed and run. Owners can be involved in companies in different ways and to different extents, depending on the ownership model. At one extreme are owners who allocate capital through small shareholdings, and who are easily able to liquidate positions if the company does not perform and deliver returns as expected. At the other extreme are owners who get involved in operational activities with an aim to develop profitability over time and exploit inter-company synergies. Good owners with a low level of active involvement will primarily ensure that companies follow principles of good corporate governance and management in order to protect their own interests. With a greater degree of involvement, owners can create added value by supporting and following up the companies.

The owner composition and owner types may be significant for value creation in companies in that they may create different incentives for exercising good corporate governance. Accordingly, different combinations of owner concentration, owner type and duration of ownership may affect the quality of the exercise of ownership.

How ownership is exercised has changed in recent years. There has been a gradual trend towards more fragmented ownership in listed companies. Companies must take into account increasingly more rapid changes in their surroundings and greater uncertainty and volatility in the global markets. This makes it more challenging to sustain strategic competitiveness and the ability to creating value over time, and makes greater demands of management, boards and owners to make good decisions quickly. The focus on owners’ and companies’ social responsibilities has also increased and, in the wake of the financial crisis, there has also been a trend towards increased awareness of the long-term performance of companies, and the emergence of activist investors. Another trend is recognition that good board work has become a more important competitive factor for the companies.

1.2.2 Prerequisites for private ownership in Norway

In the government’s view, private ownership should be the main rule in Norwegian business and industry. The government intends to boost private ownership as part of its measures to strengthen the competitiveness of Norwegian business and industry.

Private ownership is a diverse concept covering different types of holdings, for example family ownership, employee ownership, institutional ownership and ownership by private individuals. Owners have different expectations and can contribute to companies’ value creation in different ways, and the extent of owner involvement varies from highly active owners, taking an operational role in the companies’ businesses, to passive financial owners with small shareholdings.

Although there is great variation between private owners, in the government’s opinion, private ownership is characterised by certain fundamental factors that make it essentially well-suited to contributing to value creation and improving Norwegian competitiveness.

Private owners can often more directly look after their own preferences and assets, and exercise more direct personal ownership than the state, which performs its role as an owner on behalf of the community. In the case of a personal owner, there will normally be fewer decision-making steps between owners and management than if ownership is administered by institutions. This indicates that personal (private) owners may have stronger incentives for safeguarding their own ownership interests. This can produce better corporate governance, higher profit expectations and more appropriate risk management in line with the owners’ interests.

Private owners may often be closer to and better informed about the markets. This applies both to active private owners who are operationally involved in the companies they own, for example on the board, and to passive, more financial, owners who follow the companies’ developments closely on the basis of thorough financial and industrial analyses.

Private owners are likely to have stronger incentives for efficient operation and high returns. This may be an argument for boosting private ownership. It may also be an argument for bringing private co-owners into companies where the state is a dominant owner and where there are good grounds for state ownership.

The government would also like to point to some potential challenges associated with state ownership which suggest limiting the extent of direct state ownership in commercial companies and strengthening private ownership. These relate to potential conflicts between the state’s different roles, the risk of a concentration of powers, and the state’s limited industrial expertise as an owner.

The government has an objective of strengthening private ownership in Norway and organising policies to make it more profitable to establish businesses, work, save and invest. The government aspires to reduce direct state ownership over time, which may help boost private ownership.

The government will strengthen private ownership through a broad set of measures.

What is most important for ensuring healthy economic growth in Norwegian business and industry is for the general economic policy to contribute to stable and predictable framework conditions. The policy must therefore be structured so as to promote predictable and healthy trends in prices, wages, interest rates, exchange rates and tax levels. This will also have the effect of reducing uncertainty in the economy, lowering capital costs and improving access to capital. Good, general framework conditions that are not biased towards individual industries benefit all enterprises, employees and owners. This allows for a better functioning capital market, more vigorous competition, strengthened private ownership, healthy restructuring and innovation, improved competitiveness and better value creation.

The tax system is a crucial economic framework condition having great significance for Norwegian business and industry and for private ownership. The government will use the tax and duties system to finance public goods, facilitate social mobility, achieve more efficient utilisation of resources, and create better conditions for Norwegian business and industry. Private ownership must be strengthened and it must be profitable to work, save and invest, and start up, operate and develop companies.

The government took the first steps in growth-promoting tax reductions which will strengthen private ownership, among other things, in the national budget for 2014. Total tax reductions in the adopted budget came to in excess of NOK 7 billion. The general tax rate for individuals and companies was reduced to 27 per cent, the wealth tax rate was reduced to 1 per cent, while the minimum allowance was increased to NOK 1 million, and inheritance tax was abolished. The government also refers readers to the Scheel Committee which is reviewing corporate taxation. In line with the boost to growth-promoting tax reductions and a lower tax level, the Scheel Committee will also assess proposals for net tax reductions.

Work on streamlining bureaucracy for business and industry and private individuals is a key area for the government. This may help businesses and owners spend fewer resources on reporting and purchasing of administrative services. This will make it easier to start up, run and grow a business in Norway. Over time, this will result in more private ownership. The government aims to reduce the annual cost of to business and industry of complying with statutes and regulations by NOK 15 billion by the end of 2017, compared with the cost level in 2011, which represents a reduction of 25 per cent. The government also seeks to promote an entrepreneurial culture. Over time, this will result in greater capacity for restructuring and innovation, value creation and private ownership.

The government will use the national budget in the years ahead to implement further tax changes to stimulate labour, saving, entrepreneurship, business activity, private ownership and investment. The government will work for a simpler, more growth-promoting tax system and will continue to prioritise tax cuts that enhance Norwegian competitiveness and help secure productive and value-creating Norwegian jobs. The government will also assess other measures to strengthen private ownership, including measures to increase private savers’ ownership of Norwegian companies and measures to stimulate employee ownership.

Furthermore, the government is committed to making it attractive for foreign investors to invest in Norway. Foreign owners add to the competency and diversity of ownership. They may also boost knowledge transfer and expertise among Norwegian companies and private owners. It is therefore beneficial that foreign companies and investors want to invest in Norway, which is reflected, for example, in the relatively high level of shareholdings of foreign investors on the Oslo Stock Exchange. This shows that Norwegian employees, owners and industries are competitive.

1.2.3 The state’s ownership administered directly by the ministries

In the government’s view, private ownership should be the main rule in Norwegian business and industry. Direct state ownership should have a special justification.

In the government’s view, there are a number of reasons why the state should exercise ownership of different companies. These relate, for example, to corrections of market failures, the maintaining of important companies, head offices functions and key competence in Norway, the management of common natural resources and sectoral-policy and societal considerations. Beyond there being good reasons for state ownership, the state also possesses specific characteristics which may make it a good owner in a broader perspective. These include the fact that the Norwegian state is a long-term and financially strong, owner which is able to make a positive contribution to long-term ownership. Along with other long-term investors, the state can contribute to stability and stimulate growth of Norwegian companies and competence building over time. This means that, for the foreseeable future, the state will have considerable direct ownership.

In the government’s assessment, the governance of direct state ownership is handled in a professional and responsible way. Through transparency concerning corporate governance principles, acceptance of the division of roles and responsibilities in corporate legislation, governance through general meetings and an emphasis on choosing competent and independent boards of directors, the exercise of Norwegian state ownership can be seen as advanced, including in an international context.

Since 2006, the state’s portfolio of companies has been divided into four different categories. The categorisation has been based on the state’s justification and objectives for direct state ownership. The government believes that the categorisation system has helped clarify the state’s objective for ownership of the individual company and that the current four categories are an appropriate classification of ownership. The government therefore intends to maintain this categorisation.

Over time, the government wishes to reduce the state’s direct ownership. This will particularly apply to companies where the state has no particular reasons for being an owner, but it may also be appropriate to reduce the state’s holdings in other companies, assuming this can be done within a framework that safeguards the objective of the ownership.

The government believes that the state should not have a long-term ambition of ownership in companies where the state’s objectives are purely commercial. In the government’s opinion, over time, other owners will often be better able to increase the value of such companies. On this basis, in the budget proposal to the Storting for 2015, the government will ask parliament for a mandate to fully or partially divest the state’s ownership of companies in category 1. For some of these companies, the government already has such authority. The government emphasises that even though the state should not have a long-term ambition of owning such companies, any changes in the state’s holdings will be made only if it is considered to be financially beneficial to the state. Furthermore, there may be corporate or market-related factors entailing that the state should delay use of these powers.

The companies in category 2 are commercial companies where the objective of state ownership, beyond a return on invested capital, is to retain head office functions in Norway. This is achieved through a holding that gives negative control, i.e. more than one-third. The government’s premise will therefore be that it will not be appropriate to reduce the state’s holdings in these companies to below 34 per cent. There may be special factors dictating why the lower threshold for the state’s holding in individual companies in category 2 deviates from 34 per cent. In the budget proposal to the Storting for 2015, the government accordingly intends to ask for a mandate to possibly reduce the state’s holdings in Kongsberg Gruppen ASA and Telenor ASA, down to 34 per cent.

Category 3 includes companies where the state has a commercial objective in its ownership, and where there are other justifications for state ownership than maintaining head offices in Norway. The government believes that there are sound justifications for the state to have holdings in these companies. Nonetheless, for companies in category 3, there may still be scope for adjustments to and changes in the state’s ownership based on commercial considerations, and in a way that also takes into account the state’s rationale for ownership in these companies.

The state’s holdings in the sectoral-policy companies in category 4 should, as a rule, remain intact. This does not however prevent changes if the sectoral-policy interests no longer apply, or can be fulfilled in another satisfactory manner through the use of instruments other than ownership.

As an owner, in principle, the government will take a positive view of strategic initiatives and transactions that may be expected to contribute to value growth in the companies and that are also implementable within a framework that safeguards the objective of the state’s ownership.

Only in very special circumstances will the government assess increasing the state’s holdings in partly owned companies. Nor does the government consider it relevant for the state to be proactive in acquiring new strategic positions in companies subject to competition. Only in extraordinary cases will the government consider undertaking new state ownership positions. Such an undertaking would have to be carefully assessed and justified on the basis of economic profitability and broader considerations. The government is committed to state production activities being carried out efficiently, using an appropriate management and organisational structure. On this basis, the government may consider reorganisations of state-owned enterprises and the founding of new companies.

The government aims for the Norwegian state’s ownership to be an example of best practice internationally. Ownership shall be administered professionally, and the government will conduct a responsible ownership policy characterised by predictability and established principles for state governance. In executing its ownership, the state will emphasise areas as, where an owner, it has good premises for adding value to the companies, including a continued emphasis on strengthening strategic and financial follow-up of the companies through analysis, strengthening work on recruiting board members and systematising assessments of board activities. The state will place emphasis on being a leading owner when it comes to promoting good corporate governance.

In this report, the government has made certain adjustments to the state’s principles of corporate governance, in line with developments in corporate governance and established practice.

The primary purpose in the commercial companies is the return on invested capital. The government believes that various factors contribute to this. Accordingly, the government has clear expectations of the companies in terms of returns and dividends, board work, corporate social responsibility, executive remuneration, research and development, and diversity and equality.

Corporate social responsibility is an area that has garnered increased attention and importance in recent years, both in business in general and for the state as an owner. The government expects companies in which the state has a holding to work systematically on their corporate social responsibility and to be exemplary in their respective fields. The government would particularly like to draw attention to developments in the climate and the environment, and to the impacts these may have on society as a whole and on the development of companies in particular. The government expects companies to have a good understanding of risk in terms of how climate change and climate policy initiatives may affect their activities, and for them to be at the forefront of work on the climate and the environment in their sectors.

In respect of the state’s attitude to executive remuneration, the government signals certain changes in this report. In some areas, however, the government believes that a more detailed review is required before it puts forward its new guidelines. The Storting will be informed appropriately when the guidelines are in place.

The company review in chapter 9 details the state’s objectives of ownership in each individual company, based on the justifications for state ownership and the four ownership categories.

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