5 Official Norwegian Report, NOU 2004:7 The State’s Commercial Ownership
5.1 The preparatory committee on state ownership – background and topics
The Storting’s consideration of Report to the Storting no. 22 (2001 – 2002), cf. Recommendation to the Storting no. 264 (2001 – 2002), resulted in two resolutions to review the organisation and administration of state ownership:
«The Storting requests the Government to appoint an expeditious committee to obtain a broad review with a view to improve the organisation and administration of state ownership.»
«The Storting requests the Government to report back to the Storting with various models for more professional exercise of state ownership.»
This was the basis for the appointment of the preparatory committee on state ownership by Royal Decree of 15 November 2002. The committee was assigned to:
«…review and assess the organisation of state ownership in companies wholly or part-owned by the State, and in which the enterprise operates mainly with a commercial orientation.
The committee shall address and consider various models for ownership administration, including the present organisation and administration through one or more administrative bodies. The aim is for state ownership to be administrated with a view to secure State assets and solid industrial growth for the companies. The models considered must also be suitable for implementing changes in State shareholdings and for furthering any specifically defined objects for the State’s ownership in respect of individual companies. Administration costs, expertise and efficiency in the administrative proposal will be of importance.
The committee shall consider and present proposals for resolving issues of an organisational, legal and commercial nature entailed by changes in the administration and any alternative models.
The committee shall report on how the regard for the Storting’s and Government’s management of and supervision of administrative performance, and the Office of the Auditor General’s need for access to and audit of that performance may be attended to by various models. The committee should clarify if any of the models under discussion will require changes with regard to mandates granted by the Storting pertaining to the approval of mergers, the divestment of shares and the like».
The committee submitted its recommendation to the Ministry of Trade and Industry on 16 March 2004: NOU 2004: 7 The State’s Commercial Ownership.
In accordance with its mandate, the committee restricted its appreciations to the large shareholdings in commercially oriented limited companies and wholly-owned companies administrated directly by the ministries. The committee provides a summary of objectives the State either pursues or has pursued for direct ownership. A main distinction is drawn between value-maximising objectives and social and sector-policy objectives. The realisation of State objectives through the exercise of shareholder rights is considered compared with the use of alternative regulatory instruments. Different company forms are reviewed, and an overview is provided of the main characteristics of how administration has proceeded. The committee refers to key rules in the competition legislation and the EEA agreement, which prescribe legal frameworks of special importance for the administration of state ownership. The Committee also reviews the main constitutional and public administration law rules in this domain. A brief summary is also provided of the main features of the administration of state ownership in a few selected countries, including Sweden and Finland.
The Committee’s assessments and recommendations are concentrated on discussions of the objectives of ownership, and in extension of this the improvements that may be achieved through changes in the organisation of state ownership and the main rules governing decision-making processes.
The report from the committee was submitted for ordinary consultation among public and private enterprises and organisations that would be affected. The bodies consulted generally support the committee’s assessments and recommendations. The committee’s report and the consultation statements accompany the Report to the Storting as unpublished attachments.
5.2 The preparatory committee on state ownership’s assessments and recommendations
5.2.1 The objectives of state ownership
The preparatory committee on state ownership recommends that the objectives of state ownership be clarified. Clear objectives facilitate assessment of the companies’ performance. The committee refers to the fact that greater understanding of a dominant shareholder’s or sole owner’s aims will simplify the companies’ strategic work in matters requiring shareholder involvement. The State’s capital in the companies has alternative use; for example, it could be placed in financial investments or used for producing welfare benefits and services. Precise formulation of objectives and subsequent public evaluation of their achievement would provide better information about the costs and benefits of state ownership. The committee indicates that any uncertainties might result in the State, in the capital markets, being ascribed objectives it does not have. Clarification of ownership objectives might therefore have the effect of making companies, in which the State is a shareholder, more attractive to other investors. This would then benefit the State and the companies through more positive value estimates and lower financing costs.
As the basis for clarification of the objectives of state ownership, the committee divides the companies in which the State is a shareholder into four categories. The committee emphasises that such categorisations are general analysing tools, designed to obtain the fundamental objectives of state ownership:
Companies with commercial value maximisation objectives.
Companies with commercial value maximisation objectives, and ensuring head-office functions in Norway.
Companies with commercial value maximisation objectives and other specific defined objectives.
Companies with sectoral policy objecting.
The committee indicates that other objectives, which address the broader public interest, are of great importance for all companies independent of ownership. The committee maintains that companies in which the State is a shareholder should take the lead in social responsibility. Core values in social responsibility are to protect the environment and ensure sound social conditions globally and locally. The committee indicates that the State might risk weakened legitimacy, for example as a legislator and in matters concerning foreign policy, if it were to fail in its role as owner to comply to high standards in this area. Social responsibility will evolve over time and vary between different sectors. Most companies justify their social responsibility initiatives as being both intrinsically valuable and commercially valid.
Objective category 1 – Companies with commercial value maximisation objectives
In this category of companies, the objective of state ownership is to maximise their commercial value. This means that there is no reason for practising any operational administration of shareholdings other than what is employed by private asset management environments.
In the committee’s opinion, the requirement regarding solid industrial growth does not conflict with the objective of commercial value maximisation, being rather a precondition for it. Solid industrial growth thus requires, among other things, that the companies capitalise on value-creating investments within their line of business. The fact that the companies’ investments must be value creating also entails that anticipated profitability must, as a minimum, achieve the shareholder’s return targets. Companies in which the State is a shareholder must have access, like other companies, to making the most of value-creating business opportunities, including acquisitions and mergers in order to ensure solid industrial growth.
Expert talks concerning the goal formulation of the preparatory committee’s mandate («The aim is for state ownership to be administrated with a view to securing State assets and solid industrial growth for the companies» (Annex 8 in NOU:2004:7) drew the conclusion that the two distinct aspects of the goal-formulation are not mutually conflicting, but on the contrary, proper administration lead to both sound commercialisation and sound socio economics:
… «solid industrial growth for the companies means that the State will safeguard its long-term values, while long-term safeguarding of values presupposes that the companies are assured of solid industrial growth.»
Objective category 2 – Companies with commercial value maximisation objectives and ensuring head-office in Norway
The State’s ownership in this category of company is motivated purely by commercial interests, but with the added dimension that it ensures head-office activities and competencies in Norway, and where possible, Norwegian-based control and management. This ownership strategy will ensure that investment opportunities are provided in Norway, with positive impacts on business and industry development, without imposing any restrictions on foreign commitments. It will rest with other business and industry policy to provide national framework conditions that are conducive to national investment.
The aim is for the companies to develop on a full commercial basis, from their head offices in Norway. The companies’ acquisition and sale, or start-up and winding up, of businesses at home and abroad would thus be done on a commercial basis by the companies. These are also issues that naturally sort under company management in pursuance of Norwegian company legislation The State involvement in such matters would primarily be connected with the companies’ national framework conditions.
Putting value maximisation and solid industrial growth into operation for these companies will be the same as for category 1, just with the added dimension that the companies are to be headquartered in Norway.
Objective category 3 – Companies with commercial value maximisation objectives, and other specific defined objectives
The committee points to the fact that specifically defined objectives over time appear increasingly to be furthered through regulations, licences and through commercial State procurement from the companies. However, the characteristic of category 3 is that in addition, it embodies objectives over and above commercial value maximisation, which must also be achieved through state ownership. For some companies the situation may be very similar to that of category 2, in the sense that there is no need for special follow-up in assets management in order to realise defined objectives. These objectives are realised in that the company operates its business on a commercial basis within the sector concerned. This would apply for example in cases where the aim of ownership is to monitor the sustained production of products and services of importance for national security or to maintain national sovereignty. The same applies where the object of state ownership is to ensure national ownership of natural resources and to seek to remedy failures in the capital markets by building up competition, capital etc. Certain types of business enterprise under state ownership have commonly been referred to as ‘sector-policy instruments’. Based on the State’s objectives for its ownership, more specific requirements will then usually be made regarding field of activities, products, availability, quality etc.
If the specifically defined objectives have to be pursued actively through ownership, a new set of operational objectives should be set as per category 1. These objectives may conflict with the objective of value maximisation and may thus mean weighing up pros and cons on the part of the owner.
Objective category 4 – Companies with sectoral policy objectives
The State’s ownership in this category of companies is founded mainly on sector-policy objectives. Although the committee has not assessed administration of ownership in these companies, it is assumed that some of the committee’s arguments would also be of relevance for such companies.
5.2.2 Improvements in ministerial ownership
The preparatory committee on state ownership’s assessments and recommendations regarding the administration and organisation of state ownership concern the consequences of the extent of state ownership for the soundness of markets, the State’s handling of roles and decision-making basis, concretizing objectives (value and performance measurement), exercising the role of owner (including participating in the election of boards and corporate assemblies), dividend policy and investment of capital, changes in shareholdings and the Storting’s and government’s national governance and control.
Well-functioning markets, the State’s handling of roles and decision-making basis
The State has substantial shareholdings in the largest companies on Oslo Børs. The State’s ownership in these companies is stable and long-term. This impacts the liquidity of the shares in that a lesser proportion of shares are available for buying and selling. This in turn impacts the opportunities of other market actors to spread risk as desired. The lack of share trading, because the State does not move in and out of companies on the basis of immediate performance, may also influence returns in the equity market. These are factors that the preparatory committee believes the State should consider when it comes to listing of companies and decisions concerning changes to shareholdings.
The State has many roles and tasks. Besides owning shares in competitive companies, the State procures products and services, regulates markets/sectors, performs inspections and supervision and makes binding decisions in individual cases based on the prevailing regulations. It is therefore important for the State to organise itself in a manner that instils confidence that the market actors’ requirements regarding equal treatment of state-owned and private companies are respected.
Isolating the different roles in this way can be done horizontally by lodging the ownership function with separate sections with no other tasks to conflict with the role of owner. Organisational isolation of roles might strengthen legitimacy in that role conflicts within one and the same body would be reduced. Against that, one important justification for, in some instances, consolidating ownership and other roles, is where the companies are used as instruments of sector policy. Co-organisation of the various roles might improve the conditions for coherent sectoral administration. Furthermore, the co-organisation of functions might offer efficiency gains in that it would facilitate the use of expertise and information.
The committee points to the fact that conflicts between the role of shareholder and supervisory authority partly gave rise to proposals for independent supervisory bodies in Report to the Storting no. 17 (2002 – 2003) Concerning State supervision. In the above-mentioned report, increased independence for the supervisory bodies under the ministries, which are also responsible for producing services, was launched as an instrument for reducing problems concerning confidence and credibility. Such changes in the vertical governance chain are an alternative to horizontal specialisation in discrete ministerial sections.
The committee points out that a different ministry than the sector ministry should, ideally administrate the State’s shareholding in companies that operate in competition with private actors.
However, the committee is also concerned by the potentially unfortunate consequences for competition of an organisational consolidation of companies in which the State is a shareholder where these are in competition with each other. In companies competing in the same market, the State would benefit by coordinating its ownership, thus reducing competition, which is detrimental to society.
The committee also points out that the extent of state ownership means that decisions should not be made in such a way as to subject the State to unnecessary financial risk.Any misguided decisions will not only affect the State’s return on investment and the companies’ industrial growth, but may also have detrimental impacts for society in general. In the administration, multiple ownership environments would serve to assure the quality of each other’s decisions. Seen in isolation, the competition factor and the need for proper management of risks such as those entailed by extensive direct state ownership favour the model of multiple ownership environments.
The committee thus finds that the choice between a sectoral solution or consolidation of ownership under a single ministry to be a complex matter. Due consideration should be given to effective markets, State risk management, proper handling of roles, the need for industry-specific expertise and general ownership expertise. The prevalence of specifically defined objectives is one factor in favour of retaining ownership with the sector ministry concerned. However, the committee finds that the centralisation of ownership administration that has already occurred has essentially been appropriate. Consolidating state ownership has strengthened the general commercial expertise on which the exercise of ownership is founded and has improved the State’s handling of its roles. The committee holds that assessments of future transfers of individual companies should be based on the type of complex assessment outlined above.
The committee comments that several ministries that currently have a role as owner will also have one in the future. A commitment to interdepartmental collaboration on ownership issues is therefore important in order that the general body of ministerial ownership expertise, and not just the individual ministry’s expertise, is exploited to best advantage. This kind of collaboration should also aim at developing meaningful criteria for exercising ownership functions. The committee therefore recommends establishing organisational solutions to ensure better deployment of expertise and coordination across ministerial divides.
External consulting environments are retained extensively in ownership issues. Although this should result in procurement of the best expertise available on the market, the committee emphasises on a general basis the State’s need to retain external expertise in its transactions with consultants, and expertise for assessing the quality of the advice retained. Private companies and investors have to weigh up similar factors when retaining consulting services. Strong in-house expertise will reduce the need for external consultants, although these provide flexibility in periods of heavy workloads. It would also be worthwhile in itself to have issues assessed by centres of excellence external to the State administration. In some transactions such as listings, issues and divestments, the State will in any case be entirely reliant on services procured from banks and brokerage firms.
Concretising objectives
A value-maximisation objective entails that the assets held by the State increase in value as much as possible, taking into account their risk profile. The State would benefit from objectives that indicate on what scale value should increase in order for the State to be satisfied with its shareholding as a capital investment. The committee points out that direct state ownership is long-term, and that it is therefore growth over time that is most relevant to consider.
The State’s direct ownership consists of large shareholdings in relatively few companies. This entails a greater risk than in investments in the Government Pension Fund, which is based on systematic diversification of shareholdings in order to reduce the risk. The Committee indicates that the increased risk entailed by direct state ownership could justify higher return targets. At the same time, the committee points out that the risk should be assessed in relation to the State’s overall asset management. If direct state ownership produces a desired profile for State investments that does not automatically mean that the return target should be raised as a reflection of increased risk.
There are arguments in favour of adjusting return targets at portfolio level to the industrial imbalances produced by national traits. The value growth in relation to international business-sector weighted share portfolios would provide an ideal basis for comparison.
The return targets for the individual companies should be set on the basis of company-specific factors. The committee points out that setting the risk premium for such return targets is not an exact science. For many companies, this type of company-specific risk premium will not exceed the anticipated added return that forms the basis for the type of diversified portfolios administrated by the Government Pension Fund. Lower requirements should be set for companies with low risk. Conversely, companies with higher risk should be required to meet higher return requirements. The committee finds that a rough sorting would be sufficient, because more finely graded return requirements might produce a false impression of how precisely the risk concerned can be calculated. In listed companies, an industry-specific index might be a relevant yardstick as a return requirement derived from a market capitalisation model. Besides, listed companies present their own return targets, which are assessed by analysts and other actors in the capital market. A listing on the stock exchange thus provides continual market-assessment of the business.
The committee does not hold that any changes should be made to the return targets in furtherance of any objectives regarding ensuring national head –office activities. The companies should neither be penalised nor benefit as a result of the owner’s investment decisions. The same principle should be applied to companies in which specifically defined objectives are to be pursued through ownership. Any variance from commercial return targets, based on a market capitalisation model, will serve to elicit the costs of specifically defined objectives.
The committee maintains that such general return targets offer a sound and simple basis for assessing company performance, and that the requirement for return on investment over time is what matters most, rather than short-term fluctuations. Such measurements are also the main component of reports to the Storting and the public domain, but are less useful for the shareholder’s day-to-day tracking of companies.
The objective of ensuring solid industrial growth dictates the need for separate and ongoing focus on company profitability and growth potential. When it comes to formulating objectives of this kind, a more in-depth comparison of the companies’ profitability and strategic situation with that of other companies would be appropriate. One starting point would be the companies’ accounting figures. Analyses of the company’s growth over time and in relation to comparable companies helps the shareholder to assess the company’s commercial undertakings and management in terms of this objective. The committee holds that such accounts-based comparative analyses would also be useful for the State owner’s assessment of the individual company.
Exercising ownership
As part of its work, the preparatory committee surveyed the opinions of individuals such as the chairmen of the boards of companies in which the State is a shareholder. The committee indicates that on the whole the companies perceive the current system of corporate governance as satisfactory. Any points that could be improved on largely concern structural weaknesses in the State decision-making process. Several companies are keen to see the State clarify its objectives for its ownership in each company, and consistency between objectives and decisions in subsequent issues requiring the State’s involvement. Unpredictability and time-consuming administrative procedure are among the main objections raised. This is the case especially in matters requiring the Storting’s approval, such as capital extensions and structural changes. Time-consuming decision-making processes on structural issues are seen as especially problematical. Several of the board chairmen stated to the committee that the ministry charged with administration of state shareholding should be invested with more authority, in order to ensure greater flexibility and swifter decisions.
The committee indicates that direct state ownership is normally a long-term undertaking, and that the State does not move in and out of shares based on assessment of company performance. The State’s most important instrument for realising its aims is thus to exercise owner control over the companies. As a sole shareholder or with a controlling interest in a company, the State has decisive influence on elections to the board, major investments, acquisitions/mergers or restructuring, injection of fresh capital, dividend policy and solidity.
One instrument at hand for improving company results would be a drive to ensure the best possible composition of the board of directors. If the State, as is the current practice in Norway, does not actively pursue owner control through the company’s governing bodies, the selection process is then especially decisive. The committee comments that where ownership is organised within a ministry, this imposes obvious limits to how active the State should be when it comes to governance from the owner’s stance. The board’s, and to some extent the corporate assembly’s, role in relation to achieving objectives will therefore be key. Successful board appointments therefore call for a clear position on the company’s financial and industrial growth potential, the board’s performance and a good overview of current members of the board.
Within a ministerial organisation, under the supervision of ministers, the committee considers the most important contribution to improve processes would be the internal procedures connected with the appointment and evaluation of the board of directors. Clear guidelines should be drawn up based on the objectives for a shareholding in a company, and the composition of the board should be assessed in terms of this objective.
The committee has assessed current practice in Norway whereby government officials and civil servants do not serve on company boards, and recommends that this system be continued. However, continuation of current practice makes it important for the State as an owner to ensure that it obtains sufficient information about each business, and assesses whether the board of directors is serving the State’s objectives. The boards finds the current practice whereby the State serves on nomination committees in wholly owned companies to be appropriate, and recommends that this be continued. This participation is particularly important in that the State as an owner does not further its own interests in the company through membership of the actual board itself.
The committee refers to the fact that the State’s dividend policy in wholly-owned companies has been criticised in a number of cases for not showing sufficient consideration for the companies’ investment requirements. Rational formulation of a dividend policy would be one effective means of disciplining the company. From a control perspective, dividend policy on the part of the owner will often be important in ensuring that management does not have available more or less of the annual profit than what is necessary for financing profitable growth opportunities. In this way, dividend policy can be used as a means of controlling the capitalisation of the company. Retained profit is one of the several sources a company has for financing its activities. Dividend policy should thus be considered in the context of the company’s other financing options.
Although the issues concerning dividend policy are complex and should be seen in the context of the company’s other financing options and growth opportunities, the committee points out that the unpredictability entailed by the owner’s dividend decisions is a problem in relation to the objective of value maximisation. Unpredictability in the dividend policy makes strategic planning difficult because it reduces overview of the company’s financial scope of action. The rationale for the special rules concerning dividend decisions in the company legislation on state-owned limited companies and state-owned enterprises has been the particular interests associated with management and control when the State is a shareholder. The committee holds that these interests do not justify upholding the provisions because the owner, in such cases as in other cases, would be able to make changes to the board of directors. Against this background, the committee recommends that the normal rules in the company legislation concerning dividend decisions also be applied to state-owned limited companies and state-owned enterprises.
The committee points out that this will not prevent the State from operating with a dividend policy for each individual company in line with present levels, or higher or lower. The board will have to comply with the dividend policy, but will itself be responsible for the maximum limits in each individual year. This will also ensure that the board’s responsibility for company finances is more in keeping with the board’s decision-making competence under company legislation than is the case at present.
A controlling interest or sole ownership gives the State a means of controlling company capital through the weight of its holding. The committee indicates that the State’s decisions concerning changes in ownership should meet certain commercial criteria in order to further the objective of value maximisation and solid industrial growth for the companies. The State should contribute generally to an effective capital structure in the sense that the company has the means to achieve solid industrial growth without state ownership being a disadvantage. Similarly, mergers and demergers and other structural measures should exclusively be considered in terms of the value maximisation objective. The dynamics of business and industry also dictate the need for decisions on the supply of new capital or changes in shareholdings to be made with a certain speed.
The committee refers to the fact that decisions concerning the supply of new capital and dividend policy may be complex from an informed perspective, both for the State and private shareholders. Thus, such decisions cannot be expected in all cases to be made within the short space of time intimated as the companies’ expectation in their communications with the committee. As regards the fact that State decision-making is claimed to be lengthy and unpredictable, the committee holds that this should be considered in light of the fact that the decisions have to be considered at several levels and entail difficult political decisions associated with state ownership. Ministerial consultative processes, the Government’s and Storting transactions may mean that considerations other than value maximisation are involved in the deliberations. The committee indicates that this form of processing should essentially be regarded as a strength in that democratically elected authorities have the opportunity to form an opinion on the matters at issue, while various considerations can be weighed up against each other within the ministerial system before any decision is made. However, the committee finds that such decision-making processes are less expedient if the politically determined objective of ownership is maximisation of commercial value.
The Storting’s and Government’s governance and supervision
The Storting’s governance of state ownership is founded on the supervisory authority devolved upon it by Article 75 of the Constitution.
Furthermore, matters entailing changes to state ownership must be considered by the Storting. The committee points out that the Storting’s governance is to a great extent based on transacting individual matters associated with administration of the individual company, and less so with overarching strategic policy on state ownership of different types of shares. The practice of submitting general reports concerning state ownership to the Storting serves to rectify this picture; nonetheless, the committee finds that there are grounds for questioning whether extensive case-by-case consideration by the Storting is appropriate.
The committee finds that granting mandates with associated allocations by the Storting to the minister responsible would be one instrument worth considering in order to reduce processing time and in order for decisions to be made on a purely commercial basis. Shareholdings subject exclusively to value maximisation objectives produce measurable goal achievement and solely require professional assessment. The committee holds that this might favour the use of mandates more extensively than at present.
The committee advocates extended use of mandates also for shareholdings involving a supplementary objective of ensuring head-office functions of the enterprise in Norway. Owing to the objective of ensuring head-office functions in Norway and the difficult and significant strategic deliberations entailed in certain instances, the committee presupposes that such mandates should be somewhat narrower than for companies with value-maximisation objectives. The committee believes in this case it should be possible to create mandate ‘corridors’ within the current majority limits under company law. It indicates that a mandate practice of this nature would be a continuation of a type of decision made formerly by the Storting.
The committee’s proposal for a decision-making system based on the ministers responsible to a greater degree being issued with mandates by the Storting, would reduce the number of ownership matters to be debated by the Storting. The committee is of the opinion that governance by the Storting could be improved by enabling the Storting to make overarching decisions, more extensively than it does at present concerning the objects of ownership on the basis of a broad and long-term assessment. When establishing objectives for ownership in an individual company and the associated mandates and allocation decisions, the decision-making basis should include a systematic comparison of the value growth of the companies with the objectives for return on investment. This type of assessment would facilitate broad discussion of state ownership. The committee thereby recommends a programme for the Storting at regular intervals to deliberate the objectives and the extent of goal attainment on an overall basis for state ownership. In this context, the necessary mandates should also be issued.
Besides this kind of political assessment of a more comprehensive nature, the committee advocates the publication of annual ownership reports. The committee argues the case that such annual ownership reports should comprise state ownership in its entirety, and not just those companies that operate with the maximisation of commercial value as their main objective. A complete presentation would provide a full survey of state ownership and contribute to better public insight and democratic control of the administration of state ownership. Effective goal-attainment and showcasing the companies’ achievements in value creation are just as important for companies with other main objectives than commercial profitability.
5.2.3 Establishment of one or more independent administrative bodies
The committee is of the opinion that two alternatives exist for organising ownership outside of the ministries; a fund model along the lines of the Government Pension Fund (formerly the Norwegian National Insurance Scheme Fund) or a holding company model. The committee has discussed only the last of these two models in any detail. The reason for this is that the State’s direct ownership involves substantial shareholdings in a number of large companies. It is thus to be expected that individual matters in such companies are to be dealt with by political authorities.
A government fund would basically be an ordinary administrative body governed by an instructing authority. However, special schemes have been created for a number of such funds. This is the case for the Government Pension Fund, the independence of which is founded on provisions that the Fund cannot be issued with instructions in individual investment matters, by either the Government or the ministry. Within the frameworks laid down in its mandate, the Fund has mandates for buying and selling of shareholdings. The committee points out that for the direct ownership, which the committee has been assigned to review, the shareholdings in the various companies would normally represent a controlling interest. The companies may also be wholly owned. In most cases, the vote cast by the State will be of decisive importance. It would not harmonise with the Storting’s and Government’s actual need for governance and supervision and Article 19 of the Constitution if there were no possibility of political governance through ownership of these companies.
A holding company would be assumed to be under state ownership, through a ministry. The basis for the ownership relationship between the holding company and the ministry charged with administration of the ownership function would be the same as that in other State companies, but with those improvements proposed by the committee. The same rules would also apply to the Office of the Auditor General’s rights, and employee co-determination. The holding company would formally and in practice own the companies and exercise corporate governance as a shareholder.
If the decision were made to establish one or more holding companies, a decision would also have to be made on matters such as the formulation of special control mechanisms in the articles of association. The committee’s opinion on a holding company model applied to direct ministerial administration concerns more the principle involved. The assessment criteria for this organisation would be the same as for the ministerial organisation, and the concretisation of objectives would also be the same.
Well-functioning markets, the state’s handling of roles and decision-making
The committee assumes that a holding company would to a great extent be able to act independently.
A holding company with liability for performance would have incentives for coordinating ownership in a way that might be detrimental to competition. The committee points out that this would have implications for the types of companies that should then be lodged with the same holding company.
The committee points out that, if a holding company were to administrate a large proportion of State assets, this would increase the risk of misguided decisions having broad ramifications. A company of this kind would not itself be part of the State decision-making process, with the opportunities for quality assurance such as are offered by referral and consultation schemes in multiple expert environments.
A holding company would make decisions concerning assets that are currently made by the minister responsible or the Government. Such decisions would thus increasingly be more distant to deliberations between different stakeholders and interests in the State decision-making process. The committee maintains that this would build confidence that decisions are made on a purely commercial basis.
Decisions pertaining to direct governance of a holding company on individual matters would, as is the case for the current organisational form, carry the risk of weakening confidence in how ownership roles are managed. If a company of this kind is expressly mandated to perform administration and has devised an orderly, formalised system for communication between the minister responsible and the holding company, the committee believes this would then foster greater confidence that decisions are made on a professional basis.
The committee points out that the creation of one or more holding companies would require a certain amount of duplicate expertise, since the ministry would still need to have sufficient expertise to be able to control this form of independent entity. However, this could also be seen as a useful means of quality-assuring the work that goes on in the holding company. With this form of organisation, the ministry’s work would be devoted more to the State decision-making processes, while the holding company’s work would be geared more to the companies themselves. This would serve to increase specialisation in how the ownership is managed.
The development of an independent environment external to central administration might present a barrier to cooperation and information flows. The committee assumes that the expertise of the holding company could be applied in other state ownershipentities according to closely prescribed criteria. If a holding company were to become heavily implicated in State decision-making processes, the benefits of a sharper divide between the ownership role and other roles might however be reduced.
A holding company might be more attractive for recruitment purposes. However, the committee does not see changed competency requirements for ownership representing a solid argument per se for changing the current form of organisation.
Exercising ownership
Much of the rationale for establishing a holding company would rest on the greater flexibility for implementing financial and structural changes, such as investment of capital or changes in shareholdings, without prior consideration of the situation of individual companies by a ministry, the Government and the Storting.
The committee emphasises the importance of the holding company’s independent role in such processes. If a holding company cannot be given this scope of action, this form of affiliation would entail yet another hierarchical level in decision-making processes which are already now seen as labour-intensive and time-consuming in relation to the fast rate of adaptation in the sectors in which the companies operate. Insufficient scope of action might lead to disorganisation, among other things in restructuring processes, in that stakeholders would be in contact with the holding company, the supervising ministry, the Government and the Storting in parallel processes.
Single transactions would be of such a nature, either in terms of the size or general implications of changes, that they would have to be submitted for political consultation. However, the committee maintains that if a holding company were to justify its existence at all, such political consultation would have to be the exception rather than the rule.
The committee is of the opinion that a holding company should be granted discretionary powers to adjust shareholdings in the different, subsidiary companies depending on where the capital will best further the holding company’s value-maximisation objects. Matters should be brought before the owning ministry or the Storting chiefly where they concern transactions that would significantly increase or reduce the holding company’s shareholdings in business and industry overall. The committee proposes that in order to achieve improved control of the holding company’s shareholdings, consideration should be given to proposing a separate course of action if the holding company is to completely buy up or sell out of one or more new companies.
The Storting’s and Government’s control and supervision
The establishment of a holding company such as that outlined by the committee would mean that the Storting and Government would be less routinely involved than they are at present in decision-making processes concerned individual companies. Control and supervision would be concentrated on maximising value in the holding company and the extent of the ownership, not on decisions concerning individual companies.
Where ownership pursues exclusively value-maximisation objectives, the committee assumes that the need for control and supervision beyond the financial dimension is small, and could be provided in a satisfactory manner through a holding company organisation.
The committee therefore recommends in the first place that this form of organisation be considered for shareholdings with exclusively value-maximisation objectives. Important preconditions for such a recommendation are that the Storting provides the necessary scope for action and that the holding company is established according to the procedural principles outlined by the committee. The committee maintains that caution should be exercised as regards the extent and selection of companies transferred to the same holding company in the interests of state risk management and competitive factors.
In the light of matters that should be dealt with politically and challenges arising from an unfortunate concentration of financial power, the committee is not proposing that shareholdings in which ensuring head-office functions in Norway is an element of the state objectives, be incorporated in a holding company. Where ownership is based on specifically defined objectives, similar considerations should apply.
The committee views determination of the objectives of ownership as a task for the Government and the Storting. A holding company organisation would primarily be appropriate for shareholdings with exclusively value-maximisation objectives. In order for increased expenditure on administration to be covered by increased value maximisation, a certain volume of shareholdings would need to be incorporated into a holding company. The committee’s recommendation should thus be considered in the light of the financial and administrative consequences of a holding company organisation once the Government and the Storting have assessed the objectives for the various shareholdings.
5.2.4 Statements from the public hearing
The consultative bodies generally support the committee’s assessments and recommendations.
The ministry has chosen to reproduce the consultative statements grouped by topic and the committee’s most important recommendations. The consultative statements from other ministries are in the public domain, but new ministerial consideration of the preparatory committee’s recommendation in connection with this Report to the Storting has meant it is not appropriate to cite these statements in the present text.
5.2.4.1 Clarification of ownership objectives
The Norwegian Financial Services Association states that identification of state objectives is of particular importance in situations where the value-maximisation objective is counteracted by other political objectives for state ownership. This will serve to ascertain any drawbacks to the policy pursued at any time and thus provide valuable supplementary information for the democratic process forming the basis for decisions made by the Government and the Storting.
The Association therefore shares the committee’s view that clarification of the objectives would be a positive contribution to improved state ownership.
The Norwegian Confederation of Trade Unions (LO) does not believe there is any realistic alternative to comprehensive state ownership in Norwegian business and industry. This makes it all the more important for the State to exercise sound ownership of its enterprises. LO asserts that a transparent and predictable state ownership policy is well overdue and that, for the companies concerned, it is all-important for the Storting to proceed to lay down clear-cut objectives for its ownership. State ownership of strategic enterprises will preserve more jobs and boost value creation. This will have positive spin-off effects for the undergrowth of Norwegian sub suppliers. Broad agreement on the principles of state ownership will be of essence for the state-owned enterprises, for growth in the sectors concerned, such as the energy sector, and for society as a whole.
LO believes that the development of Norwegian business and industry will depend on a proportion of major companies being firmly based and headquartered in Norway, since the headquarters are where decisive strategic decisions are made, and are accompanied by important staff functions, research environments and industrial developments. At the same time, this will ensure that companies are remaining in everyday life in Norway, its politics and value creation.
LO is pleased that the committee’s recommendations assert that state ownership is important for Norwegian business and industry. Furthermore, LO maintains that the State as a large capital owner should play an active role in Norwegian business and industry. Equally, the Confederation cites the committee’s emphasis that state companies should take the lead in social responsibility. LO is fully in agreement and refers to the fact that this responsibility concerns equal opportunities, occupational health and safety, employment conditions, local communities, human rights and ethics.
The Norwegian Employers’ Association for Businesses linked to the Public Sector, NAVO, agrees with the committee’s recommendation that the State should clarify the objectives for its ownership. This form of clarification would facilitate state assessment of company performance and state determination of return targets, while it would also make it easier for the companies to formulate their strategy.
NAVO agrees that companies where the State is a shareholder should take the lead in social responsibility.
NAVO endorses the committee’s emphasis that ownership objectives might well change over time. The committee has not decided which objectives may best be realised through state ownership, as opposed to other instruments. In that context, NAVO would emphasise that the State should exercise caution in practising sector-policy control through its ownership. There are a number of other control instruments besides ownership that could be employed in sector-policy control. If an enterprise operates in a competitive market, it might damage the State’s credibility, both as an owner and as an authority, to exploit the ownership role for sector-policy purposes. In such cases, other instruments, such as sector legislation, regulations, licenses, public tenders and contracts would serve the State better in realising political objectives. Similarly, in other instances, where no competition exits, greater predictability could be achieved in the framework conditions by employing instruments other than owner control in pursuing sector policy.
NAVO backs the proposition that the four objective categories in the recommendation provide a useful starting point for clarifying the objectives of state ownership.
NAVO points out that the committee has not attempted to place any of the state-owned enterprises within the various objective categories it defines. Although definition of the objectives of state ownership is a political task, and bearing in mind that the objectives may change over time, NAVO comments that it would have been simpler to assess the expediency and relevance of the proposed categorisation if it had been exemplified. NAVO comments that it is particularly difficult to determine which companies would sort under objective category 3: companies with specific defined objectives, in addition to commercial value maximisation, and objective category 4: companies with sectoral policy objectives. In clarifying the objectives of ownership and sorting individual companies into the proposed categories, NAVO holds that it should be emphasised that the specified political objectives are to be pursued through instruments other than corporate governance. From the enterprise perspective, it is important that their categorisation is not static. There are a number of examples of companies having changed category.
NAVO notes the committee’s recommendation that companies with commercial objectives and major social remits are to attach importance to highlighting the costs involved in fulfilling those remits. From the enterprise perspective, this would mean greater certainty with regard to performance requirements and would promote greater predictability and legitimacy in relation to how the remit is discharged.
The Confederation of Norwegian Enterprise (NHO) cites its publication Eierskapspolitikk for økt verdiskapning (Ownership Policy for Increased Value Creation) which emphasised the fundamental importance of the State defining its objectives for its shares in each individual company. This should consequently be the basis for discussing organisation of the enterprises.
NHO points out that explicit objectives would also be of significance for a number of other factors than the organisation of state ownership. The State owner would be in a better position to evaluate company performance, the company would find it easier to deal with strategies and plans, and all the company’s stakeholders would have a more rational perspective on the company.
NHO maintains that one main consideration would be whether the company is to pursue value maximisation as its sole objective or if this is to be combined with other objectives. If the enterprise is to serve politically determined objectives, it moves onto a scale, which at the outer limits embodies such explicit social objectives that there is scarcely any notion of it being involved in commercial activity. In instances where the company has to achieve primarily political objectives, it is important that the State as an owner is able to record how successfully these objectives are achieved and whether the cost of achieving them is rational for society.
NHO thus emphasises that the need to define explicit objectives and to establish a system for reporting performance, therefore not only applies to enterprises with commercial objectives, but also to other state-owned financial undertakings.
NHO refers to the committee’s objective category designated «Commercial value maximisation objectives and ensuring head-office functions in Norway». Given the lack of sufficiently strong private ownership, NHO maintains that the State is in a position to achieve this kind of impact in Norway.
Since «ensuring head-office functions in Norway» is part of the public debate about state ownership, NHO sees it as important to clarify what the concept involves. The concept should not be perceived as a peculiarly Norwegian form of nationalism and protectionism, since if that were the case it would be highly detrimental both for Norway in international economic cooperation and for the companies that compete abroad. NHO stresses that the political authorities should base their deliberations on the sense of the concept defined by the committee. It should be clearly stated that Norway seek to ensure head-office functions in the same way as other countries do for key segments of their business and industry. One problem might be that this is more evident in Norway because the country has a unique and less varied industrial structure than other nations. NHO believes that this makes it all the more important for Norwegian political authorities to exercise state ownership in a way that demonstrates that Norway is not seeking exceptional status, and that it will not go further than necessary in pursuing its commitment to ensuring head-office functions in Norway. NHO notes that, based on the statements of changing governments and parliamentary committees, the committee interprets «ensuring head-office functions» as meaning that company headquarters are to be localised in Norway and that company boards and management groups should be made up of Norwegian decision-makers. The committee indicates that this will ensure that strategic decisions are made in environments with an informed view of the potentials for investing and operating in Norway and foster the right conditions for retaining expertise that is vital for national business growth.
Closely connected with the need to clarify the objectives of state ownership is the question of how much the State needs to own, i.e. how many shares are relevant in the various companies in order to achieve the State’s objectives for its ownership. This applies not least in companies subject to the commitment to ensure head-office functions in Norway. NHO points out that political views of this will differ. On the one hand, some might want the State to have a majority, or even two-thirds in order to exert active control over the company. On the other hand, there will be positions that are particularly applicable to what, in the Norwegian context, are large listed companies. In order to influence the localisation of the company’s business office, it is sufficient to hold more than a third of the shares. In listed companies, with dispersed ownership, this will also be sufficient to secure an ordinary majority at the general meeting. NHO maintains that if the State as the principal shareholder clarifies this type of policy, it would have a number of positive effects. As indicated by the committee, it would signal to the market that the State is exclusively committed to ensure head-office functions in the sense defined here. This might also have other positive impacts on the Norwegian capital market. Another issue is that any divestments should be organised in such a way that is generally appropriate for this market.
NHO believes that the conditions may present themselves quite differently for companies in which the objective of ownership is to assist in realising specifically defined objectives, in addition to commercial value maximisation. Such undertakings may have a varying degree of commercial orientation, while at the same time being committed to special remits for the State, such as managing the production of products and services within certain sectors. The administration of state ownership will in such cases obviously be more complex. This may make it difficult for the State to attract other shareholders, who for their part off course will be interested in the financial return that is the principal aim of a business enterprise. The very fact that this makes assessment of goal attainment complicated, makes it vital for these companies to have established the best possible reporting system so that it can indicate deviations from commercial return targets, and so that the costs of the specifically defined objectives can be substantiated.
The Norwegian Competition Authority points out that clarification of the objectives would facilitate assessment of company performance and thereby the efficiency of the company’s operational activities. Furthermore, it will make state-owned enterprises more attractive both as business partners and for investors. Insofar as private co-owners or potential investors take on a risk premium against the State pursuing special interests, a so-called «government discount», a clarification of the objectives of state ownership would reduce this and the value of state ownership would increase.
Kredittilsynet, the supervisory authority for financial services and the securities market, endorses the committee’s position on the importance of setting and communicating explicit objectives for Norwegian state ownership. In the committee’s assessment of the different categories of objective in Chapter 8, Kredittilsynet took note of the discussion of objective category 2 – the combination of commercial value maximisation objectives and ensuring head-office functions in Norway, including the pertinence of the latter (sub) objective seen in relation to Norway’s international commitments. Kredittilsynet is of the opinion that it would clearly be vital to retain financial sector head office activities in Norway. Kredittilsynet refers among other things to discussions concerning this issue in Norwegian Official Report NOU 2000:9 Competition interfaces in the financial sector. Kredittilsynet asserts the importance of emphasising this in the debate on ownership, because, to a great extent, the EEA Agreement and other international commitments will prevent head office functions and national foundation being guaranteed through special laws and rules with that specific aim, certainly in the financial sector. State participation as an owner may therefore from some perspectives be appropriate within the financial sector.
In discussions of the importance of formulating explicit objectives, the committee indicates that this is also important in reducing the risk of isolated political moves creating uncertainty in the capital markets about the objectives on which state ownership is based. Kredittilsynet shares the view that the actual conduct of politicians and other key individuals in authority might be of importance for confidence in the State as an owner.
5.2.4.2 Use of allocation mandates and mandate corridors
The Norwegian Confederation of Trade Unions (LO) refers to the committee’s clear signals about how state ownership entities can be made more competent, orderly and proactive. The committee’s recommendations concerning more expedient governance and extended mandates for those who are to administrate state-owned assets, among other things through mandate corridors, would, in LO’s opinion help to prevent confusion of roles and ill-defined division of responsibilities.
The Norwegian Employers’ Association for Businesses linked to the Public Sector, NAVO, supports the committee’s proposal concerning extending the use of mandates associated with the implementation of changes in shareholdings and/or the investment of fresh capital. As regards injection of capital, the State has often assisted in this when needed. NAVO shares the committee’s view that the decision-making process may be lengthy and unpredictable from the perspective of the enterprise.
As regards changes in shareholdings, NAVO supports the concept of so-called mandate corridors within the current majority limits in company legislation, as proposed for companies in category 2. NAVO also believes that this model should be applicable to companies in category 3, i.e. for those who operate with both more specifically defined objectives and commercial value maximisation objectives. The crucial question is whether they are to be wholly owned or part owned. This will in any case be a political decision. NAVO indicates that if part-ownership is chosen then, this will convey that state ownership is not an instrument for furthering sector-policy objectives.
At the same time, NAVO is somewhat in doubt as to whether it is possible to make precise implementation rules for this for each of the four categories of company. Decisions about the scope of the mandate issued to the minister responsible will need to be made for each individual company.
These decisions will also need to take account of the fact that categorisation of the companies cannot be static. NAVO refers to the fact that several of its affiliated members have moved between the four categories. NAVO also indicates that practice reveals that a company’s shift from category 3 or 4, to divestment being required and the State having to withdraw completely can happen in a short space of time. This entails that categorisation must be flexible and that the companies’ placing be continually reviewed.
NHO points to the fact that the need for the State to both define its ownership objectives and, on that basis, to determine how large a shareholding will be required, will influence whether a mandate system can be devised between the Storting and the minister assigned to exercise ownership on behalf of the State. In which case it will be necessary to have clarified between the Storting and the Government for how long shareholdings are to be kept, the amounts that can be made available and so forth. In NHO’s opinion, the basis for this would have to be a thoroughly considered position on state ownership, which is also fixed over a certain period of time and not subject to fluctuations influenced by the political mood of the day.
Other external consultative authorities that have commented on mandates/mandate corridors endorse the committee’s assessments and recommendations.
5.2.4.3 The introduction of the normal rules of the Limited Liability Companies Act concerning dividend decisions for wholly-owned companies
LO agrees with the committee that State dividend policy for wholly owned companies needs to be made more predictable and cites the committee’s proposal that the normal rules of the Limited Liability Companies Act on dividend decisions should also be applied to state limited companies and state-owned enterprises. The companies’ payment of dividends to the State must be compatible with their long-term strategy, and not so high or so unpredictable that growth of the companies is undermined.
The Federation of Norwegian Commercial and Service Enterprises (HSH) comments that explicit rules should be established to prevent company dividend policy being part of balancing the State budget.
The Norwegian Employers’ Association for Businesses linked to the Public Sector, NAVO, agrees with the committee’s assessment that the State’s dividend policy and dividend decisions regarding the wholly owned companies has often been too unpredictable. Dividend decisions that are not based on the company but on the financing needs of other measures in the state budget impair corporate management’s ability and opportunity for strategic planning. This results in the room for financial action being unpredictable and non-transparent. NAVO therefore welcomes the committee’s proposal that the normal rules of the Limited Liability Companies Act on dividend decisions also be introduced for wholly-owned limited liability companies and state-owned enterprises. This will provide the companies with greater predictability and better their options for strategic planning.
Statnett SF (owner and operator of large sections of the Norwegian power grid) agrees with the committee’s recommendation that the State should clarify its expectations from the companies in order to assure predictability. This applies to dividend decisions, requirements regarding return on investment determined on the basis of company-specific factors and qualitative goal attainment of special social objectives. Statnett emphasises that explicit expectations from the owner will serve as a useful benchmark for the company’s own assessment of its activities. In addition this will serve to create predictability concerning the company’s future and make it better able to protect its interests and to determine its business strategy.
Statnett stresses the importance of capitalisation, return requirements and dividend policy taking into account the company’s need for long-term commercial growth and attainment of politically determined objectives for societal development. Statnett, for its own part, is subject to a politically determined objective of reliable electricity supply.
Other external consultative bodies that have commented on the question of amending the rules regarding how dividends are decided on in wholly-owned State enterprises, endorse all the committee’s proposals for introducing the normal rules of the Limited Liability Companies Acts on dividend decisions in state limited companies and state-owned enterprises.
The Ministry of Justice and the Police pointed out that the committee had apparently not assessed the constitutional aspects of repealing the provisions in the Limited Liability Companies Act/Public Limited Companies Act which prescribe that the general meeting in a limited liability company wholly owned by the State is not bound by the board’s and corporate assembly’s proposals for distribution of dividends. Further consideration of the proposal would therefore have to be considered more closely in this context.
5.2.4.4 The establishment of a holding company for administration of those parts of state ownership that operate with exclusively commercial objectives
The Norwegian Financial Services Association (FNH) comments that, seen in isolation, the use of a holding company would serve to create a sharper divide between the State’s ownership role and its other roles, and would thus contribute to securing state assets and solid industrial growth for the companies involved. The success of this type of model, as compared with a ministerial model, will however depend on the Government and the Storting assuming a distinctly more supervisory role in governance of the companies than is presently the case.
NAVO notes that the committee offers no explicit recommendation regarding the establishment of holding companies for administration of state ownership. NAVO concurs with the objections and weaknesses identified by the committee concerning a holding company model for administration of state ownership.
The Confederation of Norwegian Enterprise (NHO) approves of the committee’s review of the use of holding companies, which it finds to be comprehensive and thorough. NHO also expects this review to provide clarification in the debate on the use of holding companies. In this way it should be possible to create a calmer atmosphere around an important aspect in the organisation of companies with very great significance for the Norwegian economy.
The Federation of Norwegian Commercial and Service Enterprises (HSH) points out that confidence in the State as an owner will primarily depend on whether other participants realize that the owner function’s decisions are actually made on a well-informed basis. The confidence of the public and in the market will be achieved more as a result of the resources, the expertise and culture that emerge out of the practice of ownership, than a particular choice of organisational model.
The Norwegian Shipowners’ Association believes that there is much in favour of the committee’s arguments for a holding company model for state shareholdings, but that there would also be counterarguments against this kind of change. Whatever the case, given that this is state ownership, the Government and Storting are ultimately responsible for measures taken within the companies. The Shipowners’ Association comments that the proposed holding company model might lead to situations involving far more uncertain division of responsibilities. In all probability, a strong bureaucracy would arise in a holding company. For the Government and the Storting, it would obviously be more difficult to check and review management decisions in a holding company than is the case at present. This might actually result in discrimination against competing private companies. Management of the proposed holding company would assume a far stronger position and might become a great deal more self-willed since, in practice, it will scarcely be easy for the owners to dismiss management. There is a considerable risk that this management would be able to operate with its own agenda, one that does not coincide directly with the overarching objectives. On this basis, the Shipowners’ Association has reservations about going as far as the committee proposes in establishing a new, heavily bureaucratised body invested with power. The obvious weakness of the current state ownership should not be compensated for by introducing a new system with other serious weaknesses. Instead, we should seek out the best solution, which in the Shipowners’ Association’s opinion, would be a gradual privatisation of the State’s commercial ownership combined with proactive initiatives to promote the creation of private equity.
The Office of the Auditor General points out that the practical consequences of a holding company organisation will require further consideration. The Office of the Auditor General therefore requests that it be permitted to comment in any submission to the Storting containing proposals for changes to future organisation of the State’s commercial ownership to allow it to make an overall assessment of the consequences for auditing.
The Norwegian Competition Authority comments that the establishment of a holding company would probably draw a sharper divide and give the impression of greater distances from political processes than would be entailed by a move to the Ministry of Trade and Industry. In creating one or more such companies, in each specific instance the benefits in the shape of greater distance between the role of regulator and more professional ownership will need to be weighed up against any competitive limitations and costs in terms of expertise.
Kredittilsynet points out that irrespective of whether the function of owner is to be exercised by a ministry or a holding company, it is important to make a specific assessment of what mandates may be issued by the Storting to the administrator of the ownership role without this coming into conflict with constitutional processes, in order to ensure sufficiently rapid decision-making from the perspective of the companies.
The Government’s positions
The preparatory committee on state ownership’s assessments concerning a holding company are reviewed in Chapter 7.7. The recommendations concerning clarification of the objectives for ownership are discussed in Chapter 7.5 of the report and specifically in the companies survey in Chapter 8. The assessments and recommendations concerning increased use of mandates/mandate corridors are discussed in Chapter 7.8. The proposal regarding the introduction of the normal rules of the Limited Liability Companies Act on dividend decisions for wholly state-owned companies is discussed in Chapter 7.9.