Analysis of the development of state holdings of the incoming quasi-public sector of the economy and the country specific features of strategic management

This article analyzes the development of a number of state holdings that are part of the quasi-public sector of the economy of different countries, where they managed to ensure effective strategic management. Also in the article the key is the answer to the question: how accurately and quickly the state can manage and realize itself as a full- fledged owner.

The policy of strengthening state regulation requires increasing the effectiveness of the management of the quasi-public sector.

Analysis of the post-privatization development of a number of investment-attractive companies in different countries that have passed into the ownership of private owners showed that most of them failed to provide effective management. On this key here is the answer to the question: how accurately and quickly the state can manage and realize itself as a full-fledged owner. In the world practice, form of corporate governance with state participation are "state holdings" (SH), "state corporations" (GOC), "state enterprises" (SOE) and "state commercial enterprises" (GBE), which are legal entities created by the state to conduct business or business activities on behalf of the state. In Kazakhstan, all of the above forms of corporate governance are part of the quasi-public sector of the economy. In this connection, we will consider the strategic development and management of these forms in different countries [1]. In the world there are no absolutely similar holdings, they all have different structures and portfolios. Models of the holding company - "shareholder" and holding company - "supermanager" have their own characteristics - depending on geographic, economic features, traditions that have developed in each country.

An example of a holding - "shareholder" - Shareholder Executive (UK), founded in 2003 to implement the rights of the state as a shareholder of state companies. Before the Shareholder Executive there are goals of increasing the financial results of the state company and the quality of strategic management of 26 companies - from large ones, like the Royal Mail, to not as large as the UK Hydrographic Office. It is still early to say that the holding successfully fulfills its tasks successfully, but already in the first years it significantly increased the efficiency of the companies included in its portfolio and the state received more dividends.

State Holding Khazanah Nasional Bhd - it is managed by the Ministry of Finance of Malaysia. Public shares of the 30 largest companies - such as Telecom Malaysia, Tenaga Nasional, Malaysia Airport Holdings, Malaysia Airline System - were withdrawn from the Ministry of Finance and transferred to Khazanah Nasional Bhd, which became Malaysia's largest national investment institution. In total, there are 40 national companies operating in the country, which account for 61 billion dollars of portfolio investment, which is 34% of the total capitalization on the Malaysian Stock Exchange [2].

In international practice, state holdings are increasingly seen as one of the most effective mechanisms for increasing the efficiency of state-owned companies, as evidenced by many recent examples of the creation of state holdings.

State holdings introduce in state-owned companies some of the processes and skills of boards of directors of private companies, while allowing the state to retain control over these assets. State holdings increase the efficiency of state-owned companies, causing fundamental changes in the relationship between the government and state-owned companies.

The government focuses its efforts on policy formation and regulation, transferring the exercise of its shareholder rights in state-owned companies to the state holding company, which acts as the state's principal representative on the boards of directors of companies.

The management of the company is responsible for the day-to-day management of its activities. As a result, the state, state holding and management companies appear clear and clear roles.

To obtain such an effect, the state holding should become a direct channel of corporate governance, ensuring interaction between the state and state-owned companies. He must ensure the state's exercise of its joint-stock rights through participation in the boards of directors of state companies. The main activities of the state holding should be:

  1. agreeing the positions of the stakeholders, mainly the line ministries, on the long-term goals and objectives of the companies;
  2. selection, motivation, assessment and development of the skills of the company executives;
  3. the formation of clear indicators based on the objectives of the companies, their alignment with strategic plans, budgets and investment plans of companies and sending only key decisions to the government;
  4. monitoring of companies and, if necessary, taking corrective measures;
  5. acting as a state adviser on issues related to corporate finance companies.

The state holding, therefore, will act as a shareholder representing the state, and a link between the government and the management of companies. Its role should be limited to the above activities. This means the following:

  1. Certain policy decisions should be retained by the state, for example, the distribution of capital among companies, the formulation of long-term policies and regulatory oversight.
  2. Everyday management should be managed by companies. A number of studies of many conglomerates have shown that the additional management structures that are above the generally independent and unrelated companies require costs, but do not bring real benefits, since the managers of state companies themselves are closer to their business and are not distracted by the control other companies. The state holding company's focus should be on tasks related to finding managers with the right qualities, setting the right goals, creating incentives, as well as critical evaluation of management decisions and control.

Management of companies should be engaged in day-to-day management. A number of studies of many conglomerates have shown that the additional management structures that are above the generally independent and unrelated companies require costs, but do not bring real benefits, since the managers of state companies themselves are closer to their business and are not distracted by the control other companies. The state holding company's focus should be on tasks related to finding managers with the right qualities, setting the right goals, creating incentives, as well as critical evaluation of management decisions and control. Other state holdings in different regions of the world play a very similar role and avoid the functions of the holding manager or "super manager".

Despite the fact that in the light of the above principles, decisions on such matters should remain within the competence of the government, the state holding could play a useful role as an advisor to the government using its expertise in corporate finance. A similar role is played by many state holdings, for example, Temasek in Singapore, SEPI in Spain and the Shareholder Executive in the UK.

In Scandinavia, effective regulatory bodies and a healthy political and business environment have helped transform local state-owned companies into the most successful companies in their industry. Local electricity grid companies are among the most successful in the world. The success of the use of such a lever as regulation was due to the fact that the Scandinavian states, firstly, ensured the independence of the regulatory bodies and gave them sufficient authority to implement their recommendations, and secondly, they used small highly specialized working groups in these bodies for a thorough study of industries, in which companies operate, and determine the right path for their development. Good corporate governance affects the value of the company. The survey of 200 large institutional investors in Asia, Europe and Latin America, during which their attitude to corporate governance practices was clarified, showed that investors are ready to pay a premium to the company's share price with good corporate governance.

Below are four key processes for which the boards of directors of companies should be specially minded.

  1. Setting long-term goals: conducting an organized dialogue with the management of the state company to agree on the basic goals and objectives;
  2. Selection, motivation and professional development of managers: providing state-owned companies with qualified managers who are properly motivated and developed;
  3. Approval of detailed plans and budgets: approval of medium-term plans and budgets of the state company, including investments;
  4. Monitoring and corrective actions for state-owned companies: monitoring financial and industry key performance indicators (KPIs), assessing the effectiveness of management and taking corrective actions when necessary. Experience shows that even if a state creates a formal legal basis for replicating the processes typical for the private sector in companies, it is often not in a position to carry out the abovedescribed key processes in practice.

Due to unstructured political interference in the company's activities, setting goals by its board of directors loses its effectiveness, since these goals can be ignored or changed. Members of the board of directors, who usually hold high government positions, do not have enough time to work on the board, sometimes they do not have sufficient knowledge of the industry to set the right goals and oversee the activities of companies.

In addition, management does not have the opportunity to manage the company independently, as ministries tend to selectively interfere with daily activities, introducing additional confusion and creating a sense of unaccountability in all organizations.

As a rule, state holdings are focused on financial goals and the role of ensuring effective corporate governance, with final control remaining in the hands of the state, and setting the fundamental goals and the formation of regulatory environment - at the discretion of the government.

In a number of cases, other industry goals were set before the state holdings. IRI, the Italian state holding, was vested with responsibility for the industrialization of the southern regions of Italy. The result was confusion, since it was never possible to clearly delineate decisions between the state and the IRI. As a result, IRI only added complexity and after several years, during which it demonstrated low efficiency, it was eliminated. The exception is the state holding SASAC in China. He was commissioned to help consolidate the industries where extremely fragmented state companies operate and where it is necessary to overcome management resistance in order to succeed (table 1).

Table 1 - Goals of the studied state holdings

State holdings

Goals of the state holding

Financial Results / Corporate Governance

Privatization

Consolidation / modernization

IRI

the main objective

 

the main objective

OelAG

the main objective

the main objective

 

Temasec

the main objective

the main objective

 

SEPI

the main objective

the main objective

the main objective

Shareholder Executive

the main objective

   

Khazanah

the main objective

   

SASAC

the main objective

 

the main objective

APE

the main objective

   

Note:

Compiled by the author

A significant majority of other state holdings limit their intervention, following the classical model of participation through the board of directors.

In most cases, state holdings clearly focus on financial performance and ensure effective corporate governance. Their main role and responsibility are to realize shareholder rights, ensure achievement of goals and maximize the financial efficiency of state companies, taking into account those restrictions that are set by the state.

It is important to note that the government and regulators should ensure that companies achieve high financial performance through real productivity gains, not at the expense of infringing on the interests of the end user, for example, unjustified price increases.

Given the strong focus on financial results, state holdings often provide the state with financial adviser services. For example, they can help determine the appropriate timing for privatization and assist in the implementation of this process, as is the case with SEPI in Spain or the Shareholder Executive in the UK, but should not make final decisions.

The state holding should have two main goals:

  1. It should structure the relationship of the state with state-owned companies. Final decisions are made by the government, but it should not interfere with the day-to-day management of state-owned companies. It should influence the strategy of state companies only through an organized dialogue with the state holding.
  2. It should form the behavior of the state as a private shareholder. The state holding will be the only channel of interaction between the state and state companies, serve as a center of best practice of corporate governance and apply approaches used by private shareholders to ensure achievement by state-owned companies (see table below).

In general, the existing system of corporate governance of companies requires significant improvements. Weak corporate governance by the state is one of the main barriers hindering the increase in the efficiency of companies.

Because of the existing system in the distribution of roles and responsibilities, there is no clarity. As a result, people who are the most qualified to solve tasks to improve the efficiency of companies, namely their management, do not have enough freedom to operate companies; while for them sufficient incentives are not created and there is no reliable monitoring of their activities. Before one of the companies in the portfolio of British holding Shareholder Executive - British Waterways, which on behalf of the state manages the network of waterways and docks - set goals of commercial and non-commercial nature: the first and most important goal is to provide public access to the waterways of the message, and the second goal - Achievement of financial independence by 2012.

There are other examples in the world: GLC - Dubai Holding (UAE), Future Fund (Australia), Korean Invesment Corporation (South Korea), TeliaSonera AB (Finland / Sweden), etc. However, all of them are multidisciplinary and diversified, and only some of them have subsidiaries. In the practical world there are no state holdings, absolutely identical in terms of structure, form of ownership and goals.

In general, the analysis of international experience has shown that some rules play a decisive role in the success of the state holding:

The state should participate only in stating the fundamental goals for state-owned companies every two to three years as part of a structured process controlled by the state holding. All other issues related to the activities of companies should be left to the discretion of the state holding.

The state holding through the boards of directors of companies should manage the companies and realize the rights of the shareholder, since he is the most qualified to achieve the goals and maximize the financial results of the companies. The government and other responsible bodies should establish only general "rules of the game": the fundamental goals and regulatory framework.

  1. The state holding should be an active owner, the center of the best practice of corporate governance, but not a "super manager" and not a classical industrial or managing holding.
  2. The state holding should have complete freedom of appointment and dismissal from the position of company managers, including the head of the company, by making appropriate decisions through the boards of directors of the companies. Also, the state holding should be able to determine the level of remuneration of managers and determine what part of their remuneration should be tied to the results of activities.

The task of selecting and motivating managers is best solved by the boards of directors of companies whose members are well aware of the specifics of the company's activities and understand what managers it needs and how to stimulate them. Board of Directors should also have the right to dismiss managers; otherwise setting goals and monitoring will not be taken seriously.

The state holding must appoint a majority of the members of the company's board of directors if the state owns a large part of its shares. The boards of directors of companies should have a significant number of independent directors.

Representatives of the state holding and independent directors appointed by the state holding should form a majority on the boards of directors of state companies and make decisions taking into account the practices of the private sector. Independent members of the boards of directors will bring objectivity and international experience into its work.

 

List of references:

  1. Development of a methodology for the evaluation and monitoring of the activities of the analytical study - Almaty, 2008
  2. Thomas Keller. Conception of holding. - Obninsk: 1997
  3. Amsden A. 1989 Asia s Next Giant - South Korea and Late Industrialization. - Oxford, University Press, New York and Oxford.
  4. Chang, H-J. 2000. The Hazard of Moral Hazard - Untangling the Asian Crisis. - World Development - 2000. - Vol. 28.-4
  5. CEPD (Counsil for Economic Planning and Development of the Taiwan Government) 2002 Methods for Managing Privatization.
  6. De Soto, H. 2000. The Mistery of Capital, Bantam Books. - London.
  7. Singapore Ministry of Finance 1993. Interim Report of the Committee to Promote Enterprise Overseas.
Year: 2017
City: Karaganda
Category: Economy