Susan Watson: Mixed-ownership model warrants closer look

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Air New Zealand has performed well since the Government became a major shareholder. Photo / NZPA
Air New Zealand has performed well since the Government became a major shareholder. Photo / NZPA

The debate over the sale of shares in state-owned enterprises has been polarised between those who consider private ownership to be a good idea and those who think that the state should continue to own and control state businesses.

Both sides may be missing the point that partial privatisation means that the mixed-ownership model companies will be neither wholly public or wholly private, neither fish nor fowl.

The hybrid nature of mixed ownership may offer some unique advantages and disadvantages that do not exist for state-owned enterprises or for companies listed on the stock exchange.

Boards and management of mixed-ownership model companies (MOMCs) may feel freer to focus on the long-term success of the company.

While decision-making rests with the board and management, many boards of wholly private companies may feel constrained to focus on share price over other considerations.

Share price is obviously largely driven by short-term profitability. If the share price drops below a certain point, a wholly private company may be at risk of takeover, and the incumbent board and senior management may lose their jobs.

While a 51 per cent stake in MOMCs is retained by the state, control will remain with the state.

Most shareholder resolutions require more than 50 per cent of the shares being voted in favour to be carried, so the Government will retain control over the composition of the board and payments of dividends.

Some management decisions require the support of special resolutions of shareholders (75 per cent majorities) but even here, participation by small shareholders in decision-making is more illusory than real.

Special resolutions are required for game-changing or game ending decisions.

An example is whether the company should enter into a major transaction, that is, a transaction equivalent in value to half the current assets of the company. Another example is whether the company should be put into liquidation.

Also, a special resolution can be passed with 75 per cent of the votes of those who vote being in favour of the resolution.

Not all small shareholders vote their shares - many are rationally apathetic, may favour the resolution and may give proxy votes to the board.

Even on those matters that require a special resolution, dissenters would be unlikely to muster enough votes to stop the resolution being passed.

The board and management of MOMCs can thus make decisions and plans, knowing that small shareholders are unlikely to be able to stop those plans proceeding. The majority stake held by the state also means that the MOMCs will be immune from takeovers.

Is this a bad thing?

Evidence from some overseas studies on insulated boards like the boards in the MOMCs show that less immediate accountability to shareholders may in fact permit boards and management to focus more on the long-term objectives for the company.

The share price acts as a barometer informing boards how the market evaluates its decision-making, but the board is not at risk of removal through takeover.

We have an example within New Zealand of a MOMC - Air New Zealand seems to have done well since it was bailed out and the Government became a major shareholder.

Continued Government ownership of partially privatised entities also creates a potential moral hazard - one that has been identified in overseas studies.

Typically the share prices of MOMCs are higher than the share prices of wholly privatised corporations. This may be because the markets believe that the Government will not allow partially state-owned companies to fail.

Some commentators also think that partially state-owned corporations have a regulatory advantage.

The Government is unlikely to regulate unfavourably in an industry in which it holds a significant stake, as that will drive down the value of its shares.

But we may be unique in New Zealand in that the regulatory risk for the MOMCs is the opposite - a change in Government may in fact lead to regulation that is unfavourable to those companies that will drive down their share price.

The point remains though that governments partially owning listed companies cause a form of conflict of interest that may operate favourably or unfavourably for other shareholders.

The fact remains that partially privatised companies are entities that are neither wholly public nor wholly private.

Rather than being dismissed as unsatisfactory by both sides of the currently polarised partial privatisation debate, the particular consequences and merits of mixed ownership warrant more examination and consideration.

Susan Watson is a professor in law at The University of Auckland School of Law.

- NZ Herald

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