The State as a Shareholder: Case Finland
A presentation for “Policy Dialogue on
Corporate Governance in China”
25.2.2004
Pekka Timonen
Doctor of Laws, Chief Counsellor
Ministry of Trade and Industry/State Shareholding Unit
Finland
26/07/2016
V/kalvot/eng/esitys/China PTi 04
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1. INTRODUCTORY REMARKS
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Institutional environment is essential = no “one size fits all” –
approach
Essential institutional facts and institutional arrangements for
Finnish model are
a) Small and open economy is absolutely dependent on
international markets (as we cannot beat them we have had
to join them and make the best out of it)
b) Competitive environment means constant pressure from
market participants (only the strongest will survive)
c) International competition means a level playing field as well
in domestic as in international markets (we cannot trust on
“domestic markets” or any other such illusions)
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1. INTRODUCTORY REMARKS
d) Stock market capitalisation means constant pressure from
financial markets and institutions which requires maximum
amount of transparency (there are plenty of others to take
those investors’ money if we cannot keep them satisfied) a
– d together ensure that neither companies nor owners can
afford inefficiencies and that owners cannot tolerate bad
management
e) In a market economy business decisions must be made by
business professionals, not by politicians or by civil servants
(professional management is absolutely needed)
f) In a limited liability company there are clearly defined roles
and responsibilities for owners, for management and for a
body between them, the board (separation of ownership
and control is absolutely needed and independent,
professional board members are essential to make this
system work)
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1. INTRODUCTORY REMARKS
It is widely recognized that Finland is one of the most
competitive economies in the world. According to standard
economic theory there should be a contradiction between
competitiveness and state ownership as state ownership
protects inefficiencies and hinders competition. As this is not a
case we must have done something well, be it accidentally or
purposeful.
In fact these points e and f together have made it possible for
the state to remain a significant owner and to create a
successful market economy.
State has created special ownership functions to carry on the
tasks of the owner and left the management for business
professionals. Boards have as well supervisory as decisionmaking functions and they are composed mainly of
independent professionals. State does not interfere in the dayto-day management.
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2. GENERAL PRINCIPLES FOR STATE
OWNERSHIP
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There is an essential difference between companies that carry
out special assignments closely related to State administration
and companies that are involved in purely market-based
business.
Special assignments are mainly related to some special “half
commercial, half administrative” tasks like retail alcohol
monopoly, national gambling and lottery monopoly, public
broadcasting and so on. It is not at all clear if all these really
are “special assignments” from international viewpoint or if they
do or do not operate on market terms but this is how we define
and justify them.
A company operates on market terms if it carries out business
in even a partly competitive operating environment and aims for
profit in its operations.
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2. GENERAL PRINCIPLES FOR STATE
OWNERSHIP
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When a company operates on market terms, the ownership
steering of such companies must be kept separate from
regulation and official duties to ensure that the companies’
economy and operations are transparent and that the owner
does not disturb the markets in which the companies operate.
The first and most important general principle of ownership
policy states that regulatory duties and ownership steering shall
be effectively separated so that, for companies operating on
market terms, the State’s shareholder duties shall be
accomplished in an independent and consistent manner so that
they are clearly separated from regulatory tasks.
A major point to keep in mind is that the entry of just one
minority shareholder in a limited liability company essentially
changes the basis for ownership steering.
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2. GENERAL PRINCIPLES FOR STATE
OWNERSHIP
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If a company has other shareholders apart from the State, the
equality of owners and creditor protection prevent the company
from being saddled with costs or obligations serving the
interests of a single owner.
The second general principle states that the State in its
capacity as shareholder shall act in accordance with the
Finnish Companies Act and the Securities Market Act, exercise
its shareholder power trough Shareholders’ Meetings and not
require or demand exemptions or rights that other shareholders
do not have.
To make this work, a clear distribution of authority between
Parliament and the Government is required. State ownership in
general is a parliamentary question, details of ownership policy
or owners decisions are not.
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2. GENERAL PRINCIPLES FOR STATE
OWNERSHIP
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The third general principle is that the roles of Parliament and
the Government shall be specified.
It is not however only a distribution of authority between state
actors that matters but also and primarily a distribution of
powers between owner and company organs. It must be clear
that authorities are responsible for ownership policy, not for
business decisions.
The fourth general principle states that there shall be a clear
division of labour between the shareholders in a company and
the company executives: the decision-making relating to
shareholder policy is the responsibility of the State, and the
decision-making on business operations falls under the
mandate of company organs.
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2. GENERAL PRINCIPLES FOR STATE
OWNERSHIP
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State ownership relies heavily on good corporate governance:
State (as owner) leaves the decision making to independent
boards and to professional management. State owned
companies do not have any special requirements for their
accounts and their auditing and companies comply with all
regular listing requirements and corporate governance
standards of Helsinki Stock Exchange (HEX).
These four principles are the heart and the backbone of state
ownership in Finland. They are partly targets or ideal models,
partly a description of our current policy.
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3. PRACTICAL ISSUES
3.1. What is the owners’ role in good corporate governance?
 all owners are not equal: only blockholders have real power but
small investors only have nominal power (or group power if
they are able to unite)
 separation of ownership and control has its’ risks: if there is a
power vacuum the management will most certainly fill it =
active ownership is required
 a majority owner or the biggest blockholder is the apparent
choice to control the company organs and to evaluate them
 all publicly owned companies are subject to the same
accounting rules and disclosure practices as other companies;
this has been enough to ensure accountability even at the
political level
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3. PRACTICAL ISSUES
3.1. What is the owners’ role in good corporate governance?
 it is not enough to evaluate boards and management yearly but
there has to be some formal or informal channel to change
information and bring out owners’ opinions and interests
 There is a need to find a balance and probably always a need
to make some compromises. Finnish concept is a mix of two
crosswise goals: be an active and responsible owner but do not
interfere in the day-to-day management. This is carried out by:
 (a) continuous evaluation based on public information and
combined with analysis of market environment and
competitors;
 (b) company specific targets and indicators for performance
and for distributions;
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3. PRACTICAL ISSUES
3.1. What is the owners’ role in good corporate governance?
 (c ) active participation in board nominations with one (but only
one) state representative in boards
 (d) informal contacts with chairmans of the board and with
managing directors.
 (e) active participation in restructuring processes and
negotiations if they are likely to require shareholders’ approval.
If not state does not participate.
 (f) open minded and positive attitude on value-creating
structural arrangements
 (g) an overall trust in civil and company law institutions with
clearly defined responsibilities for company organs.
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3. PRACTICAL ISSUES
3.1. What is the owners’ role in good corporate governance?
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Despite all beautiful principles and statements it is not always
easy for the state not to get involved. In Finland especially
employment issues are sensitive and easily bring out claims
that owners should stop rationalisations or terminations. As
state does not interfere in business decisions, this usually
brings out some critics afterwards.
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3. PRACTICAL ISSUES
3.2. Separation of ownership steering and regulation
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As already stated, this separation is the most important general
principle of ownership policy. It is however also the most
difficult to carry out.
In Finland ownership functions are currently carried out by 9
ministries, 3 of which have a significant role in ownership
steering. In fact all these ministries have regulatory functions as
well. These functions are kept separate inside the ministries but
this is not a reliable and stable solution.
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3. PRACTICAL ISSUES
3.2. Separation of ownership steering and regulation
 There is a pending proposal to create a centralized ownership
function which should have no connections with regulatory
functions. A strong resistance prevails, as this would mean a
redistribution of powers between ministries, between civil
servants and between politicians. As there are no real
alternatives it should only be a question of time and perhaps of
suitable political coalition.
 In Finland it is not realistic to create an autonomous ownership
function. It will be under political control whatever the
administrative solution will be. If a centralized unit will be
founded it must be independent from regulatory functions but
state shareholding cannot be independent from neither national
economy nor political control.
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3. PRACTICAL ISSUES
3.3. Promoting competitive neutrality
 State promotes competitive neutrality in all its ownership
functions
 There are no policies or practices related to subsidies to public
ownership or to investments. It should be noted that there has
not been even indications of any distorting effects for years.
 There is no special regulation in place for publicly-owned firms
to secure competitive neutrality and a level playing field and
this is in Finland not a question of regulation but of practices.
 When firms are active in competitive environment there are no
priviledges or special arrangements. This means that market
mechanisms are enough to secure level playing field. When
companies have special privileges (like alcohol monopoly and
gambling monopoly) they do not have competitors and the
issue of competitive neutrality is not relevant.
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3. PRACTICAL ISSUES
3.4. Attitude on privatisation
 There was a kind of wave of privatisation from late 1980’s to
late 1990’s. The tide has turned and privatisation has slowed
down.
 Ownership has its grounds in our economic history and state
was a strong driving force in our industrialisation process after
second world war. State ownership is widely accepted and
seen as a stabilising factor in a small national economy.
 People - and not only labour unions - think that our economic
independence is partly guaranteed by national ownership.
State seems to be the only option as there has not been an
overflow of domestic capital and other domestic owners
available. Therefore a realistic alternative for state ownership is
an increasing foreign ownership and there is no political
support for wide and / or rapid privatisation plans etc.
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4. IN CONCLUSION
 Separation of ownership and control is essential. Corporate
governance only becomes relevant when this separation has
been implemented.
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Preconditions for Finnish corporate governance -model and for
Finnish state ownership -model are institutional arrangements
that define roles, responsibilities and accountability. If there is
any lesson to learn or any model to adopt, there has to be
some mix of similar institutional arrangements in place.
Otherwise it most certainly will not work.
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