The Centre has decided to continue to hold not less than 51 per cent of the paid up share capital in listed public enterprises, even after disinvestment. Thus, those SOEs will continue to enjoy the ‘government company' status. The government decision reflects government's intention to use these enterprises as an instrument to achieve certain national objectives. The Prime Minister in his speech delivered at the conference of chief executives of Central Public Sector Enterprises held in New Delhi on March 8, 2007 said, “The revitalization of the public sector is an integral part of our strategy of promoting ‘inclusive growth’. We regard the public sector as an engine of growth, a source of employment generation and as an important source of R&D in our industrial sector. Our Government's policy has been to remove all irritants coming in the way of healthy functioning of public enterprises" (Source: https://bsmedia.business-standard.comdpe.nic.in/newsite/gcgcpse.pd, accessed on August 5, 2009). It is clear that shareholders, as a group, are not the primary stakeholder of SOEs.
Conflicting objectives
We expect companies to comply with law, to behave ethically and to be a good corporate citizen. But we accept that the core objective function of any commercial enterprise is to create 'shareholder value'. The CEO and the board of directors take care of interests of stakeholders (e.g. employees, local community, vendors and customers) because 'shareholder value' cannot be created ignoring their interest for long. However, they are not required to balance the interest of all stakeholders. The 'stakeholder society' theory has lost ground because when we expect a manager to balance the interests of all stakeholders, we confuse them and the system dilutes managers' accountability.
In many situations primary objectives (e.g. to support the government initiative for inclusive growth, to create employment and to become an important source of industrial R&D) of listed SOEs might be in conflict with the next important objective of 'creating shareholder value', which a listed company has to pursue to compete for funds in the capital market and to fulfil their primary responsibility towards non-controlling shareholders. For example, Reliance Industries Limited (RIL) exports majority of its production of petroleum products to optimise its shareholder value, while oil companies in the public sector have to sell petroleum products in India at administered prices. It is quite possible that when administered price mechanism will be dismantled, RIL will shift its focus from export markets to the domestic market and sacrifice SEZ benefits if that strategy benefits shareholders. Oil companies in the public sector do not have the liberty to formulate strategies that will enhance shareholder value. Therefore oil companies in the public sector cannot create as much value as RIL can create for its shareholders.
SOEs consider primary objectives as constraints in formulating strategies to enhance 'shareholder value'. The government should clearly articulate the primary objectives of each listed SOE. As a good governance practice, the website and the annual report of each SOE should display the same prominently. This will help the capital market to value the equity of SOEs appropriately.
Managing stakeholders
Stakeholders in a company are many. Important stakeholders are shareholders and owners, management, employees, customers, suppliers, local community, local and national governments, trade unions, media, regulatory bodies and pressure groups. The interests of different stakeholder groups are inevitably different and may be in direct conflict. Companies adopt different strategies for dealing with different stakeholder groups based on their power and the level of their interest in its strategy. In case of SOEs, the 'interest level and power matrix' is different from the same for non-government companies. For example, in case of non-government enterprises central government and national media are stakeholders having high power but with low interest level, while in case of SOEs they are stakeholders having high power and high interest level. Similarly, in case of SOEs, pressure groups, including political parties, constitute a group having high power and high interest level. In case, of non-government companies, their grouping depends on the nature of industry in which the company operates. For example, for a mining company, they are usually categorised as a group having high power and high interest level because of the local community surrounding the mines and the national and regional importance of natural resources. On the other hand, for a FMCG company, they are usually categorised as a group having high power but with low interest level.
An SOE has to deal with large number of powerful external stakeholder groups having high interest level in the SOE's strategy. This leads to sub-optimal utilisation of resources from shareholder's perspective, which is detrimental to the interest of non-controlling shareholders. SOEs do not enjoy the level playing field with their counter parts in the private sector. Therefore, performances of SOEs are not comparable with that of companies operating in the private sector.
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This leads to the question whether the government's policy to continue its holding at 51 per cent or more is appropriate for companies which are not of strategic importance. The relaxation of the government policy in respect of those companies will improve their performance and will benefit the government and other shareholders.
Plethora of controls
The government has created two important institutions, the CAG and the Vigilance Commission to ensure the propriety of transactions entered into by public institutions and to ensure that public offices are not used for undue personal benefits by public servants. Although, no one questions the need for those institutions, we must accept that increase in controls slows down the process of decision making and makes decision makers unduly risk averse. This adversely affects the performance of SOEs. It might be beneficial for the government and non-controlling shareholders if the government reduces its holding below 51 per cent in SOEs, which are not of strategic importance.
Unique corporate governance issues
There is no unique corporate governance issue for SOEs, except those discussed above. In family business usually the promoter group formulates the strategy to ensure that it fits into the family values and structure. Similarly, the multinational parent formulates the strategy for its subsidiaries to ensure that subsidiaries support the strategy of the parent. Therefore, it is not unique that the government formulates the strategy for SOEs to ensure that they support its plans and programmes (e.g. inclusive growth and energy security). The board of directors seldom challenges the strategy formulated by the promoter, the parent or the government. It is a myth that the board of directors provide direction to the company which belongs to a family group or which is a subsidiary or which is a SOE. In these companies, the board focuses on strategy implementation rather than on strategy formulation. Therefore, it appropriate if the government grants autonomy SOEs only in respect of strategy implementation and not forstrategy formulation.
Conclusions
The government should review its policy regarding SOEs, which are not of strategic importance. As regards, other SOEs, it should formulate and articulate their vision and mission clearly. The mismatch between publicly articulated vision and mission and the true vision and mission leads to under valuation of equity. Therefore, the government should complete the task before the disinvestment process begins.