Governments often acquire ownership stakes or restrict foreign investments in strategic companies. But few countries have an ownership policy or equivalent. Such lack of clarity may lead to boards being either ineffective or bypassed altogether. Alissa Kole writes that governments with important SOE portfolios must develop a legal framework governing companies that receive state investment.

Government decisions to invest in companies have been widely anticipated and positively received, especially during the COVID period, which has called for support of national champions as well as food and medical security. States have made equity injections in private companies and already state-invested ones across sectors, from banking as they have during the financial crisis, to airlines which have historically required support, to other sectors which have hereto not called for state investment.

Governments have come to the rescue of companies not only through investments aiming to shore up national assets, but also through investment restrictions protecting national champions. These measures have redefined the international investment landscape and competition internationally. In recent years, both mechanisms have dramatically impacted the international corporate landscape and are poised to do so as governments rush to protect nationally sensitive technologies such as microchips, 5G and AI.

Governments act either through investment frameworks such as the US CFIUS mechanism or, more recently, through the Inflation Reduction Act or through governance mechanisms such as the golden shares prevalent in France. While decisions to protect companies are anything but new, some of them have caught observers by surprise. Some have raised eyebrows: the Chinese government’s intervention in the management of Alibaba, the Brazilian government’s replacement of the CEO of Petrobras and the French government’s announcement that Danone was a strategic enterprise.

In some instances in a not-so-distant past, issues of governance and management of state-owned enterprises (SOEs) have even spilled across borders. Take the Renault-Nissan-Mitsubishi alliance, which has investments by both Japanese and French governments. When Carlos Ghosn, its former CEO, escaped Japan fleeing persecution, tensions between governments, which now includes the government of Lebanon, where he has retired fighting extradition, have escalated.

An international regulatory architecture, such as the European Commission’s anti-trust framework and the OECD investment and governance principles, aim to create a level playing field between SOEs and their private competitors. But government interference in the ownership or management of state-owned companies continues.

Disregarding these standards, the Meloni government in Italy has intervened in recent months through investments in Telecom Italia, ITA Airways and an attempt to restrict the role of Chinese owners in Pirelli.

Italy is far from alone in this regard. Indeed, the OECD recently suggested that “a new group of mechanisms to manage risk associated with the ownership of certain assets that are inherently sensitive has just emerged”, allowing governments to intervene in an ongoing ownership relationship. If ownership interference is now the preferred method of “state protectionism”, its governance implications are then important to consider and assess.

Although the Guidelines on Corporate Governance of SOEs, currently under review by the OECD, define an international framework on how states oversee and govern companies in which they are full or partial owners, practices vary significantly. In fact, they vary much more in SOEs than in listed companies, where we can witness greater convergence of requirements on board independence, corporate disclosure, investor communications and other aspects.

While listed SOEs may have converging standards due to public disclosure requirements, non-listed SOE boards vary from those comprised of ministers to others with significant employee representation, to some that are fully executive. Each of these configurations carries its specific risks that needs to be addressed, splitting the role of the state as a shareholder and a regulator, but also as providers of critical infrastructure, services and employment.

The pendulum swings wide from some Nordic countries, where state-owned companies are subject to the same corporate governance code as private firms, to some African states where SOEs are exempted from national corporate law. In the best-case scenario, these latter countries have a specific SOE law which substitutes for the corporate law. While there are certainly merits for having a specific SOE law, its presence may create inconsistency in governance between private and public companies or even among the latter, if not applied uniformly.

From my experience drafting such laws, I believe they may not solve all fundamental challenges of state ownership. One of them is the rationale for government ownership which remains vague in most such pieces of legislation. The other is the definition of strategic assets that imply a different degree and mechanism of government intervention. More often than not, SOE laws do not specify governance mechanisms such as golden shares, share transfer approval mechanisms, or state endorsement of board or senior executives which may help states protect key companies and avoid random interventions.

In the case of Petrobras, the government replaced its CEO overnight, bypassing the company’s board. The consequence was negative not only for investors in the listed oil company, but for Brazil more generally. Interactions between governments and state companies need to be enshrined in a clear understanding between the ownership entity and SOE boards. Situations where the ownership arrangements lack clarity or where the board appointment process is not streamlined may lead to boards being either ineffective or bypassed altogether.

For this reason, it is critical that governments with important SOE portfolios develop a legal framework governing state-invested companies that does not solely focus on the SOE law but also on a rationale for ownership and specific criteria for strategic firms. Decisions on both require across-government coordination that can help states decide on privatisation or investment decisions, but also on governance parameters of strategic companies and the extent to which they can be customised to address risks to national sustainability.

In the world characterised by high state ownership activism and investment protectionism, notably around high tech, food and healthcare, the prerogatives and responsibilities of states as investors should be addressed and clarified, perhaps most of all, to themselves. Yet, only about half of the fifty countries last surveyed by the OECD had an ownership policy or equivalent. The majority of African, Latin American, and Middle Eastern countries that have an important SOE portfolio currently have no defined thinking on how to protect strategic assets until a specific situation arises. At that point, state shareholders often resort to governance instruments which may not have been codified, and can hence catch investors by surprise, as a mechanism of protectionism.

• This blog post represents the views of its authors, not the position of LSE Business Review or the London School of Economics.
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