State Ownership and Corporate Governance Empirical Evidence from Norway and Sweden by Stine Ludvigsen A dissertation submitted to BI Norwegian School of Management for the degree of PhD Series of Dissertations 3/2010 BI Norwegian School of Management Department of Public Governance Stine Ludvigsen State Ownership and Corporate Governance: Empirical Evidence from Norway and Sweden © Stine Ludvigsen 2010 Series of Dissertations 3/2010 ISBN: 978 82 7042 955 4 ISSN: 1502-2099 BI Norwegian School of Management N-0442 Oslo Phone: +47 4641 0000 www.bi.no Printing: Nordberg The dissertation may be ordered from our website www.bi.no (Research – Research Publications) 1 Acknowledgements In the process of writing this thesis, many people have provided me with invaluable help and support. First of all, I would like to express my greatest gratitude to my supervisor Dag Morten Dalen. Thanks for taking on the role as my supervisor in 2004, for generously giving of your time to provide me with in depth and constructive comments, and in particular for keeping me on track during the last year of the thesis work. Just as much as I value your great academic skills, I also appreciate you have been a most sympathetic discussion partner. I am also very grateful to my co-supervisor Nick Sitter who has invested major time and effort in my thesis – by regularly reading through and discussing with me numerous drafts, providing suggestions for improvements, and organising an exclusive “reading course” on the topic of political economy. Besides being an extraordinary talented researcher you have also provided me with great encouragement and friendship. A special thank also goes to the chairman of the doctoral committee, Øyvind Bøhren, for providing me with constructive comments during my Proposal Defence and for serving as an exemplary academic role model. I would also like to thank Terje P. Hagen and Kaare Strøm for investing their time and effort to serve as committee members. Terje also provided me with useful comments during my Proposal Defence. Throughout my years as a doctoral student at the Department of Public Governance I have been fortunate to become colleague and friend with some great people. A warm thanks to Ellen A. Jacobsen who has provided me with excellent administrative support, but even more important with continued encouragement and so much fun – you are really something special! I am also deeply indebted to Mona K. (“Maggie”) Solvoll, Catherine B. Arnesen and Helene Hoggen who have provided me with great friendship, invaluable support as well as with extensive academic and non-academic input. Thanks to Anne Flagstad, my trusted conversation partner, with whom for many years I shared both office and research interests. Thanks to Lars C. Monkerud for answering endless questions about panel data methods and for many nice lunches. Thanks to Caroline Dale Ditlev-Simonsen for your hospitality and great care about your colleagues. I would also like to thank the Inspirea girls at the Department of Strategy and Logistics (Birgitte Grøgaard, Tale Skjølsvik and Helene Colman) for lots of constructive discussions and enjoyable lunches/dinners. i I would like to thank Rune J. Sørensen, Leif Helland, Kåre Hagen and Kjell Eliassen for their useful comments on an earlier version of the chapter on executive compensation. I would also like to thank Gerson Komissar for showing a continued interest for and belief in my work. Thanks also go to Ulf H. Olsson for discussing econometric issues with me (even at football matches); to Randi Lunnan for your support and input on an early stage of the thesis process; to Lars Thue for greatly sharing your sector knowledge with me; to Johan From for encouraging me to embark on the “PhD-road”; and to Bjørn Eriksen for generously helping me out on issues of employment conditions. Thanks to Trond Fevolden (Secretary General of the Norwegian Ministry of Education and Research) for your kind help in identifying and classifying Norwegian state-owned companies. I also appreciate the research assistance of Vilde G. Larsen in collecting board member data and the assistance of Torill Eide in preparing the manuscript for printing. For financial support of the thesis I am grateful to both Telenor and the BI Norwegian School of Management. Finally, thanks to my family and friends for continued love and support. I am privileged to have such good friends as Mone, Hilde, Bente, Ingunn and Tina who provide me with so much laughter and fun. Thanks to my parents and to Ellen and Morten for their unlimited support and assistance on all personal matters. My warmest thanks to Brede who has not only been patient with me throughout the processes of working with my first master thesis, my second master thesis, and my doctoral thesis, but who has also provided me with great encouragement and wonderful food! Last, but not least, thanks to our daughter Oda who, since she was born two years ago, has greatly enriched our lives. May, 2010 Stine Ludvigsen ii Abstract Since the late 1990s, the corporate governance of state-owned companies (SOCs) has moved to the forefront of the political agenda in several Western European countries and elsewhere. Triggered by large corporate scandals, international corporate governance developments, and the recurring criticism of state ownership administration, we have seen political attempts to cope with issues of firm monitoring and control. Among the governance issues which have received the most attention are board appointments (who should serve as chairmen of SOC boards?), chief executive compensation contracts (how much should top managers be paid, and should incentive schemes be included in the compensation contracts?), and dividend payments (how much dividends should be extracted from SOCs?). In this thesis, I offer a comprehensive treatment of these issues insofar as I provide both thorough descriptive accounts and rigorous statistical analyses of the factors which might explain governance decisions. The empirical investigation draws on data from a broad sample of SOCs in the two Scandinavian countries of Norway and Sweden over the period 2000-2005. From a theoretical perspective, the question of what happens to governance decisions in the case of state ownership relates to the motivation of key decision-makers (i.e., incumbent politicians and corporate directors). Probing the political economics and corporate governance literatures on this very issue, the thesis distinguishes between three models of government- owner motivation: Politicians care about creating a favourable reputation as professional representatives of shareholder welfare (reputation motive); maintaining their popularity among voters so as to keep their positions (re- election motive); or implementing their preferred party-policy (ideology motive). In a similar vein, corporate directors care about their reputation as competent representatives of the shareholder electorate (reputation motive), but also their prospects of being re-elected to current board seats (re-election motive). Moreover, I add to these models some institutional features and firm characteristics, which makes for a more realistic picture of governance decision-making. While, in the area of SOC board appointments, theoretical ideas and actual practice seem in fact disassociated, the empirical results suggest that the governance models framing the explanation of CEO compensation contracts and dividend payments capture important aspects of reality. Indeed, the empirical findings provide support for both the reputation and the re-election model. In all three studies, the results are also sensitive to the institutional system and national context within which SOCs operate. The results have iii important implications for public policy and practice insofar as the scope for political influence seems to produce governance decisions which are possibly not conducive to efficiency. iv Table of Contents Chapter 1 Introduction ............................................................................................ 1 1.1 The Broad Plan of the Thesis................................................................................ 3 1.2 Contributions to Research .................................................................................... 5 1.3 Theoretical Foundations ....................................................................................... 8 1.3.1 Why do we need corporate governance? ................................................ 10 1.3.2 Which governance mechanisms? ........................................................... 13 1.3.3 What motivates politicians? ................................................................... 15 1.3.4 Some final remarks on the notion of self-interests ................................. 17 1.4 What is a State-owned Company? ...................................................................... 17 1.5 A Comment on Omitted Variables ..................................................................... 19 1.6 The Structure of the Thesis ................................................................................. 20 Chapter 2 What Motivates Politicians and Corporate Directors to Engage in Corporate Governance? ......................................................................................... 22 2.1 The Motivational Concerns of Politicians .......................................................... 23 2.1.1 The reputation model ............................................................................. 24 2.1.2