At many major listed companies, the job of influencing politicians and joining industry-backed lobby groups is meat and drink to the IR manager’s colleagues in government relations. But what happens when government still controls a sizeable stake in a company? Is the relationship with the state akin to dancing with the devil? And does investor relations in a partially-privatized organization require a different set of skills?
Certainly it requires the IR practitioner’s full armory to be brought to bear. IROs need an acute sense of political awareness, remaining sensitive to the views – and often fears – of the public. After all, their company may in the future seek to please demanding investors to the detriment of public service.
While some companies claim their investor communications to the government are the same as for other shareholders, it could be argued that by its very nature the state enjoys privileged access to inside information unseen by other investors.
But as explained by Swisscom’s head of IR, Bart Morselt, this privilege can be counterbalanced by the IR team being responsive to the needs of other shareholders. ‘They do get to see information which comes to the board, and this is why I do not see the government’s representatives in my investor relations role because they have other connections to the company and are already in the inner sanctum,’ he explains.
The Swiss government still owns 65.5 percent of Swisscom, but is only free to dispose of another 15.5 percent of the company. Fact is, while the government’s board representatives may be distanced from the daily political grind of the Swiss parliament, they remain public servants subject to the will of the people.
Morselt adds: ‘It is a very difficult process in Switzerland because reducing the government stake to below 50 percent requires a change in the constitution and this would require a referendum. To change the law will be a lengthy process taking probably two years at least, and it could be a very difficult process.’
Increasing the free float and reducing the government stake is less a political debate than a public debate, Morselt continues.
‘It’s not only telecommunications that people are thinking about.
It’s public services in all areas – water, gas, electricity. There is currently a general public debate going on about where the state should have a majority stake and where it should not.’
Morselt, who also has experience with partially privatized companies in Holland and the Czech Republic, says it’s still a difficult emotional debate which is in the public rather than the political domain. ‘The political domain has put forward the proposal to reduce the stake, but public opinion will decide this matter in the end.’ This suggests that if the public does not support reducing the government’s stake, then vote-conscious politicians will listen.
Great Danes
In the mid-1990s Swisscom’s Danish counterpart, TDC (formerly Tele Danmark), had five government representatives on its board of twelve directors. The company’s IR team felt a need to counterbalance the privileged position enjoyed by the state.
IR manager Ole Soeberg explains that the relationship with the government was different from that with other shareholders. ‘There was no direct contact between the investor relations team and these government representatives,’ he says. ‘The board members had access to more information than other shareholders so the level of communication to them was different.’
‘That meant there was clearly a different set of working routines from those used for dealing with other institutional investors,’ he goes on. ‘But there was no clash of interest between the regulator and the government as a shareholder, because the former CEO at TDC had a high position in the government before becoming CEO of the company. He was able to ensure a smooth relationship between the government and the company.’
Soeberg cites a key example: When the government was a majority shareholder, its representatives on TDC’s board approved plans to cut the company’s workforce. This implies a pro-business mindset on the part of the government, he says. But it also proves there was significant state involvement in activities that directly affect the share price.
This arrangement is in stark contrast to a purported ‘hands-off’ arrangement at fellow telecommunications company, Telekom Austria. Spokesman Martin Bredl says the company is not owned directly by the Austrian government but through a state-owned Austrian holding company, OIAG, which oversees all partially government-owned companies.
There was a change of government during Telekom Austria’s sell-off, but all political groups supported the flotation. The plan was to float one third of OIAG’s 75 percent holding. In the event 22 percent was sold to investors.
‘The expertise of the OIAG has always been the same as any other shareholder – they understand the shares as much as any other institution,’ Bredl remarks. ‘Admittedly OIAG required the IPO to be carried out in a particular way. It was their program of communication and it was paid for by them. It was also the biggest flotation ever in Austria, so it was quite a big campaign, but there wasn’t any real difference from the IPO campaign of any private company.’
OIAG’s involvement is now centered on the supervisory board. It retains a 47 percent holding in Telekom Austria and the company’s supervisory board still oversees management, concerning itself with ‘high level strategic issues’ rather than with the day-to-day running of the company. The company does not need to consult the supervisory board at all before talking to shareholders.
Special delivery
A similar arrangement exists at Germany’s recently-floated Deutsche Post, where investor relations head Hans-Richard Schmitz claims there is no difference between the company’s communications with private shareholders, institutional shareholders or the people who represent the government’s stake.
‘We visit them and give them presentations and we invite them here to our analyst conferences,’ explains Schmitz. ‘That’s a legal obligation and you cannot differentiate between the various shareholder groups that you serve.’
But unlike Telekom Austria, Deutsche Post’s relationship is with the finance ministry, which has experience of previous privatizations including Deutsche Telekom and Lufthansa, Germany’s flagship airline.
‘The government made the rules for the price of the shares when we floated, although this involved more discussion between the banks and the government than with us,’ vouchsafes Schmitz. ‘They have also said they would like to see the company’s shares distributed to a wide range of investors in Germany as both a political and a social strategy – a good mix of retail shareholders and global institutions,’ he adds.
Schmitz denies that this tied the hands of the company’s IR practitioners and adds that a change of government did not affect plans for flotation and hence Deutsche Post’s investor relations activities.
‘The change in government came before we started our flotation. On the political side there was no difference in the parties’ privatization policies, conservative or socialist. I think their objectives are more driven by the need for money for the government than by any political issues.’
The political momentum in Germany is the driving force behind the unraveling of state ownership – a development Schmitz clearly feels will be unhindered by the see-saw of political debate.
Indeed, he can take heart from the experience of Petro Canada in North America, where a decade of privatization is now entering the final phase after a three-year moratorium on the sale of the Canadian government’s final 18 percent stake. Only one non-executive director now represents the government on the company’s board and the desire for full privatization has won cross-party support during the course of the past ten years.
‘When we became publicly traded [in 1991] and had a broader set of shareholders, not just the government, there was a greater focus on our performance against that of our peers, which was a very positive development,’ comments Gordon Ritchie, head of IR. ‘The final sale will be a government-dictated process. All they need do is work through the usual investment bankers and the equity markets. The question of share price will depend on whether they sell the shares on the open market or go through the investment community for a block deal. Either way it’s not for us to influence.’
Hands off
The ‘leave well alone’ stance appears common for most government representatives on company boards where sophisticated equity markets operate. But is this because they have less in-depth knowledge than an expert in a major financial institution?
In the UK, Hull-based Kingston Communications has two local government representatives on its board as non-executive directors but they are there in only an advisory capacity and – according to IR manager Anita Pace – ‘more or less leave the executive team to get on with running the company’.
‘They clearly aren’t as specialist as City analysts but they are very knowledgeable about the company because they have to be,’ Pace explains. ‘Our chief executive has a very good relationship with Hull City Council and has regular meetings with the authority. But I think he would do that irrespective of whether they were shareholders or not.’
However, it would be foolish and naive to conclude that all in the garden of government shareholding is rosy. Sometimes the very presence of state involvement can have a direct impact on share value. Investors may put a discount on any company that features heavy state ownership. But at newly-floated Norwegian oil group Statoil, head of IR Mari Thjomoe explains that the state is sensitive to shareholder value.
‘I think the government and energy ministry are very much aware that the way they treat their shareholding in Statoil is actually influencing the value of the company itself, since investors need to be assured that their interests will not be abused by the majority stakeholder. Investors need to be reassured about this. They need to feel secure about the way they are treated compared to the government,’ she says.
She goes on to explain how Statoil handles investor relations with the government: ‘We give the same information to the state as we give to other investors. They do not receive any information in advance or have access to confidential information. We do conduct one-on-ones with the state shareholder as we do with other major shareholders but it’s right and proper that the government shareholder should be treated just like all other investors.’
But with the ministry of petroleum and energy responsible for regulating the oil industry, surely the state could abuse its position of power as regulator and major investor to the detriment of minority shareholders? Not in Norway. While the ministry regulates the sector, government shareholdings are handled by a separate department – effectively creating Chinese Walls within the Norwegian government to ensure there are no conflicts of interest.
Thjomoe’s comments reveal how IR experience can help ensure that though some investors may believe that in dealing with the government they are dancing with the devil, these companies can avoid being pricked by the horns.
