In Strange Company: The Puzzle of Private Investment in State-Controlled Firms

The following post comes to us from Professor Mariana Pargendler of the Fundação Getulio Vargas School of Law at São Paulo, Brazil.  

Despite prior waves of privatization, state-owned enterprises (SOEs) remain a fixture of the variety of capitalism embraced by Brazil, Russia, India, and China as well as other emerging and developed economies. The state, however, is too often not alone in the companies it controls. Minority shareholdings in government-controlled firms are pervasive around the globe, and have been on the rise in a number of jurisdictions. As of 2010, publicly traded SOEs accounted for a startling one-fifth of the world market capitalization.

The coexistence of government and private stockholdings in business corporations is puzzling, and has long baffled observers. The potential for conflicts of interest between private and government shareholders is evident: while private investors presumably seek to maximize the financial returns on their stock, the government also has political objectives to fulfill – be they either benign (serving the public good) or malign (the product of rent-seeking). Yet, defying predictions, this strange combination of state and private capital has not only persisted but has also appeared to thrive.

Instead of expressing surprise at the resilience of these hybrid entities or criticizing governmental involvement in what could be private firms, as does most of the literature, my paper, co-authored with Aldo Musacchio and Sergio G. Lazzarini, In Strange Company: The Puzzle of Private Investment in State-Controlled Firms examines legal and extralegal factors that induce private investors to partner up with the government as the majority shareholder. We show that the viability of listed SOEs depends on a hybrid governance structure that combines elements of private ownership with public checks-and-balances against uncertain governmental interference. This is a delicate equilibrium to obtain – and one not without challenges, as government intervention persists as the biggest threat to private minority shareholders in these firms. We explore the promise and perils of this approach by looking at the recent experience of a sample of national oil companies (NOCs): Brazil’s Petrobras, Norway’s Statoil, and Mexico’s Pemex.

The full paper, which was recently made publicly available on SSRN, can be found here.