State Ownership and Corporate Governance

In the paper State Ownership and Corporate Governance, which was recently made publicly available on SSRN, I explore the role of the state as shareholder in the political economy of corporate governance. Although atypical in the United States, state ownership of listed companies is pervasive and growing elsewhere in the world. According to a recent survey, state-owned enterprises are now responsible for approximately one-fifth of global stock market value, which is more than two times the level observed just one decade ago.

There is a large literature exploring the potential inefficiencies of state control of enterprise, and a growing literature on the ways in which the law, and in particular corporate law, might be structured to limit those inefficiencies. In this paper, I look at the other side of the problem: what is the effect of state ownership on the structure of corporation and capital markets law, not just as it applies to state-controlled firms but as it applies in general to firms that are entirely privately owned? The latter issue is arguably as important as, or even more important than, the problem of controlling the inefficiencies of state ownership, but it has been almost entirely neglected.

Drawing from historical experiments with government ownership in the United States, Brazil, China, and Europe, this study shows that the conflict of interest stemming from the state’s dual role as shareholder and regulator can influence the content of corporate laws to the detriment of outside investor protection and efficiency. I posit that this mechanism may account for an overlooked channel for reverse causation in the relationship between legal investor protection and ownership structure: while a deficient legal regime and underdeveloped capital markets may prompt the state to assume an entrepreneurial function, the political role of the state as controlling shareholder may, in turn, hinder the development of an effective investor protection regime as a precondition for further financial development.

Finally, I explore the promise of different institutional arrangements – ranging from ranging from different ownership structures to dual regulatory systems – to mitigate the state’s interest in the design and enforcement of corporate law rules applicable to private firms. In particular, I suggest that, by ignoring the state’s conflicts of interest inherent in its dual role as shareholder and regulator, the conventional wisdom has likely overestimated the aggregate benefits of a unitary corporate law regime for both state-owned and private firms.

The full paper is available for download here.