The pandemic could see the State reintroduced into the economy in a major way. The British State is likely be taking stakes in entities across the economy resurrecting a role it hasn’t played in some time. Though perhaps not the preferred option, a number of rescue schemes could ultimately result in the Government taking stakes in firms as a last resort.
Through Project Birch, a HM Treasury devised last resort bailout plan, the Government could take equity stakes in firms deemed to be strategically important to the economy at large. Aviation, aerospace and steel firms are believed to be involved in discussions with HM Treasury about the Scheme.
Through the Future Fund too, a scheme devised by the British Business Bank intended to extend loans to innovative firms, the State could end up with meaningful stakes in a broad portfolio of businesses. The fund distributes cash through convertible loan notes — loans that convert into shares if the business is unable to pay back. Just under 600 loans with a combined value of around £600m have been approved. Some including the financial services trade body TheCityUK have suggested that Bounce Back Loans extended to smaller firms could also ultimately be converted into equity stakes if debt is deemed to be unsustainable.
Given these developments and over three decades on from the mass privatisations of the 1980s and ‘90s, the question of how the Government should act as a shareholder is now firmly back on the agenda. While the mass privatisations of the Thatcher and Major years are now some way in the past, the crisis of 2008 did of course see that State temporarily revive a larger role in the economy.
The Global Financial Crisis saw the Government take on significant stakes in Lloyds and RBS through UK Financial Investments. UK Government Investments, UKFI’s successor, is far from insignificant holding a core portfolio of 16 entities that employ over 50,000 people, generate around £7 billion of income and manage gross assets of almost £155 billion. Entities partially or wholly owned by UKGI include the Land Registry, the Royal Mint, the Post Office and the renamed NatWest Group.
The underlying principle which ought to guide any intervention is proper insultation between State functions; the State must obviously ensure a clear separation between its ownership function and other functions that may influence the conditions for State-owned enterprises, particularly with regard to market regulation.
The OECD published a highly influential set of governance principles for State Owned Enterprises or SOEs in 2005 which were updated in 2015. The OECD principles address two key aspects of SOE governance: the organisation of the shareholding function within the state administration and the characteristics of SOE boards of directors. The OECD principles have been applied in different ways in different countries.
The UK does not necessarily provide the most significant example of how to govern state-owned enterprises – due to the relatively small size of the SOE sector in the UK economy and a high degree of consensus amongst UK policy makers concerning the undesirability of retaining significant enterprises in public ownership unless absolutely essential.
Nonetheless, the UK has over the last decade or so been relatively successful in ensuring SOE governance at arms' length from large scale political interference, particularly at the operational level, and in ensuring that boards of directors of SOEs are broadly equivalent in terms of their competence and independence to those of their private sector counterparts. In the aftermath of the pandemic, it must continue to do so.
Carum Basra is the IoD's Corporate Governance Policy Adviser