Finnish state-owned company Solidium manages stakes in 11 listed companies, with a mission to be a strong, long-term owner in important Finnish companies. The company's CEO Antti Mäkinen (AM) spoke to Nordea's Johan Trocmé (JT) for the Nordea On Your Mind report, "The ideal owners," which explores the benefits and drawbacks of different corporate ownership structures.
Representing the state ownership model, Mäkinen describes Solidium's completely apolitical governance model focusing exclusively on corporate performance, as well as sustainability and transparency. He says there's a role to ﬁll to look after Finnish national interests in cases where there are no obvious replacements for ownership of its EUR 9bn portfolio.
JT: How would you briefly describe Solidium’s mission?
AM: Since the Second World War, Finland has had a number of big state-run companies, which started to be partially privatised and stock exchange listed in the 1990s.
Solidium was established in late 2008, among other things against the backdrop of Stora Enso announcing several plant closures with major job losses. The Finnish state owned roughly 12% of Stora Enso, and there was intense political discourse on the state's role as a shareholder, with some arguing that it should have tried to stop the plant closures. When the dust settled, the relevant minister at the time explored a solution for transferring the direct responsibility for exercising ownership influence in public companies from the government ministry to a dedicated, separate entity focused exclusively on this. It was thought that the establishment of such an entity with its own board and management team with a clear mission and mandate to operate quite independently would help to avoid confusion and distractions from political parties seeing opportunities to use state ownership in big companies as a policy tool for their individual political agendas.
Another argument for reviewing the governance of state ownership in public companies was to simplify the management of e.g. rights issues. Decision processes for whether or not to participate in rights issues could be very complicated. For example, when a listed company partly owned by the state was raising new equity in a rights issue, the state had to wait for conﬁrmation of the government budget, which was in turn dependent on a parliamentary vote. In the end, it took six months for the state to reach a decision to participate. This was not ideal for a company which needed new capital. Solidium, with its strong balance sheet and independent decision making, is able to commit to such transactions without lengthy public debate.
In the planning stage, it was decided that the stakes in listed Finnish companies where the state was a majority shareholder would not be included in Solidium's mission. The argument was that when the state had such a strong level of ownership influence, it would be unreasonable to try to isolate or distance it from the political agenda. Thus, in December 2008, a portfolio of some EUR 5bn comprising the state's listed minority stakes was transferred into Solidium.
JT: How do you operate as an owner?
AM: Solidium has a board with seven members, of which one is a civil servant and the other six are experienced business leaders. There are no politicians on the board. The government wrote a mandate letter to the board when Solidium's portfolio was established, and each new Finnish government since then has done the same. Each of the four mandates since the beginning have been broadly similar in nature, although each subsequent mandate has arguably had an even clearer commitment to sustainability. According to the mandate, we need to continuously evaluate the portfolio to ensure that it serves its purpose as outlined in our mission, and change it as we see ﬁt. And our portfolio has indeed changed. We have made several exits, and in my four years as CEO, we have invested in three new companies – Konecranes, Nokian Tyres and Nokia. As we are a long-term anchor owner, however, you should not expect us to have a very high turnover in our portfolio.
A core element of the mandate is to strengthen Finnish ownership in companies deemed to be of strong national interest, which is decided by factors such as employment, investments, and research and development, to name a few. In practice, this has meant a portfolio of stakes in big listed Finnish companies that do not have other strong major owners. The thinking is that big, listed companies can also beneﬁt greatly from having strong major owners who take responsibility and approach their ownership from a long-term perspective. Such owners would typically seek to actively influence the development of the company, rather than simply sell their shares if they have any reservations about governance or strategic direction. Nokian Tyres is a good illustration of a company that had what you could call an "ownership vacuum". When Bridgestone reduced its holding in the company from 18% at its peak to 3%, it was still the biggest owner. That is when Solidium stepped in, and we currently own 8.8%.
Regardless of what you might think of state ownership of companies, I think Solidium has a role to play given the scarcity of alternatives in Finland. We do have family owners and private investors in listed companies, but it is hard to see that they would have the capacity to ﬁll the void if Solidium's EUR 9bn portfolio did not exist. There are certainly companies which have thrived without having a major shareholder, their shares being widely held by institutional investors. A typical example of when the question of an anchor owner pops up is when private equity-owned companies are listed on the stock exchange. Investors are typically keen to know what, if any, owner will guide it in its new public life once the private equity sponsor has left the scene.
JT: Do you see any differences in how you exercise your influence as an owner, compared with, for example, private institutional owners? More or less formal engagement? More or less hands-on? How active is your ownership?
AM: Every owner, of course, has their own individual approach, but I think that on a general level differences in how we operate compared with other major owners are only minor. We have been in continuous dialogue with Industrivärden, co-owners with us in SSAB, and with the Swedish Wallenberg family's FAM, co-owners in Stora Enso, as well as with other family and institutional owners in Finland. We work in very similar ways.
One difference with Solidium being state-owned is that we are not particularly tax-driven. We do not need to be concerned with owning at least 10% of a company in order be exempt from tax on dividends received. Another difference is that many other private major owners have an explicit ambition to be the biggest owner or to have a decisive influence.
We are very clear that we are open to co-operating with other major shareholders, and we don't strive for control of companies we invest in per se. Some big owners typically aim for a more dominant ownership level of some 20%, and to appoint the chairman and maybe one other board member. With our investment team of seven people, it would not be reasonable for us to aim for such an active and ambitious level of control in the companies we invest in. So far, we have not considered ourselves to have the staffing or all the competencies to exercise ownership influence on such a basis.
Day-to-day, we work in similar ways to our peer owners, analysing the companies and their competitors and industries, and meeting with the companies at the CFO, CEO, Head of Sustainability and chairman level. When I joined Solidium, we did not have any board representation in our portfolio companies. We decided to seek this, and allow for it to take time in order to ﬁnd the right candidates for the boards. Being state-owned, we don't run any friends-and-family networks as some of our private peers do. We only nominate board members who are employed by Solidium or are members of Solidium's board, which means we have a limited pool of candidates for board representation.
I would say we are broadly similar to other major owners in our governance approach, but we are more active as an owner, not least through our gradually increasing board representation, than a typical institutional investor.
JT: Is your agenda as an owner affected by the fact that you are representing the state? Additional non-ﬁnancial targets or objectives? Level of ambition for sustainability?
AM: It is explicitly stated in Solidium's mandate that we do not have any political objectives or agenda. There is no other mission for us than working for our portfolio companies to perform well. At the beginning of our current mission, I think Solidium was a pioneer in championing sustainability issues, as our owner considered it a priority. But I would say that over the years, other institutional owners have caught up and now consider it similarly important. Differences in attitudes towards sustainability have narrowed, particularly in the past three to four years.
JT: Have you seen companies perceive speciﬁc beneﬁts or burdens from having a state owner? Security from ﬁnancial muscle? Even greater demands on transparency or accountability? Other factors?
AM: I don't think there are decisive beneﬁts from having a big state owner. The notable exception relates to solvency and ﬁnancial strength. I have been told that during the global ﬁnancial crisis of 2008-09 – before my time at Solidium – eight out of ten of our portfolio companies at the time asked us if we would participate if they needed to carry out a rights issue to raise new equity. In the end, this was not necessary. It does state in our mandate that we should fulﬁl our obligations in capital raisings, provided that it is justiﬁed and makes economic sense. In good times, this may not make much difference, but in difficult times a state owner can be one of few players with the capacity to provide new capital.
I would say it is generally the case that an owner who is "too poor" is not a very good owner. I have seen situations when I was in banking earlier in my career when companies with a major owner were in practice "forbidden" from using new equity to fund acquisitions, as the major owner was not able to invest or was unwilling to dilute its ownership. This is not a good situation for a company needing investment to grow, either organically or through acquisitions. In this sense, it can be an advantage to have a major owner with great ﬁnancial muscle, whether it is a state owner or another entity. We have required companies to account for how much tax they pay in different geographies, for example, but in recent years I would say it has become the norm for large listed companies to report this, so again other owners have caught up. But more generally, I think our demands and expectations today are similar to those of other institutional owners.
JT: Do you think there are industries or types of companies which could beneﬁt particularly from having a state owner?
AM: I don't think there is any compelling argument for state ownership in large companies as such. Looking at Solidium's portfolio companies and their development over time, I think they could have fared equally well with other Finnish private ownership. But there is certainly a value for society in the fact that we are a professional, long-term owner. If we were not there, some or all of the companies could end up with foreign owners instead. This could, of course, be ﬁne, such as in the case of Wärtsilä, where the Finnish Ehrnrooth family was replaced as main owner by the Swedish Wallenberg family's Investor AB, which operates with a similar long-term perspective and approach.
I think much is lost when a company is taken over by foreign interests and sees its group headquarters move abroad. There may be plenty of operations and jobs left in the original home country, but the intellectual and strategic activity tends to move to where the headquarters are. And that is where knowledge and the lawyers, accountants, advertising executives, consultants and other similar high-quality jobs will go too.