Jack Mintz: Government and business make bad corporate bedfellows

Prime Minister Mark Carney speaks to reporters in Ottawa on Aug. 7. (Credit: Spencer Colby/The Canadian Press files)

The Trump administration has raised eyebrows with reports it’s negotiating a 10 per cent stake in money-losing chipmaker Intel in return for funding provided under the 2022 Chips Act. This is not the only example of Donald Trump lurching into state capitalism. He has also commandeered a “golden share” in Nippon’s acquisition of U.S. Steel that allows him to veto the company’s U.S. production and investment transactions and even obtain majority membership on U.S. Steel’s board.

These interventions raise eyebrows for a good reason. Governments and businesses make bad bedfellows. It’s one thing to subsidize a company and append social requirements, as the Biden administration did with the Inflation Reduction and Chips Acts. It is quite another to become the owner of a public-private mixed enterprise with control over every decision the company makes.

Arguments in favour of mixed enterprises are specious at best. As the OECD notes in a report on improving the performance of state enterprises: “The presence of outside shareholders can have a disciplining effect, reinforcing board independence, increasing transparency and disclosure and controlling the level of State influence in company operations, while driving performance through a more increased focus on maximizing shareholder value.”

The problem with this argument is that the state-owned enterprise’s inadequate financial performance is put onto the backs of private investors who do not have full control of the company’s decisions. These same crude arguments were made more than half a century ago when mixed enterprises became the craze in Europe and Canada, supposedly to improve the performance of state-owned enterprises. In fact, it was the topic of my PhD thesis in 1978. I argued that “agency costs” — the cost of imperfectly controlling managers by shareholders — lead to mixed enterprises typically performing less well than private companies.

Mixed enterprise is inherently unstable. Governments and private investors have quite different objectives for a company. Private investors are interested in maximizing share value. Sure, arguments have been made that companies should adopt non-profit objectives under ESG and Corporate Social Responsibility but, ultimately, the investor wants a company to make money, not lose it. The mixed enterprises created in the 1970s disappeared in the Thatcher-Reagan revolution for good reason.

Intel lost US$18.8 billion last year and US$3.8 billion during the first six months of this year. It can only survive with government funding, including the original $8.5 billion in grants and $11 billion in low-cost loans from the Biden administration. If the current administration becomes a co-owner, it will likely shrink from tough decisions like laying off workers or closing down plants. Instead, Washington will be pressured to provide even more subsidies.

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State capitalism is more popular in Europe and Asia but does no better than it would in the U.S. The windmill-maker Ørsted is 50.1 per cent owned by the Danish government. It shifted from oil and gas production to windmill construction by selling stakes in old projects to fund new ones. But when interest rates and other costs soared it found new projects could no longer be funded and its share price has fallen 85 per cent since peaking in 2021. It recently sought new funding from shareholders but they balked given uncertainty over the large windmill project off the New York coast. There is another lesson here. After pushing green energy, the Danish government finds it will need to provide more financial support. Mixed enterprises have a way of becoming government enterprises in the end.

These days most mixed enterprise is found in China. Many state-owned companies, such as battery manufacturer CATL and China’s oil company, CNOOC, have subsidiaries listed on the Hong Kong and New York stock exchanges. A recent study concludes that, given the heavy state control of China’s economy, mixed ownership helped some companies but hurt others in terms of investment efficiency. But China’s experience is exceptional since it professes to be “a socialist market economy,” as Jiang Zemin termed it in 1992.

Canada has had a large number of mixed enterprises, including Suncor, Cameco, Potash Corporation of Saskatchewan and the Canada Development Corporation. Between 1985 and 1995, most of these enterprises were sold off to the private sector. The Saskatchewan government did maintain a golden share in Potash Corporation, however, which it used to block BHP’s 2010 takeover attempt. That was no benefit to shareholders, who were unable to sell their shares in a company that lost value over the next few years. Still under Saskatchewan’s protection, Nutrien, as it is known today, has been a good but not stellar company with its share price rising by only a fifth over the past seven and a half years.

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Let’s hope that in its effort to build, baby, build, the Carney government does not resort to the new forms of state capitalism that now even the United States is dallying with. Government getting into bed with the private sector won’t do anything for Canada’s lagging growth.