By Mikko Rajavuori, University of Turku
The Organisation for Economic Co-operation and Development (OECD) is currently revising its Guidelines on Corporate Governance of State-Owned Enterprises (SOE Guidelines). Originally issued in 2005, the SOE Guidelines have emerged as one of the OECD’s most successful instruments, as governments around the world have modified their ownership practices to minimise the adverse effects of state ownership on competitive markets through improved corporate governance.
Approaching their ten-year mark, the SOE Guidelines are more relevant than ever. Marked by a rise of globally orientated state ownership, the ways in which states own companies has emerged as a crucial issue across political, economic and legal planes. This blog post discusses the recently circulated draft version of the new SOE Guidelines in the context of surging “state capitalism,” as the development is often dubbed. Additionally, it seeks to draw attention to the omission of human rights considerations from the revision process.
The original SOE Guidelines sought to provide governments with an international benchmark to assess and improve the way they exercise control over state-owned companies. Building on decades of academic discussions and varying policy prescriptions, the SOE Guidelines were devised to ensure a level-playing field between state-owned and private companies in the market. In short, the SOE Guidelines offered practical guidance to find the proper scope of state ownership in the economy in general and the proper balance between active use of ownership rights and undue political interference in particular.
For the most part, the SOE Guidelines have been a great success. Many OECD member countries have modified their ownership policies through means including centralising ownership function, enhancing transparency, and ensuring more independence for SOE boards. In general, corporate governance of state-owned companies has sharpened and OECD member-state governments are more careful in balancing ownership and regulatory functions. Building on the original instrument’s success, the on-going revision process seeks to continue on the same track.
But the world is not same in 2015 as it was in 2005. When the original SOE Guidelines were issued, state ownership was still approached in a register dominated by accelerating privatisation and shrinking public ownership. In ten years, the economic realities underpinning these policies have changed. Emerging economies such as China, Brazil, and India rely heavily on internationalising state-led investment, as indicated by the rise of sovereign wealth funds, the aggressive foreign direct investment (FDI) by national champions, and the surge in state-orchestrated development banking. However, the re-emergence of state shareholders has not been limited to the global South. Instead, the bailouts following the Global Financial Crisis have brought back, for longer or shorter periods, the heavy-handed intervention also in the US and Europe. According to recent estimates, nearly 20% of the world’s top 100, and over 10% of the top 2000, publicly traded multi-national corporations are partially state-owned. Their combined FDI amounts to roughly 11% of global FDI flows and they command more than $2 trillion in foreign assets. In short, global economic conditions featuring state ownership of internationally operating companies have changed dramatically in ten years.
In many cases, the empowerment of state shareholders in global markets has prompted unease. The EU Commission has struggled with Chinese state-owned enterprises in its merger control policy. The WTO has had similar problems with the Chinese state-owned sector. Various national FDI review mechanisms have been erected to screen SOE investment on the basis of national security. State-owned companies have featured regularly in investment treaty arbitration.
The above examples suggest that the rise of “state capitalism” and the growing economic weight of state shareholders are regulated in myriad ways. As prime examples of these efforts, both the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) treaty negotiations tackle the issue prominently. Illuminating in its comprehensive take on state ownership, the EU’s stance “for including SOE-related disciplines in the TTIP is to develop a joint platform of rules which could be used in other agreements/forums to address concerns raised by the development of state capitalism.” State shareholders are increasingly facing a flurry of checks in the ways they own companies.
At the same time, however, the regulatory rationales displayed by the various legal regimes seem to be missing one key element: international human rights law. As state shareholder power grows and globalises, so does its relevance to the realisation of human rights around the world. State shareholders command enormous power over companies operating globally but so far the transformative potential of this influence has not attracted attention beyond limited corporate social responsibility-influenced initiatives. The new draft of the revised SOE Guidelines is a telling example. The instrument’s primary response to the broad implications and societal impacts of state ownership is framed in terms of “internal ethics” imposed on SOEs. By omitting a detailed discussion of the state’s role as an owner with distinct obligations flowing from the international human rights treaties, the new draft SOE Guidelines sever the state’s human rights function from its ownership function.
Contrary to the approach of the OECD, state ownership as a human rights-sensitive governance space is being increasingly realised by individual governments, civil society actors, and other international organizations. Take, for example, the case of the UN’s successful Guiding Principles on Business and Human Rights (GPs), which have already been integrated with the OECD’s other instruments dealing with the conduct of multinational enterprises and export credit.. The GPs are explicit in positioning human rights-sensitive ownership policy as a state obligation and not a company-level responsibility spread over a number of state-owned entities. Since their endorsement, the approach of the GPs has been picked up by a variety of the UN human rights treaty bodies.
Similarly, the human rights-sensitive investment activity by the Norwegian Government Pension Fund Global, or even the Chinese guidelines on SOEs’ fulfilling corporate social responsibilities reflect growing interest in the social potential of state ownership. In this vision, state shareholders, akin to shareholder activists, are seen to have the tools to push for more “social corporate law”. Understanding “state shareholder activism” in terms of obligations flowing from international human rights system has the ability to stabilize and legitimize this form of human rights governance.
A widely used international benchmark, the OECD’s new SOE Guidelines will constitute an integral part of the emerging regulatory framework, as witnessed by the EU’s attempts to include the instrument in the TTIP in order to ensure that SOEs “shall observe high standards of transparency and corporate governance.” In their current form, the draft SOE Guidelines fail to promote the demands on states acting as corporate owners that arise from the international human rights system. As such, they continue to miss an opportunity to use the transformative market power that states are increasingly carving for themselves in the global economy.
 For a brief introduction, see e.g. Ian Thynne, ‘Ownership as an Instrument of Policy and Understanding in the Public Sphere: Trends and Research Agenda’ (2011) 32 Policy Studies 183.
 See e.g. Aldo Musacchio and Sergio Lazzarini, Reinventing State Capitalism. Leviathan in Business, Brazil and Beyond (Harvard University Press 2014).
 For a recent review, see Alvaro Cuervo-Cazurra and others, ‘Governments as Owners: State-Owned Multinational Companies’ (2014) 45 Journal of International Business Studies 919.
 See e.g. Angela Huyue Zhang, ‘The Single-Entity Theory: An Antitrust Time Bomb For Chinese State-Owned Enterprises?’ (2012) 8 Journal of Competition Law and Economics 805.
 See e.g. Ming Du, ‘China’s State Capitalism and World Trade Law’ (2014) 63 International and Comparative Law Quarterly 409.
 See e.g. Mark Clodfelter and Francesca Guerrero, ‘National Security and Foreign Government Ownership Restrictions on Foreign Investment: Predictability for Investors at the National Level’ in Karl Sauvant, Lisa Sachs and Wouter Schmit Jongbloed (eds), Sovereign Investment: Concerns and Policy Reactions (Oxford University Press 2012).
 Albert Badia, Piercing the Veil of State Enterprises in International Arbitration (Wolters Kluwer 2014).
 See also the comments made by Institute of Business and Human Rights and Trade Union Advisory Committee to the OECD in OECD, ‘Public Consultation on the Revision of the Guidelines on Corporate Governance of State-Owned Enterprises’ (2014).
 The draft version of the SOE Guidelines refers to the GPs but fails to integrate them fully into the ownership function.
 See e.g. CRC, ‘General Comment 16, State Obligations Regarding the Impact of the Business Sector on Children’s Rights. UN Doc. CRC/C/GC/16.’ (2013).
 See e.g. Larry Catá Backer, ‘Sovereign Investing and Markets-Based Transnational Rule of Law Building: The Norwegian Sovereign Wealth Fund in Global Markets’ (2013) 29 American University International Law Review 1.
 For traditional critique, see Joseph Heath and Wayne Norman, ‘Stakeholder Theory, Corporate Governance and Public Management: What Can the History of State-Run Enterprises Teach Us in the Post-Enron Era?’ (2004) 53 Journal of Business Ethics 247.
 For discussion, see Peter Muchlinski, ‘The Changing Face of Transnational Business Governance: Private Corporate Law Liability and Accountability of Transnational Groups in a Post-Financial Crisis World’ (2011) 18 Indiana Journal of Global Legal Studies 665.