Public, Family-Owned and State-Owned Companies: Which Are More Efficient?

Corporate governance theory distinguishes three types of companies:

1. Public companies

2. Private (family-owned) companies

3. State-owned companies

The more advanced a country is, the more public companies predominate.

A public company has many shareholders, none of whom dominates. It has transparent reporting and elected management, a kind of democratic system within a single corporation. Its goal is to maximize the value of the company and, with it, the value of its shareholders' stock.

Private (family-owned) companies are those with one or two large shareholders who fully control the company. Their goal is to maximize profit for the main shareholders. Capitalization is not always the primary objective. Such companies are fairly closed and not always transparent.

Management is appointed by the family or the main shareholder, and there is no guarantee that the shareholder will choose the most effective manager.

A state-owned company is one controlled by the state. Such companies pursue a variety of goals. Their managers are appointed by civil servants and, quite often, are drawn from among civil servants. In the long run, the performance of such corporations will always lag behind that of both public and private companies, because there are many conflicts of interest. Even where management is effective, the company's performance does not always depend on it.

In essence, a large number of public companies is a mark of a socially oriented state. Every society moves from private family-owned companies toward public companies with many shareholders. In developed countries, state-owned companies remain only in sectors where profit is not the main purpose of the business. Countries that emerged from communism have a longer road to travel: they move from state-owned companies to private ones, and only then to public ones.

Kazakhstan has a symbiosis of the state sector and private family-owned companies. There are essentially no public companies in the country, and they are unlikely to appear in the next 10 years.

Floating 10–20% of a company's shares on the Kazakhstan Stock Exchange (KASE) does not change the nature of the company, because that nature is determined by control.

Why, then, do public companies have an advantage over the others?

It is quite simple: their goal is to maximize the value of the company (not profit, but specifically the value of the company). A company's value depends on many factors, and profit is the main one, but not the dominant one.

In such a company, indicators of future profit also matter. They depend on the company's strategy and vision and, most importantly, on the trust that stakeholders place in the company.

For example, if a company maximizes profit in one year at the expense of future years, and does so behind closed doors, the market will not be able to value it at its maximum.

Consider the opposite case: a manager who presents a clear strategy, deliberately does not maximize current profit because it would damage that strategy, and operates with full transparency. The value of this company will be higher than in the first case, and such a manager is the more effective one.

Shareholders of public companies earn not from dividends but from the growth in the company's value. Naturally, the manager described above will suit them better than one who works only to maximize profit and his own bonuses.

Private companies run by a family act solely in their own interests. Often they maximize profit in closed companies or, if the business has no future, extract assets or most of the profit, to the detriment of creditors and other minority shareholders. Naturally, if the company is doing well, they will maximize profit within that company.

In state-owned companies, the main task is to carry out the state's instructions and strategy, which do not always correlate with the goals of a commercial organization.

Given that the top management of such companies is appointed by civil servants, these managers depend only on civil servants, whose own fate depends on more senior civil servants. In other words, stakeholders' influence on the fate of such managers is very indirect. Their efforts are therefore directed at satisfying a civil servant rather than the company's ultimate shareholders, the population.

We can talk as long as we like about how good or bad the managers in state-owned companies are, but performance does not depend entirely on them. Many of them are capable, intelligent people who achieve success locally in their own areas. But overall, such systems will still lose out in efficiency to public companies, which we do not have and will not have in the next 10 years. That is the reality of our country's level of development.

Now, on salaries at our main state-owned company, Samruk-Kazyna.

Salaries at Samruk-Kazyna are higher than those of civil servants, several times higher, and this is a drawback, since managers often depend on civil servants.

Yet these salaries are not that high compared with private companies, where top managers earn many times more than at Samruk-Kazyna.

But even in its current state, Samruk-Kazyna needs good, expensive talent; without it, Samruk-Kazyna would have died long ago. The questions everyone asks about whether Samruk-Kazyna is needed at all should not be put to its management but to its shareholder. All of Samruk-Kazyna's managers are hired managers and, naturally, they do their job.

Anyone who criticizes the management should criticize its effectiveness, not call into question matters that do not depend on it at all.

Bonuses are the best tool devised so far for motivating top management. And believe me, open bonuses are better than hidden theft.

I want to make clear from the outset that I am against having such a state giant as Samruk-Kazyna in its current form. But in the current situation, it is not possible simply to dissolve it. What is needed is a clear strategy for denationalization and privatization of state assets, and that is a question for Samruk-Kazyna's shareholders, not its management.

So in this situation, what is needed is more information on compensation compared with other private companies, and more openness about what exactly particular managers have achieved. We should judge their effectiveness, rather than call into question what does not depend on them.