Since 2008, the world’s governments have injected an unprecedented amount of capital into what used to be known as the private economy. The United States and United Kingdom have led the way, but the governments of many other countries have moved into similarly uncharted waters, taking huge equity stakes and purchasing warrants and senior debt positions in financial institutions and corporations. To be sure, bailouts for such companies as AIG, Northern Rock, General Motors, and Fortis Bank were necessary evils. They protected both financial and nonfinancial industries, as well as the wider public, from the excessive negative aftershocks that would have occurred if the failed organizations had simply gone bankrupt.
But what now? Unlike sovereign wealth funds, which make long-term commitments in many of their investments, governments have made only temporary investments, according to government officials. Nonetheless, although some banks are beginning to repay their investments, government ownership will continue for many companies, if only because it will be difficult to sell the shares at attractive prices. The global economy must first recover, and that won’t happen before mid-2010. The ways in which governments assume their novel responsibility will remain at center stage; they could have a significant effect on the quality and speed of the recovery itself.
To many capitalists, the prospect of “governments running companies” instantly generates visions of socialism. They regard this phenomenon as a de facto nationalization and fear a general turn toward protectionism and more government interference in free markets. But it is more accurate to think of this new wave of government intervention as heralding a new kind of stakeholder in corporate governance.
So welcome, “stateholder.” You have means you did not have before to reform corporate governance and bring this function to a new standard. You will be with us for some time, and you may as well learn to do your job effectively.
Questions remain unanswered about whether public monies are and will be wisely invested and spent, whether stateholders will act differently in their board member role than private individuals or institutional shareholders do, how financial performance will be affected, whether these companies will emerge stronger or weaker, and whether such companies will be equipped to operate effectively or constrained by a heritage of bureaucratic shackles.
Unfortunately, the track records of most state-run, state-owned, and state-supervised institutions — such as Sallie Mae and Amtrak in the U.S., British Leyland in the U.K., Sabena in Belgium, and Alitalia in Italy — have not been very good. These companies have failed in the public eye and have also failed to achieve any nonsubjective economic or effectiveness benchmark.
Fortunately, counterexamples exist. They include major French utility Électricité de France, former national airlines Air France and Lufthansa, and Chrysler after its U.S. government rescue in 1979. These examples demonstrate that government stateholders can perform well in their shareholding functions if they have a clear purpose and execute their responsibilities well.
The large sovereign wealth funds of China, Singapore, and the Gulf states may provide another positive example. Sovereign funds do not have the same short time horizon that other stateholders face because they have not been “forced” to become rescuers of last resort. But they face the same duality of public–private interests, and finding the right balance is still daunting.
Although this new global experiment of stateholding is still in its early stages, four simple guidelines ought to steer the behavior of stateholders. Getting those four elements right will contribute to making the challenge surmountable. Getting them wrong will further erode public trust in both business and political leadership.
1. Commit to systemic governance. The root cause of the financial crisis was not a flaw of capitalism. It was a failure of governance — not just by corporate leaders, but by corporate boards and regulators as well. Former Federal Reserve chairman Alan Greenspan admitted as much in October 2008, when he testified to a U.S. congressional committee that his major mistake was “in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.”