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 / Spring 2010 / Issue 58(originally published by Booz & Company)


Welcome, “Stateholder”

As stateholders acquire governance expertise, they will (and should) seek out new ways of sharing knowledge without violating corporate confidentiality. Boards and executives will also find new forums for discussing governance. One excellent model is the Canadian Coalition for Good Governance. It was formed to promote good governance practices in the companies owned by its members, which include a wide range of institutional investors — pension funds, mutual funds, and third-party money managers.

3. Enforce transparency. Secrecy is a tradition dear to the financial-services industry and most of the corporate world. It will take vigilance to prevent stateholders from embracing it as well.

Why is transparency necessary? Where there is no broad awareness of the priorities and practices of government-owned corporations, stateholders will be vulnerable to lobbyists and predators. Indeed, dominant shareholders have often used their power at the expense of minority stakeholders. The public desires information and accountability. As shown by the initial debate in the U.S. on the crisis and on the Troubled Asset Relief Program (TARP), a small group of people at the top of a company or even at the top of government can no longer make critical decisions by themselves. Extensive, honest communication (not “spin”) is required: The stateholder can act much more freely in this regard, with a greater accountability to the public.

For example, if stateholders plan to sell a company, they should make explicit the rationale, conditions, and expectations for the sale, and then leave open the date and the corporate acquirer. If the government’s desire to sell becomes known in advance, the sale could be executed in a way that avoids unhealthy stress on the organization. Sufficient time must be taken for the best match to be found, and the appropriate acquirer may not necessarily be the highest bidder.

There are many examples of what not to do. The takeover by the Belgian government of Fortis Bank in October 2008, and the decrease in shareholder value, led to months of legal disputes and ambiguity. The TNK–BP joint venture, founded in 2003, appears to have been a play by three Russian shareholders to eliminate their BP partner with the (silent) consent of the Russian government. The onerous controls implemented by Swissair on airlines it acquired in the 1990s (Air Liberté, AOM, and Sabena) represented an abuse of minority shareholders that ought to have been identified earlier and stopped.

These examples suggest that interventions by the stateholder should be governed by a neutral body — not governed directly by ministers or officials who are political appointees. In that sense, supervisory authorities must have total independence and should function more like a central bank than a government department.

4. Choose board members carefully. Stateholders will need to select competent and experienced board representatives for the companies they own. Because not all shareholder-selected board members add value, one can assume that not all government appointees will necessarily do so — at least not without better training, selection, and oversight. Opportunities for conflicts of interest abound in a context where ambiguity is pervasive and where feedback takes a long time to arrive and is difficult to evaluate. Yet training may be hard to come by, because compared to management training, governance training is still in its infancy — if not in gestation.

There is now a great opportunity for experienced and professional bankers to volunteer to represent the stateholder stake. Such sufficiently independent government representatives would truly take a long-term view in rebuilding former or still-great institutions. To find them and provide a structure for them, governments should call upon civil society, giving some institutions (like the previously mentioned Canadian Coalition for Good Governance) a clear mandate and a healthy dose of independence to help take on the task.

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