The amount of government capital injected into the so-called private economy since mid-2008 is unprecedented. The United States and United Kingdom led the way, but many other countries drifted into the same uncharted waters. So now what?
To many capitalists, the prospect of governments running companies instantly generates horrifying visions of nationalisation and interference in free markets. Indeed, the track records of many state-run institutions -- such as Sallie Mae and Amtrak in the US, British Leyland in the UK, Sabena in Belgium and Alitalia in Italy -- have not been great. Fortunately, some remarkable counter-examples exist: the former national airlines Air France and Lufthansa have survived the EU directive of competitive skies and attest that governments can, with a clear purpose, perform well as shareholders.
Thus, we see the recent spate of government intervention as heralding the arrival of a new type of stakeholder with the means to reform corporate governance and to bring it up to a new standard.
Welcome, then, stateholder. You will be with us for some time, so you might as well learn how to do your job effectively. Here are four simple guidelines to help.
Commit to active systemic governance of capital markets
You should never again forget that essential tenet of the capitalist system: markets and their agents need to earn public trust -- continuously -- in order to serve the public interest. Someone needs to monitor the system not only to identify bubbles but also to pierce them as early as possible. This task fits governments well. No other single actor has their systemic interest.
We have just emerged from a long period of market deregulation and low government intervention. Rather than letting the pendulum swing back to overregulation (as in the past), it would be better to find a proper balance by agreeing on a clear vision, then taking multiple small steps to get there.
|Ludo Van der Heyden|
Alas, current practice is far from this. You would think, for example, that the EU would act in concert to protect its currency. Yet European governments are still acting largely independently from one another and solely protecting their own national interests.
Hold boards responsible for good corporate governance, not just financial reporting
Several years ago, the US witnessed its biggest corporate governance reform in the Sarbanes-Oxley act. But while onerous and expensive, it did little to prevent the current crisis.
Boards must therefore be required, through legislation, regular prodding and, above all, the threat of intervention to embrace their fiduciary responsibility to the company as well as to the share price. You, the stateholder, should have the means to audit governance standards -- and to intervene directly in the public interest, restoring good governance before excessive institutional value is destroyed.
If stateholder audits reveal poor corporate control and risk management, recommendations should be made and implemented. These might include removing particular board members or the chairman. Of course, strong frameworks and guidelines would be necessary. Intervention would have to be triggered by particular parameters and initiated by a government agency such as the Securities and Exchange Commission in the US and the Financial Services Authority in the UK.
You, the stateholder, should thus assume responsibilities in the opposite direction of a typical shareholder: intervene only when standards are bad -- and withdraw only when they improve.
Become exemplary agents of governance and enforce transparency
Even in good times, however, you the stateholder can set the example. Insist on training board members (including your own representatives) in governance capability, as well as improving processes such as succession.
You must also find new ways of sharing knowledge without violating corporate confidentiality. 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.
The public requires information and accountability. Extensive honest communication, not spin, is needed -- and the stateholder can provide it. A government can, say, make explicit its desire to sell a company, and the conditions for the sale. Knowing these in advance can save the organisation from unnecessary stress and allow time to find the best match (not necessarily the highest bidder).
There are many examples of what not to do. The Belgian government's takeover of the Fortis Bank in October 2008 led to months of legal disputes and ambiguity. The TNK-BP joint venture of 2003 appears to have involved three Russian shareholders eliminating BP with the (silent) consent of the Russian government. The onerous controls implemented by Swissair on airlines it acquired in the 1990s represented an abuse of a minority shareholder, which should have been exposed earlier.
These examples suggest once again that interventions by the stateholder ought to be overseen by a neutral body -- and not directly by political appointees. The supervisory authorities must have total independence and function more like a central bank than a government department.
Make it clear that working for you is an opportunity for public service -- and redemption
You, the stateholder, will need to select competent and experienced board members to represent you. Only independent experts will be able to take a truly long-term view on rebuilding former (or still) great institutions -- and then selling them. To find such people and provide a structure for them, you should call upon civil society, giving independent institutions (like the Canadian Coalition for Good Governance) a clear mandate.
Bankers with a sense of public service, eager to redeem their industry in the eyes of the public, should embrace this noble and delicate challenge. Remuneration ought to follow, but without the excessive bonuses that boards previously awarded their managers (and themselves). The greatest reward for public service is, after all, public recognition.
However, it is not just former bankers who stand to gain redemption. Paradoxically, governments' failures as regulators have led to their current massive presence as stateholders. Having reached this point, governments now represent our biggest hope for corporate reform. We believe society should actively support these new stateholders in the definition and execution of their mission. We may not get another chance like this for a long time.
Robert Gogel is a serial turnaround executive and co-founder of the European Executive Council (EEC), a think-tank of senior multinational executives.
Ludo Van der Heyden is the Solvay Professor for Technological Innovation at INSEAD.