Vol. 15 No.6 (June 2005), pp.518-522
CORPORATE GOVERNANCE IN GOVERNMENT CORPORATIONS, by Michael J. Whincop. Aldershot, England & Burlington VT: Ashgate Publishing Ltd., 2004. 258pp. Hardback. $99.95/£55.00. ISBN: 0 7546 2276 2.
Reviewed by Daniel J.H. Greenwood, SJ Quinney Professor of Law, S.J. Quinney College of Law, University of Utah. Webpage: http://www.law.utah.edu/greenwood
Michael Whincop’s monograph begins with a summary of law and economics theories of the firm and a useful survey of the current state of quasi-independent government controlled business corporations in the English speaking world. The core of the book reports the results of a questionnaire-based study of Australian governmental corporations. His surveys, consisting mainly of multiple choice questions of the “agree-don’t agree on a scale of 1 to 5” type, were submitted to 55 current and 66 former board members of 22 governmental corporations organized under the Queensland Government Owned Corporations Act of 1993. They cover a range of issues including managerial and directorial appointment, compensation, independence, and relations with the governmental shareholders. This, then, is a case study from the perspective of one role only of a limited sample of governmental corporations in one corner of the developed world. The book is filled out with some suggestions for reform of governmental corporation governance informed more by the theoretical imperatives of law and economics models than by any of the reported empirical results. Generally clearly written, the book is unfortunately marred by typographical errors (pp.15, 26, 76, 81, 86, 92, 130, 155, 157, 190) including one instance where reported values appear to have been reversed (p.81).
Despite the limitations of the small sample and limited questionnaire, I found the book an interesting and important addition to corporate governance scholarship. Political scientists, lawyers and corporate governance theorists puzzling about the relationship between reality and the theoretical models of the firm used in corporate law and related fields will want to consider the views of these participants in a deviant form.
Whincop works within the dominant – but increasingly unsatisfactory – paradigm of corporate law scholarship, which views corporations as private economic actors that, as a normative matter, exist to make as much money as possible for their shareholders (in their role as shareholders, neglecting other relationships they have with the firm). Markets, in turn, are expected to ensure that maximizing this narrow view of shareholder interests is also in the social interest: firms seeking to maximize their residual (which the model, oddly, contends is the same as maximizing shareholder return) will seek to minimize their costs and maximize their returns – i.e., to produce attractive products as efficiently as possible. The major concern of the law, on this view, is to ensure that the firm’s managers operate the firm in accordance with these norms of shareholder primacy and profit maximization, without succumbing to [*519] the temptations of mixed loyalties or risk-aversion.
Governmental corporations (GCs) by their nature challenge almost every assumption of the dominant paradigm.
First, of course, in the English speaking countries, they exist almost exclusively in areas where there is broad consensus that ordinary market processes do not reach acceptable results. Utilities supply necessities in monopolized markets or at below market costs. National reserve banks and Ginnie Mae overcome informational failures, providing credit where non-governmental entities would not. The general ideological presumption that private profit maximization is also social welfare maximizing is simply untenable when, as is often the case in GCs, the corporation has a monopolistic lock on essential services or otherwise was formed specifically to respond to market failure.
Whincop reports that, perhaps in reaction to the collapse of the post-war British model that subjected nationalized industries to intensive ministerial control with little market responsiveness (p.25), the Australian model has sought to create broad areas of firm autonomy, to make explicit where market signals will be overridden, and to account for them explicitly (rather than relying on implicit cross-subsidization within the firm). This is done through negotiated agreements with the relevant ministries: Statements of Corporate Intent (SCI), setting out goals to be met (as an equivalent to internal evaluation mechanisms and stock market pricing signals) (p.31), and Community Service Obligation (CSO) agreements, providing for explicit subsidy of services to be delivered at below-market prices (p.33).
Although Whincop is not centrally concerned with whether firm directors are aware of conflicts between market pressures and alternative understandings of the public interest or how they deal with them, he does report that these agreements are generally negotiated between the board and the relevant minister (rather than between the two bureaucracies) (p.130) and that a substantial minority of directors view them as basically meaningless, with no consequences if they are violated, especially when the minister is not involved in their negotiation (p.133).
Second, the standard model postulates role-bound shareholders interested only in economic returns to shareholding. It is harder to imagine that the shareholder of these firms – in the Australian model, the ministers of the Treasury and the relevant ministry – have such narrow concerns. To be sure, the human shareholders of ordinary business corporations also have multiple and conflicting interests (many, after all, are also employees or pensioners of the firms in which they hold stock), but in practice our financial intermediaries ordinarily will filter out those other interests. Even if I take a broader view of my interests, my mutual fund manager is unlikely to survive unless he focuses strictly on increasing returns to the shares he manages. Governmental corporations, in contrast, put the mixed interests of shareholders front and center: the cabinet minister shareholders of these Australian governmental corporations would be derelict in their duties if they encouraged their charges to profit-maximize at any cost. In the [*520] government corporation, as Whincop states, the “single objective function--maximization of profits--simply disappears” (p.10).
Interestingly, Whincop reports that half of his directors nonetheless believe that their primary duty is to cause the firm to profit-maximize, and only 28% see acting in the interests of Queensland as a whole as their job (p.89) . Even though these firms are in businesses where maximum profit is not in the social interest and have a shareholder that is not interested in maximum profit, directors still accept profit as an imperative. Thus, the profit maximization imperative appears to function on a moral, ethical imperative – not as an expression of personal interest, adopted “interest” of a role-constrained client, or even as a proxy for social interest. Whincop no doubt would disagree, but he appears to provide additional evidence that the values of homo economicus are learned, not innate, and once learned, are applied even beyond their rational sphere.
Third, these firms are entirely exempt from the market for corporate control. While these firms are less likely than ordinary business corporations to have the self-appointed board of the Berle and Means model (p.69), and indeed directors are frequently replaced – most commonly when the relevant ministry changes party (p.106) – still, this is not a grove in which “at the end of every vista, you see nothing but the gallows.” (Burke, Reflections on the Revolution in France (1790)) – the strongest market incentives are missing. In publicly traded corporations, declining financial performance is rapidly reflected in declining stock price that invites takeover; here, directors answer to a political boss for whom short-term financial projections are likely to be less salient. If, as the dominant model claims, the key determinant of ordinary publicly traded business corporations is market pressure, these firms should operate radically differently from standard financial-market controlled firms. In contrast, if the central determinants of agency behavior are sociological or consequences of the internal incentives of bureaucracies, they may be quite similar to ordinary firms, particularly if they function according to private rather than public norms on matters such as hiring and tenure, public regarding-ness, conflicts of interest, working culture and the like.
Interestingly, despite his conclusion that governmental corporation boards operate “in a manner quite different” from business corporation boards (p.195), my reading of Whincop’s survey evidence does not show any glaring differences. (To some degree, this interpretive difficulty is a problem of experimental design: Whincop provides no evidence at all about his implicit control group – he did not survey directors of non-governmental firms). For example, his directors believe that formal educational qualifications and managerial skills are key qualifications for directors, while political party membership and experience are not (p.81): suggesting, like their views on the goal of the firm, that they see these firms as more like the business than the governmental sector. Nor does it demonstrate raging discontent among the directors; for example, proposals to increase board representation of community, labor or managers, or conversely, to shrink the board overall, were all rejected by the [*521] sample (increasing community representation receiving the most support) (p.83).
Moreover, the survey does demonstrate consistent differences between the views of directors with private sector experience and those without. Thus, while most directors view their firm as having sufficient “freedom to maximize workforce productivity” (presumably at the expense of values that might not show up in productivity measures), directors with private sector experience are far less positive (p.175). Whincop interprets this difference as reflecting the private sector directors’ “greater experience” (p.176), but it seems more plausible that it reflects different acculturation, that the difference is one of values rather than empirical perceptions. Directors out of the private sector are more likely to place a higher value on maximizing measured productivity and less on competing values such as social service, worker satisfaction, equitable treatment and equal access, or environmental and quality issues that are harder to measure.
Finally, the standard theory tends to assume that shareholder control is relatively unproblematic, not least because shareholders are modeled as simple, identical fictions with only a single interest, readily visible to any competent observer. Here, however, the shareholder is a governmental minister standing in for the entire citizenry: it is impossible to ignore the reality that these shareholders (like all citizens) have values and interests outside the stock market. As Whincop points out, the government is not only shareholder, but also customer, regulator, lender, supplier, neighbor – just like us. Here, the complexity of social demands on the corporation cannot be ignored. Whincop theorizes this as creating “costs of governance” (in addition to the more conventional “agency costs”) and quite correctly emphasizes the need to consider the problems arising from unclear and conflicting agendas at the shareholder (and political/social) level (p.11).
Whincop views the governmental corporation’s deviance as potentially troubling. In his recommendations he seeks ways to focus ministerial attention on narrow financial success rather than broader social (or narrower political) values – for example, by increasing the influence of the debt market (p.191), by a two-board structure in which social values will be restricted to advisory roles (p.196), by increasing the size and variance of CEO pay (p.200), and by making the board effectively self-perpetuating during good performance (p.214).
More broadly, however, his work raises issues about the proper balance between role-bounded professional understandings and broader “statesman” visions. UK-style nationalization and our own experience with “captured” agencies (TVA, the nuclear regulatory agencies) have taught us the dangers of asking the same bureaucracy to promote and regulate, grow and restrain, a single industry. But after Enron it is impossible to ignore the opposite problem: when agents are told that their only obligation is to profit-maximize without violating the rules of the game, the powerful incentives and moral imperatives of capitalism are likely to break all restraints, pushing the rules to the point where competition serves no [*522] one. Governmental corporations are attempts to mediate market and political systems of decision-making through novel separations and joinings of bureaucratic roles and obligations. This pioneering effort at examining them should inspire much additional work.
© Copyright 2005 by the author, Daniel J.H. Greenwood.
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