The Government as Active Shareholder

Abstract:     
The U.S. government has acquired large shareholdings in companies like AIG, GM and others, essentially becoming "owner of last resort" through its defense of the "too big to fail" doctrine. I argue in this Congressional testimony that the government should adopt a pro-active stance in terms of exercising its voting rights to promote best governance practices. I am not advocating direct government intervention in the business operations of the firms in which it is a large shareholder. What I do recommend is the form of shareholder activism commonly exercised today by large institutional shareholders such as pension funds, and which is needed to ensure that the companies operate under the most effcient governance system. Minority shareholders benefit from the presence of a large blockholder because only the latter has the economic incentive to exercise voting rights in an efficient manner. Thus, the government is now in a unique position to improve ineffcient governance systems and practices. However, to have this positive effect, the government must take a pro-active stance on share-voting in accordance with the value-maximizing principle. I discuss four areas where the institutional investment community (as relatively large shareholders) in the U.S. recommends active voting to improve governance: (1) director election reform, (2) elimination of costly takeover defenses, (3) splitting CEO and board chairmanship positions, and (4) executive compensation ("say on pay").

Number of Pages in PDF File: 25

Keywords: Shareholder activism, corporate governance, share-voting, director election, say on pay, privatization

JEL Classification: G32, G38

working papers series