Government Ownership: Why This Time It should Work

The McKinsey Quarterly, June 2009

4 Pages Posted: 2 Jul 2009 Last revised: 24 Aug 2009

Date Written: June 2009

Abstract

This article discusses why recent government investments in private companies might avoid the hazards experienced by state-owned enterprises in the past and suggests additional measures for governments to adopt to insulate these firms from undue political interference.

In their efforts to revive economies that recently teetered on the edge of collapse, various governments have acquired substantial stakes in a number of private firms. Given the poor performance of state-owned enterprises across the globe - owing to unclear objectives, political interference, lack of discipline, and poor transparency - the public is understandably anxious about the expanded role of government in the economy.

But the situation in some countries is better than what people perceive and taxpayers may be spared these governance failures this time. Five structural characteristics should reassure the public that government intervention today will be far less damaging than past experience would indicate. These include: 1) Western governments have been forced into equity ownership and are "reluctant" shareholders, 2) governments insist that they will seek to sell their holdings as soon as possible, 3) the limited number of capital injections has made it is easier for the public to measure the value created or lost, 4) looming budget deficits should constrain governments from engaging in wasteful spending at bailed-out firms, and 5) governments have kept a portion of companies' ownership in private hands, thus preserving a high level of transparency and compelling governments to consider the impact of their actions on other shareholders.

Furthermore, government can put in place certain safeguards to instill the public with greater confidence that they are acting not only to insulate government-held firms from inappropriate political influence but also with the companies' best commercial interests in mind. These include: 1) clearly stating the objectives for their holdings, 2) defining and announcing their "rules of engagement," 3) establishing an intermediary body to hold the government's stakes in private companies, 4) ensuring that public policy objectives pursued are separately funded or underpinned by commercial principles, and 5) maintaining a high level of transparency, including by announcing a preliminary timetable for exit.

Keywords: Government ownership, state-owned enterprises, corporate governance

JEL Classification: G28, G30, G38

Suggested Citation

Wong, Simon C. Y., Government Ownership: Why This Time It should Work (June 2009). The McKinsey Quarterly, June 2009. Available at SSRN: https://ssrn.com/abstract=1426443

Simon C. Y. Wong (Contact Author)

Northwestern University School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

London School of Economics

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/collections/law/staff/simon-wong.htm

Tapestry Networks ( email )

404 Wyman St.
Suite 225
Waltham, MA 02451
United States

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