Abu Dhabi, UAETuesday 11 December 2018

Governments in the driving seat of private companies

Until the credit and financial crises the rules of who ran corporations and publicly listed companies was simple.

Until the credit and financial crises the rules of who ran corporations and publicly listed companies was simple: a board of directors supervised company management. The financial crises changed all that. Any chief executive whose company share price loses 96 per cent of its value should not expect job security. Still, it is usually the board of directors that does the firing and not the president of the US.

With its moves on General Motors (GM) and Chrysler, the administration of Barack Obama has ventured far into industrial policy, in which the US government clearly picks winners (GM) and losers (Chrysler). Despite previous indications it would not let any of the "big three" car companies go bankrupt, the new "tough love" government approach is the threat of Chapter 11 with court-ordered restrictions and significant pain for creditors and bond holders.

Given the state of the economy and the number of jobs linked to the car industry, the US administration probably is not prepared to go as far as Chapter 11, but is frustrated by a lack of "stakeholder concessions". A "quick and surgical" reorganisation is being eyed, possibly mimicking the financial bailout concept of a "good" firm and a "bad" one by breaking off pieces of GM, such as Saturn or Hummer, and letting those sink or swim by themselves without further government funds. Chrysler, meanwhile, with the administration ordering that it sell itself to Fiat, is clearly "not too big to fail".

Huge banks such as Citigroup have so far been spared this treatment, but that may not remain the case. The industry is on tenterhooks over how banks that "fail" their stress tests will be dealt with. The tests are meant to reveal just how much capital the largest institutions will need under adverse economic scenarios, but regulators have to decide how much further to go than just requiring banks to raise more capital.

Weaker institutions will probably be strong-armed ("encouraged" is the word preferred by governments) into selling troubled assets through the new Public-Private Investment Programme, which effectively creates the "bad bank" vehicle for the toxic waste while the "good" bits get fresh capital. The financial crises has revealed some flaws in the manner by which publicly traded corporations in the private sector had been managed, leading to state intervention and bailouts around the world.

The global economy, until last year's meltdown, had been riding an ever-optimistic view of the benefits of globalisation, individual economic freedom and rolling back the barriers of government intervention. The so-called government "glass ceiling", made up of undue interference, bureaucracy and regulations hindering private-sector growth and benevolent self interest, would either be raised or smashed. Economic growth would keep magically growing.

However, we have woken up to a new world disorder of incompetence at the highest level of board supervision, unbounded greed and a reckless disregard for the most basic tenets of prudent risk management and control in corporate capitalism. Governments, and by extension their taxpayers, were the saviours of many institutions. For some developed economies, watching their governments start to take over the reins of management, however direct or discreetly behind the scenes, is a hard act to swallow.

There is a sullen acceptance in some quarters about this creeping state management, but this is based on the hope and premise that governments will fail in managing the rescued institutions in the end and that managers will triumphantly come back to rescue governments from their folly. This, however, will not be easy as the public will no longer tolerate the old corporate slogans of "can we get away with this?", but rather "should we be doing this?".

At the same time the witch hunt has to stop some day as the prevalent feeling is that it was the unregulated that are responsible for the current mess and that they took advantage of gaps in global deregulation to get away with it. This is also wrong as it was a colossal failure of judgement by executives at sometimes highly regulated institutions that lent too much to poor quality credits that has partly led to the current crises.

And so to who will we entrust our future: governments or private sector executives? In the Gulf, we have always allowed a bit more leeway for governments to run our major economic entities but governments around the world now realise that to manage effectively, the old way of doing things has to change. They must be able to hire the brightest and the best as well as the most experienced players. Taxpayers must become accustomed to the fact that governments will have to pay top money for quality individuals to prevent future costly bank failures and public bailouts.

As governments will soon find out, it is not that simple to be in the driving seat of corporate management. Dr Mohamed Ramady is a former banker and visiting associate professor, finance and economics, King Fahd University of Petroleum and Minerals, Dhahran