Virtual Privatization: Governance Reforms for Government-Owned Firms

David A. Skeel, Jr.

Professor of Law, University of Pennsylvania Law School.

jcls Vol 2 Issue 1 (July 2002)

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Abstract

This article explores three different kinds of reforms that could be used to help governmental corporations achieve some of the benefits of privatized, market-based governance without giving up governmental control. The first, and simplest, proposal is to use an annual contract between Government-Owned Corporation (GOC) managers and their ministerial shareholders to reduce managerial agency costs. In addition to providing a benchmark for managerial performance, the contract also could be used to segment the GOCs different goals in order to minimize the down-side effects of having multiple principals (with multiple objectives) monitoring the manager-agents. Second, I suggest that requiring at least some GOCs to issue subordinated debt would create a class of private investors who could provide additional monitoring as well as market signals about the prospects of the firm. Finally, I focus on various boundary problems with GOCs, as compared to private firms. I argue that GOCs should be required to set up separate subsidiaries when they expand into new product areas. Requiring the GOC to set up a separate subsidiary would make it much easier to police inappropriate cross subsidization.

Keywords

agency costs, company law, managerial performance, market signals, market-based governance, multiple principals, private investors, privatised corporations, shareholders, subordinated debt, subsidiaries