The Government's giant shadow in the boardroom: having regulators as a shareholder--and even sitting on the board--puts the independent directors in a troubling fiduciary situation: the government's objectives may conflict with the traditional goal of shareholder value creation.

Author:Elson, Charles

The role of the government as a shareholder is in and of itself highly problematic. Yet, even more troubling to investors is the notion of the government as a member of the company's board of directors. The issues created by the government as a shareholder are only magnified when the government has more influence on the company's decision making through board membership.

Whether by direct representation or significant involvement in the nominating process, the government can have much influence over board function. It also has a major impact over corporate direction, focus, and director conduct. The government as an investor does not consider shareholder wealth maximization as its primary goal. The principal objective of the government is to bolster societal benefits, usually in the form of jobs and political rewards for the investment it is making. When the government is heavily involved in the corporate decision-making process, these incentives conflict with the traditional goal of shareholder value creation.

Thus, where the government demands and receives some form of board representation, the representatives find themselves in a troubling fiduciary position. Such representation creates three major problems. They include conflicting obligations imposed upon the government's representatives themselves, disruption to the ordinary function of the remaining directors, and, finally, an increased mistrust in the ability of the board to maintain the best interests of the public investor as they carry out their responsibilities.

Markedly different objectives

The government-anointed director is caught in a precarious position. A government's investment in a corporation differs markedly from that of the other shareholders. Governments are political creatures and make investments to meet political objectives such as job preservation or, in the case of the financial crisis, economic stabilization. Long-term investment return is not a primary, or perhaps even secondary, goal.

The government has the incentive to demand changes in corporate strategy to meet its own objectives, without regard to its impact on ultimate shareholder return. The notorious case involving political pressure on General Motors to keep certain facilities open to preserve jobs in a particular congressional district is a significant example of this problem. The governmental representative director is under tremendous pressure to support the demands of his or her sponsor.


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