GOVERNMENT AND CORPORATE GOVERNANCE I and II

June 06, 2012 5:52 PM

GOVERNMENT AND CORPORATE GOVERNANCE (I)

For Hobbes, it is certain that there must be a sovereign

According to Thomas Hobbes we all have natural passions that carry us to, among other things, partiality, pride, and revenge. The laws of nature, as Hobbes sees them, including ‘justice’, ‘equity’, ‘modesty’, and ‘mercy’, are contrary to our passions.

Therefore, we will only observe the laws of nature if we have fear of some power to cause them to be observed. According to him, covenants, without the sword, are but words that lack every strength to protect a person.

See Thomas Hobbes, Leviathan, Amsterdam: Boom 2007, p. 207 and further.

For Hobbes, it is certain that there must be a ‘mortal god’, a sovereign, for whom fear exists, and who can enforce peace and security. If everyone (or at least the majority) transfers one’s right of governing oneself to only one such person (or assembly of persons) then a ‘civitas’, a state, is created. Within that state, a sovereign has absolute power: he is the one who determines everything, makes up the rules and can do no wrong. Hobbes goes on to argue: “However, he himself is not subordinate to the laws made by the sovereign, or in other words, by the state itself” (p. 293).

Of course, this is an appealing point of view for the sovereign. I would think that the rules issued by the state (government) itself, must be correctly and strictly observed by that same state. It cannot be well conceived that, for example, the police and Public Prosecutor’s Office (as ‘instruments’ of the state) would be allowed to violate the law with impunity, can it?

As this short introduction shows, there may be very different opinions about the nature and the role of the state. Today’s topic then concerns the question of how we should look at government-owned companies and in particular the influence of the government on these companies. I will leave the category of government-owned foundations undiscussed here.

It will probably hold for most of the government-owned companies that their activities originally belonged to the regular governmental duties. At some point in time, these activities have apparently been (stronger) grouped organization-wise and a certain unity and coherence was introduced therein, often a legal spin-off came about, which was most clearly apparent when these activities were incorporated in a publicly held company (N.V.).

J. van den Noort, ‘De verrassend veelzijdige geschiedenis van overheidsbedrijven’ [The surprisingly multifaceted history of government-owned companies], in: Historische Bedrijfsarchieven Openbare Nuts- en Communicatiebedrijven. [Historical Company Archives Public Utility and Communication companies] Een geschiedenis en bronnenoverzicht [A history and list of sources], Amsterdam 1993, p. 13-70.

(To be continued)

Karel Frielink
Attorney (Lawyer) / Partner

24 May 2012

GOVERNMENT AND CORPORATE GOVERNANCE (II)

Government (not) at a distance?

Being a director of a government-owned company is certainly not always as easy. Neither is being a shareholder in a government-owned company. The directors will usually complain about too much influence from politicians, while the politicians will usually find that they have too little grip on government-owned companies. In this connection, there are two important topics we will have to consider briefly.

I will ignore cultural aspects here. In that respect see e.g. chapter 8 of the dissertation of A. van Marrewijk, Internationalisation, cooperation and ethnicity in the telecom sector, Delft: Uitgeverij Eburon 1999, 340 p. My approach to the addressed issue can and will be qualified as “European Dutch”. Whether this qualification is interpreted as positive or negative is a matter of perception and appreciation.

The first topic concerns the definition of the boundaries between the government and the market. Which activities are to be considered as duties of the government and which can be left to the market? Quite generally speaking, the idea is supported that the government must regulate public interests through legislation and regulations: thus the government should not have to nationalize bread production in order to guarantee that this daily necessity remains affordable, but it may do so by means of price regulation.

Special situations may sometimes occur, however, as we have seen with the banking crisis, where the government in the Netherlands became shareholder of ABN Amro Bank and Fortis Bank Nederland (that merged in 2010). However, the starting point there is that the government will eventually dispose of these shares again. There is no reason to keep these shares in the hands of the government for years on end.

The second topic concerns the view on the distance between government and government-owned companies. Two extremes may be distinguished here and arguments may be given for both points of view.

(1) Government at a distance

The government must remain at a distance as much as possible and behave as an ‘ordinary’ shareholder of a government-owned company. In other words; government-owned companies must be managed and run from a business perspective, thus commercially. Arguments for this point of view (derived from a lecture held by Mr. Etienne Ys [former prime-minister of the Netherlands Antilles] in 2008 on how supervisory directors and politicians deal with each other):

• Politicians are too busy to concern themselves with business operations
• Politicians have no powers of judgment regarding ‘business’
• Politicians manage from a social perspective and undermine the business aspect
• Risk of too much party-political interference, integrity in danger

The arguments that go with this are :

• Politicians set policy frameworks, establish priorities, and set standards
• Politicians develop a justification protocol and steer towards results
• Politicians leave actual business operations in the hands of experts
• Supervision and control on standards by (independent) supervisory directors

The ideal result would then be: the best possible product or service, low cost and maximum profit.

(2) Government not at a distance

In another view, government is not at a distance, but the government-owned company is managed as if it were a government service and thus part of a department (ministry). The arguments for this point of view are:

• Politicians are always called to account and thus should be able to involve themselves in the day-to-day business operations
• Politicians are there to guard the ‘patrimonio nashonal’ [national heritage] and to protect it against commercial interests of individuals
• Government-owned companies serve the common social (and thus not commercial) interest
• Government-owned companies do not fit in a more businesslike sphere

Politicians do not like to turn over power gladly. The direct participation by political parties in the supervisory board and board of directors increases the influence from politicians. Political parties (as a result) indirectly exert influence on important decisions within a government-owned company, such as appointments, recruitment of staff, tendering processes, and such. Politicians promote member loyalty by means of giving away positions. This is a phenomenon that has bothered us here in Curacao for decades.

My point of view in this discussion is as follows. A government-owned company is no longer part of the public sector but, apart from matters regarding concessions, licenses and other public interests, must be safeguarded against – and be able to function independently from – direct or indirect politically determined government influence, with the exception of the influence that directly ensues from the business (company) position of the government as shareholder. On a daily basis, we may read in the newspapers that the practice is different here in Curacao.

Reference is also made to my lectures as published in: Karel Frielink and Mirto F. Murray, Twee Curacaose Meesters [Two Curacao Masters] , Nijmegen: Wolf Legal Publishers 2011, p. 39-57 and p. 71-77.

In my opinion, a government-owned company must function in a manner that is to a large degree comparable to every other professionally run commercial company and is, in free competition with other market parties, oriented towards achieving financial gain for the shareholder, in this case the government (or – if one wishes – the community).

See also paragraph I.A. of the OECD ‘Guidelines on Corporate Governance of State owned Enterprises’ (2005): “There should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for state-owned enterprises, particularly with regard to market regulation.”

Furthermore, it seems desirable to me that the government makes a clear choice. If any activities are placed in an NV (or BV) then the direct influence of the government on those activities ought to be at a minimum. Only then we are talking about ‘good corporate governance’. If the government wishes to have a large(r) influence then it would seem obvious to transfer these activities again to the range of duties of the government and have them weighed in directly on the national budget. Then everybody would know exactly where he stands. (To be continued)

Karel Frielink
Attorney (Lawyer) / Partner

31 May 2012

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