Virtual Privatization: Governance Reforms for Government-Owned Firms

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 downside 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.