If boards of directors and senior managers have not already examined their relationships with government entities from a “big picture” perspective, now is the time to get serious about the endeavor, and I don't just mean laws and regulations that might fall under a compliance rubric. In an environment where societal and even judicial expectations of corporations have gone beyond maximizing profits, corporations need to reexamine their relationships with government entities to move closer to a form of partnership with government, rather than seeing government as an adversary. I am not suggesting the French or German model of “golden shares” or supervisory boards with government representation, nor am I suggesting anything close to the Chinese model, where corporations are in many respects viewed as agents of the state. Rather, I am referring to the articulation of goals that are consistent with important societal issues of the day such as climate change, diversity in the workplace, economic opportunities and even the preservation of our democratic institutions.
As is often the case in politics, economics and stock market behavior, useful and appropriate ideas get pushed to an extreme and lead to excesses that must be addressed. And the pendulum may swing to the opposite extreme, again requiring a major course correction. The history of American capitalism to an extent reflects these moves, including the dynasties of Carnegie and Rockefeller; Teddy Roosevelt's “trust busters;” the rise of national unions; Milton Friedman's capitalist manifesto and the “greed is good” mantra; massive corporate dislocations in traditional industries such as the steel and auto industries; the growth of IBM and Microsoft along with government efforts to stymie them; and the more recent dominance of Facebook and Amazon followed by calls to restrain and regulate.
| Two Views: Government-Corporate Partnerships: Yea or Nay? |
In August 2019, we saw significant changes in the messaging from the Business Roundtable, which certainly represents the mainstream of domestic corporate philosophy — the group seeks to “move away from shareholder primacy … to include commitment to all stakeholders.” Whether this shift was just a defensive move in reaction to pressures building in society or a forward-looking pivot, this statement inherently recognizes the need to acknowledge, work with and partner with other constituencies, including government. Social media has in many ways democratized the pushback against corporate domination and perceived misbehavior, as evidenced by the strength of the ESG movement coming from the investor community.
One might argue that the current emphasis on ESG standards from both an investor and a company perspective has already made this “partnership” concept a necessary practice for corporate behavior, and to some extent this is true. But I would add that corporations must be more forward-thinking in their behavior and objectives. Rather than just being reactive to the current demands of ESG evaluators and rule makers, corporations need a longer-term vision about what it means to balance the profit-making imperative within the context of government and societal constructs.
Clearly this balancing act is fraught with risks. Too close an alignment with political/societal issues of the day can turn out to be misguided when political leadership changes hands or today's imperatives become tomorrow's problems. If governmental entities exercised undue influence on corporate behavior, or vice versa, the results could be disastrous if not downright illegal. Too cozy a relationship between the government and corporations will lead to inefficient allocation of resources, cronyism, privacy issues and many dangerous outcomes that are well documented in corporate history. This is why independent boards must be particularly sensitive to and familiar with the underlying principles guiding these relationships and the details of their execution. The right question for boards to ask is not whether the corporation should partner with government, but how such partnerships should be structured, pursued, monitored and evaluated.
Some topics lend themselves to industry-wide collaboration through trade associations or organizations such as the Business Roundtable. However, the most forward-thinking companies will develop specific programs and priorities that are tailored to their business needs and perceived opportunities. These efforts will span local, state and national boundaries — the broader the scope, the more likely it is that umbrella organizations will be the proper vehicle for government “partnerships.” However, I would expect that the competitive nature of companies within common industry groupings will ultimately force most entities to establish unique arrangements to achieve their corporate objectives. The biggest challenge will be articulating, developing and maintaining the proper balance of these partnerships so shareholders are the true beneficiaries of these relationships rather than the unfortunate victims of them.
Peter Langerman is the chairman of Franklin Mutual Series. He is a co-lead portfolio manager of the Franklin Mutual Shares Fund, the Franklin Mutual Global Discovery Fund and related strategies. In 2010, Langerman was selected to serve as one of three trustees of the American International Group (AIG) Credit Facility Trust, which held the U.S. government's controlling interest in AIG. In 2011, the trust was terminated as part of the successful recapitalization of AIG. Langerman is a member of the board and executive committee of UJC Metrowest (New Jersey) and heads its investment committee. He serves on the national board of the All Stars Project and the advisory board of the Weinberg Center for Corporate Governance at the University of Delaware.
Any views expressed herein are those of the author and do not represent the views of the organization the author works for.