Academic

What Kind of Investor Should the Government Be?

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

The fact that the government is increasingly playing an investment role in major corporations raises many questions.  To be sure, one of those questions revolves around the appropriateness of any government investment-- though that train clearly has left the station.  Regardless, it is still important to think about the other issues raised by government investment in private entities.  One issue I have been thinking about relates to the type of investor the government should be.  That is, should the government narrowly limit its role as an investor to promoting issues that will increase corporate profits, or should it encourage corporations to engage in actions that go beyond strict profit maximization?

On the one hand, a strong case can be made for the proposition that the government?s investment goals should be focused solely on issues of profit maximization.  Indeed, the government has placed billions of taxpayer dollars in the hands of corporations, and hence it should be concerned with safeguarding those dollars and ensuring that those dollars are returned to the taxpayers.  Hopefully with interest.

On the other hand, as an entity with a clear public mission, the government may be the quintessential socially responsible investor?that is, an investor that is concerned with ensuring that corporations pay heed to other stakeholders such as employees, consumers and the broader community.  Hence, one wonders if the government?s investment activities should encompass some public goal beyond profit maximization.  For example, as had been widely reported, GM recently decided to roll out a "Total Confidence" Plan?a consumer protection plan which includes a traveler?s assistance program and up to nine months of payment protection for buyers who lose their jobs.   According to a GM spokesperson, the government was aware of and completely supported the plan.  In an article earlier this month discussing the GM program and the government?s influence on corporations, the Washington Post noted that the government?s role in companies like GM has impacted companies in big and small ways.   The potential that the government, as an investor, may be in the position to encourage corporations to consider other stakeholders and programs that go beyond profit maximization, raises the question of whether the government should use its role in such a way.  Of course, it often has been claimed that focusing on other stakeholders enhances the corporate bottom line, at least in the long-term.   Indeed, the GM program is not just about consumer protection, but also about encouraging customers to buy GM vehicles.  From this perspective, investors interested in a corporation?s long-term health can and should encourage a focus on both shareholders and other stakeholders.   And perhaps this means that the government as an investor can and should promote policies that protect other stakeholders.

Nevertheless, there are some who think it is inappropriate for corporations to focus on issues beyond profit-maximization.  Moreover, sometimes companies may have to choose between policies that enhance profit in the short-term and those that focus on the long-term and hence on issues beyond the immediate bottom line.  Which brings me back to my initial question.   Should the government be the kind of investor that focuses on strict profit-maximization, or should it encourage corporations to do more?

Full post as published by Conglomerate on April 14, 2009 (boomark / email).