Putin on the Corporate Board
The next globalization battle lurks over the horizon, but you can already guess its contours. It will be shaped by two revolutions in finance and business: the growth of vast government-controlled investment funds abroad and the muddled progress toward shareholder democracy in this country. Taken together, these changes will give foreign governments a say in how corporate America is run. Lou Dobbs is going to love this one...An increase in foreign ownership of American shares is a likely consequence of the massive trade deficit with the rest of the world. We're buying goods - including defective tires, lead-contaminated toys, and shiploads of a certain gooey black liquid - and paying for them with financial assets (stocks and bonds). Or, alternatively, our trading partners are buying American financial assets and paying for them with goods. Much of this accumulation of assets is ending up in foreign government hands for two main reasons: (i) much of the global oil business is in the hands of state-owned companies and (ii) foreign central banks are piling up dollars as a consequence of intervening in foreign exchange markets to keep their currencies cheap.
Traditionally, foreign governments invest their dollars in US Treasury bonds (which helps keep US long-term interest rates low), but there is a trend towards setting up investment funds to diversify into other, higher-return assets; China's recent purchase of a stake in Blackstone, a private-equity firm, being a noted example. If foreign governments end up with significant holdings of equities (stocks), they will have a voice, as shareholders, in corporate America's decision-making. And this is where Mallaby forsees trouble:
...Chunks of corporate America could be bought by Beijing's government -- or, for that matter, by the Kremlin. Given the Chinese and Russian tendency to treat corporations as tools of government policy, you don't have to be paranoid to ask whether these would be purely commercial holdings.
But the final straw may be that even the least threatening form of investment -- the purchase of publicly traded equities -- will not escape controversy. This is because of that second upheaval: the advent in the United States of something approaching shareholder democracy. As Alan Murray writes in his new book, "Revolt in the Boardroom," companies are no longer controlled by all-powerful CEOs. Instead, chief executives increasingly live in fear of activist shareholders and directors. Bosses from Harry Stonecipher of Boeing to Carly Fiorina of Hewlett-Packard have been ejected from the corporate suite in a manner that would not have been conceivable a generation earlier.
What if the Chinese are seen to have a hand in the firing of some future Fiorina? The more shareholders exercise power, the surer the backlash against governments that buy up chunks of the stock market.
Hmmm.... maybe Vladimir Putin can do something about the obscene compensation packages our CEO's (with the help of their cronies on the corporate board) like to give themselves.