Conflicts of Interest

Big Brother Shareholder

Mighty River Power will be a dirty float.  The Prime Minister, John Key has confirmed it.  The dirt in this float usefully illustrates how governments "do" commerce badly. 

Firstly, let's paint the more general picture, before addressing the dirt.  For governments, politics matter: their real constituency is not the owners of a business, but the voters whom they must either impress or placate.  Governments always stand ready and willing to trade off the rights of property owners, making them the fall-guys for the "greater good" which just happens to be the good of the current governing political party.


In the case of the planned Mighty River float the government has two key political objectives.  First, the government wants to keep the assets New Zealand owned.  Second, it seeks to ensure that mum and dad (i.e. voters) buy and retain their shareholding for a long time.  These two objectives, if achieved, would negate much of the political criticism of the sale--namely, that retail investors will on-sell their shares to large institutions which in turn will sell them off to the highest bidder, likely to be offshore. 

Hence the dirty float.  The sale process will be skewed in favour of mum and dad investors.  All retail investors will be guaranteed getting up to $2,000 worth of shares (price to be determined).  Institutional investors will have to wait in line.  In addition, retail investors will be allocated bonus shares if they hold on to their shares for three years.  This will make the float dirty.  In a dirty float, someone gets an advantage and someone else pays for it.

Take bonus shares.  When you issue bonus shares, you give away part of the company to someone.  In this case, all shareholders who do not receive the bonus shares have their ownership proportionally reduced.  They own less of the company than before.  Those who get the bonus shares own more.  The government (in this case, a fifty-one percent shareholder) would be stealing from one kind of investor and benefiting another--for its own political gain. 

The bonus share give-away will either be paid for by Mighty River, or by the tax-payer.  If the former, the dominant shareholder will be giving preferential treatment to a sub-set of other shareholders.  This would be not just immoral, but--on the face of it--illegal.  Consequently, the government will likely inject some taxpayer funds into the company, in order to buy more shares, then gift retail mum and dad investors the shares as bonus shares.  This benefits some tax payers at the expense of others.  It also benefits some shareholders at the expense of all others.  Immoral to be sure, but regrettably legal.  It would also have implications for the Crown retaining 51 percent of the company but there will doubtless be some remedies to hand. 

By muddying the float in this way, the government is providing a perfect illustration of the risk of purchasing an asset in which the Crown is a majority shareholder.  Politics will always trump property rights.  Many think that owning shares in a business in which the Crown is a majority shareholder reduces risk.  In fact it introduces a new form of dangerous risk: the majority shareholder is also the rule maker and the referee.  Moreover, the majority shareholder counts political risk above all else: individual property rights are well down the ladder.  The rule of law and property rights become very runny wax noses when re-election looms. 

Mighty River Power will remain an asset which will primarily serve the Crown's fiscal interests and the government's political agenda. 

The Crown's fiscal interests will motivate it to ratchet up dividend payments to the detriment of the company itself.  Excessive dividend payments usually result in companies racking up ever mounting debts.  Since Mighty River will carry an implicit Crown guarantee this would be a seductively easy  route to take. 

Moreover, the government's political agenda is going to create two classes of shareholders: those who vote in elections and those who don't.  It would be smart to work out to which kind of shareholder you would be and maximise your utility accordingly.  Ironically, if you are a retail investor, there is now a strong incentive not to be a long term owner: it is likely that the smart retail money will take the bonus shares then sell out completely. 

The bottom line is that on balance, government's do commerce badly.  Caveat emptor.