Winning the acquiescence of employees is essential to successful privatization.
Proposing to sell shares on favorable terms to employees can give help
give employees an interest in seeing that privatization goes forward.
Moreover, employee stock ownership helps to emphasize the link between
employees' rewards and the performance of the company. On the other
hand, too much employee stock ownership can hinder enterprise restructuring
and bias investment decisions. In addition, like any investor, an
employee benefits from diversifying his or her portfolio of assets.
A job is typically an important asset for an individual, and a job is subject
to firm specific risks, among other risks. Thus an individual gains
benefits from diversification by holding stock in companies other than
the company in which he or she works. Put simple, if the company
at which the individual works shuts do, the employee will not lose both
a job and a value of a stock investment in the company.
State enterprises often need new technology and managerial expertise
as well as capital. A strategic industry partner is another firm
in the same or a similar industry as the enterprise to be privatized.
Attracting such an investor can be crucial to turning around a state enterprise.
Such an investor is expected to not just buy shares in the company, but
also to play an active role in transferring industry-specific expertise
to improve the privatized enterprise's performance. Evaluating
bids from potential strategic partners typically involves evaluating many
criteria in addition to the aggregate cash value of the bid. Such
an evaluation process is more subjective than a straight cash sale and
it is more susceptible to corruption. Strategic investors also typically
want to be assured of a certain amount of influence over key decisions
of the firm. Moreover, because the strategic investor brings non-cash
assets to the transaction, selling shares to a strategic investor typically
does not maximize the government's revenue from the sale of shares.
Domestic institutional investors are typically banks, insurance or pension
funds, and wealthy individuals. While such investors do not have
industry specific expertise, to the extent that a particular investor owns
a significant share of stock, the investor has an incentive to devote effort
to monitoring and reviewing the performance of the enterprise.
When a share offering is complex or includes unusual conditions, marketing
to a few institutional investors, who are willing and able to understand
the details of the sale may be more appropriate than trying to sell to
a larger pool of investors. Some institutional investors expect to
sell their shares of a privatized company over a relatively short term,
while others may buy and hold shares.
Foreign institutional investors are likely to have similar characteristics
to domestic institutional investors. Nonetheless, there are policy relevant
implications of the choice between domestic and foreign institutional investors.
Foreign institutional investors may be able to tap larger amounts of capital
than domestic institutional investors. Involving foreign investors
may also insure world standards in information disclosure and managerial
accountability. On the other hand, involving foreign investors potentially
will allow foreigners to reap the benefits from an appreciation in the
value of the enterprise's. Such a concern is particularly relevant
if, for some economically sensible reason, the offering has to be made
at a "low" price.
The general public is often able to and interested in investing in an
enterprise if shares are appropriately priced and the enterprise presents
a credible plan for future growth. Achieving widespread domestic
public ownership of shares stimulates the development of domestic financial
markets important in raising further capital. In addition, because
the success of private enterprises is linked closely to sound general economic
policies, achieving widespread share ownership helps to develop a domestic
constituency for sound economic policies. However, dispersed share
ownership increases the importance of state administrative capacity to
prevent various forms of financial market fraud. In additional, widely
dispersed share ownership lessens shareholders' incentives to undertake
the costs of monitoring and reviewing the enterprise's performance (the
free rider problem).
The foreign general public offers the widest possible base of investors
from which to attract investment. However, meeting the regulatory
standards for marketing shares to the public in a number of different countries
requires considerable managerial expertise. In addition, attracting
foreign portfolio investors may increase capital account volatility and
macroeconomic risks.