MORAL HAZARD IN PUBLIC COMPANIES AND GOVERNANCE MODEL

Too-big-to-fail was an issue in the financial crisis. This gives bad incentive to such TBTF companies to take too much risk: if win, TBTF companies get all the fruits, but if lose, the tax payer will compensate. This problem was well recognized when the 2007/08 financial crisis hit, and Lehmann Brothers was not rescued so it went broke. Large semi-public companies such as Tokyo Electric Company (TEPCO) are TBTF’s, and are in the same danger as TBTF financial companies. The meltdown of the nuclear core was brought by a loss of an emergency power, that was designed to cool the system supposedly in emergencies, but it didn’t work actually. In order to prevent such critical loss of emergency power, TEPCO had said it had well prepared. But it seems to have taken a bet (such as not to retire its oldest power plant, Fukushima Daiichi) and the TEPCO’s behavior indicates that they have incentives to take large bets; if fails in the bet, the Government (or taxpayers) will compensate for the “loss” from the bet. A proposed remedy for financial institutions, imposing them a higher capital ratio, doesn’t work for this case. The remedy for financials works, because they take “large” bets by using smaller capital (i.e., higher leverage) in the business. But TEPCO’s “bets” were not related to its capital structure, so regulation on its financial aspects won’t be effective and moral hazard incentive still works. Starting by the analysis of TEPCO case, the purpose of our research is to cook-up with a method to internalize consequences of “bets” TEPCO may take. The Public choice theory and the principal-agent theory give us theoretical instruments to give voices to taxpayers interests and the results obtained could be a good practise for the management of any situation similar to TEPCO case.