Monday, October 31, 2011
Corporate Power & Government Capture
Failure of Corporate Governance has led to government capture
For the past thirty years I have focused my energies on corporate governance and the legitimacy of corporate power. And by legitimate, I mean that the people who exercise power for the corporations need to be accountable to somebody. Over the years, it has become clear that they really are not accountable to anybody, and our experiment in self-regulation and minimal oversight has failed. In practice, this has meant that a small group of individual CEOs exercise power over financing elections and lobbying the passage and enforcement of laws.
Where are we now?
The failure of owners to be involved in overseeing the corporations they own and the failure of government to enforce rules already on the books has led to what is known as capture. Capture means, to me, the power to allocate the resources of government, in this case the U.S. federal government. We’ve seen this in the bailout, in tax leniency and in subsidies. We’ve seen it in deregulation and the failure to enforce regulations that already exist.
Capture is a very predictable and logical outcome of our failures. All the corporate governance efforts I’ve been involved with have stressed the internal accountability of those with power in a corporation. And one of the essential elements of accountability that are critical for long term credibility of sustainable corporations is that they be subject to a governing law, and that they comply with law in a full way and not in a grudging way.
So this is about corporate power – excessive corporate power. The balance of power is not only tipped but so out of skew that we’ve come to accept is as normal. We excuse it by saying that corporations need to be competitive or that they create jobs. We excuse it by saying that CEOs take risks and therefore need outsized salaries to compensate for that. But while some of that may true, corporations also take a lot from our society: educated workforce, roads, subsidies, military protection, diplomatic work done by our government and more. Furthermore, they don’t take responsibility for the by-products or off-products of their work: pollution, health issues, wear and tear on the infrastructure paid for by citizens. Society is a give-and-take proposition but for now, the powerful take much more than they contribute and that is not sustainable. 
Business Roundtable: Roadmap For Growth press conference. Dec. 8, 2010.
For me, corporate governance has failed and it’s time to move on. These larger issues are where I see the discussion going so I’ll be writing more on this topic in the weeks to come. Please comment or send me your thoughts. There’s so much to talk about and I look forward to hearing what you think.
October 31, 2011 |
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I have to agree 100% with Tokyo Tom's assessment. The principles of Creative-Destruction are sure and true (I will have more on that later).
As private capital exchanges mature and provide more efficiency for the capital allocation of small to medium sized businesses you will see more of the kind of ownership that Bob is talking about come through.
The moral hazzard of Too Big To Fail is the elephant in the middle of the floor that folks do not want to address and it is ticking time bomb. With the protection of the government, these firms lose their ability to innovate and are protected (i.e. bailouts) from the inherent market self-cleansing process.
Shepherd Call
As private capital exchanges mature and provide more efficiency for the capital allocation of small to medium sized businesses you will see more of the kind of ownership that Bob is talking about come through.
The moral hazzard of Too Big To Fail is the elephant in the middle of the floor that folks do not want to address and it is ticking time bomb. With the protection of the government, these firms lose their ability to innovate and are protected (i.e. bailouts) from the inherent market self-cleansing process.
Shepherd Call
Bob, the answer is simple:
-- Let shareholders of publicly-listed firms alone to figure out how to protect their own interests, and
-- Let better managed firms that don't tap public markets (and thus who have smaller numbers of more sophisticated investors who don't need the dubious 'protections' of Government) to eat the lunches of the bigger, more bureaucratic and less profitable public firms.
In other words, the existing system can't be saved, and it is not worth the effort. What we need is a whole lot more of Schumpeter's 'Creative Destruction', which we can expect from private firms -- which have been growing as Sarbanes-Oxley has helped large firms build barriers by walling off access to capital markets.
One action item that I still see as necessary is to encourage the use of alternative corporate/organization forms where shareholders/owners retain a significant tail of risk. Since it is the moral hazard and risk-shifting made possible by state-granted limited liability status that has also fuelled the growth of the regulatory state, states can also experiment with dramatically lowering regulations for smaller local firms where shareholders have unlimited liability or must pony up additional capital to pay damages for any torts.
Sincerely,
Tom
-- Let shareholders of publicly-listed firms alone to figure out how to protect their own interests, and
-- Let better managed firms that don't tap public markets (and thus who have smaller numbers of more sophisticated investors who don't need the dubious 'protections' of Government) to eat the lunches of the bigger, more bureaucratic and less profitable public firms.
In other words, the existing system can't be saved, and it is not worth the effort. What we need is a whole lot more of Schumpeter's 'Creative Destruction', which we can expect from private firms -- which have been growing as Sarbanes-Oxley has helped large firms build barriers by walling off access to capital markets.
One action item that I still see as necessary is to encourage the use of alternative corporate/organization forms where shareholders/owners retain a significant tail of risk. Since it is the moral hazard and risk-shifting made possible by state-granted limited liability status that has also fuelled the growth of the regulatory state, states can also experiment with dramatically lowering regulations for smaller local firms where shareholders have unlimited liability or must pony up additional capital to pay damages for any torts.
Sincerely,
Tom
Have you read William Greider\'s THE SOUL OF CAPITALISM? He has some very good points about the responsibilities of fiduciary institutions. I wrote a column on it, to be published soon. Will try to paste it here.
WHAT DO WE REALLY WANT? by Mary Boland
Perhaps the best analysis of our economy is William Greider\'s 2003 book THE SOUL OF CAPITALISM. It is a lively, easy to read book that anyone will find informative. Here I can only highlight some key points.
Greider explores why American capitalism generates not just great material abundance but also terrible social and financial inequality and devastating ecological destruction.
He discusses the fact that the stock market has become a poor vehicle for distributing capital to productive enterprises in general and small and medium businesses in particular. In fact the latter get no Wall Street capital.
And the large multinational corporations that do use Wall Street have recently created no new jobs in America; in fact in the five years before the latest financial crash the Fortune 500 companies reduced their employment of American citizens by 4 %. At the same time, small and medium companies, despite being starved for capital, created 20% more American jobs. (And paid their taxes)
Small and medium companies have to rely largely on local banks for capital and local banks have not only declined greatly in number in recent decades, but they are also notoriously risk averse and inclined to short-term thinking.
So one of Greider\'s main points is that our economy would be much better if we found a way to direct more capital into small and medium businesses and less into large multinational corporations.
He also points out that small and medium businesses are much more rooted in their communities and thus inclined to respect social values.
Which brings him to another dysfunctional feature of capitalism today. Namely the total disconnect between stockholders and corporate management. This results in a lack of responsibility on the part of corporate management, which thinks of little but boosting their company\'s stock price in the short term so top executives can cash out their stock options most profitably.
Greider thinks that a change of attitude on the part of the institutional investors, who own 1/2 of all corporate shares and 21 per cent of all varieties of financial assets, might be a big part of the solution here. So far they have been passive investors, seeking only to maximize returns in the markets with no regard to social and environmental consequences.
But Greider points out that most of these institutional investors, particularly pension funds, have fiduciary responsibilities to the workers whose savings they are managing. And those fiduciary responsibilities need to include regard for social and environmental consequences as well as the longer term welfare of the economy.
For example, my husband and I receive pension benefits from Colorado\'s Public Employee Retirement Association.
It does us no good if they maximize returns in the short term while investing money in corporations that create no jobs so we end up supporting grown children.
It does us no good if they invest in big banks that crash the economy, destroying the gains that were made so our pensions are in danger.
It does us no good if the crashed economy causes state and municipal budget shortfalls so severe our grandchildren\'s education is badly compromised.
It does us no good if we have to approach death knowing our grandchildren will live in a horribly polluted world full of civil unrest.
I could go on and on, but you get the point. Institutional investors have a fiduciary responsibility to become active investors who pressure corporations not to engage in behavior that damages the long-term health and wealth of their beneficiaries. And their beneficiaries are pretty much the same as society at large.
At the same time these institutional investors need to seek out and invest in small and medium businesses that create American jobs as well as socially responsible businesses, large or small.
Another fundamental remedy for our economic ills that Greider proposes is simple in concept but will take much effort to execute. In his words, \"people must figure out how to own their own work.\"
In the 19th century most people owned farms or stores or workshops. Large corporations produced material abundance, but put a lot of small operations out of business. So we gave up a tremendous amount of individual independence and control in the 20th century as most of us became dependent on jobs.
Now we have to find the means to get back as much of that independence and control as we can. We need a lot more employee-owned businesses, corporations, partnerships, and coops. And we need more worker participation in corporate management.
Greider devotes much of his book to this important subject. But I have simply run out of space. I recommend you get the book from the local library or buy it.
WHAT DO WE REALLY WANT? by Mary Boland
Perhaps the best analysis of our economy is William Greider\'s 2003 book THE SOUL OF CAPITALISM. It is a lively, easy to read book that anyone will find informative. Here I can only highlight some key points.
Greider explores why American capitalism generates not just great material abundance but also terrible social and financial inequality and devastating ecological destruction.
He discusses the fact that the stock market has become a poor vehicle for distributing capital to productive enterprises in general and small and medium businesses in particular. In fact the latter get no Wall Street capital.
And the large multinational corporations that do use Wall Street have recently created no new jobs in America; in fact in the five years before the latest financial crash the Fortune 500 companies reduced their employment of American citizens by 4 %. At the same time, small and medium companies, despite being starved for capital, created 20% more American jobs. (And paid their taxes)
Small and medium companies have to rely largely on local banks for capital and local banks have not only declined greatly in number in recent decades, but they are also notoriously risk averse and inclined to short-term thinking.
So one of Greider\'s main points is that our economy would be much better if we found a way to direct more capital into small and medium businesses and less into large multinational corporations.
He also points out that small and medium businesses are much more rooted in their communities and thus inclined to respect social values.
Which brings him to another dysfunctional feature of capitalism today. Namely the total disconnect between stockholders and corporate management. This results in a lack of responsibility on the part of corporate management, which thinks of little but boosting their company\'s stock price in the short term so top executives can cash out their stock options most profitably.
Greider thinks that a change of attitude on the part of the institutional investors, who own 1/2 of all corporate shares and 21 per cent of all varieties of financial assets, might be a big part of the solution here. So far they have been passive investors, seeking only to maximize returns in the markets with no regard to social and environmental consequences.
But Greider points out that most of these institutional investors, particularly pension funds, have fiduciary responsibilities to the workers whose savings they are managing. And those fiduciary responsibilities need to include regard for social and environmental consequences as well as the longer term welfare of the economy.
For example, my husband and I receive pension benefits from Colorado\'s Public Employee Retirement Association.
It does us no good if they maximize returns in the short term while investing money in corporations that create no jobs so we end up supporting grown children.
It does us no good if they invest in big banks that crash the economy, destroying the gains that were made so our pensions are in danger.
It does us no good if the crashed economy causes state and municipal budget shortfalls so severe our grandchildren\'s education is badly compromised.
It does us no good if we have to approach death knowing our grandchildren will live in a horribly polluted world full of civil unrest.
I could go on and on, but you get the point. Institutional investors have a fiduciary responsibility to become active investors who pressure corporations not to engage in behavior that damages the long-term health and wealth of their beneficiaries. And their beneficiaries are pretty much the same as society at large.
At the same time these institutional investors need to seek out and invest in small and medium businesses that create American jobs as well as socially responsible businesses, large or small.
Another fundamental remedy for our economic ills that Greider proposes is simple in concept but will take much effort to execute. In his words, \"people must figure out how to own their own work.\"
In the 19th century most people owned farms or stores or workshops. Large corporations produced material abundance, but put a lot of small operations out of business. So we gave up a tremendous amount of individual independence and control in the 20th century as most of us became dependent on jobs.
Now we have to find the means to get back as much of that independence and control as we can. We need a lot more employee-owned businesses, corporations, partnerships, and coops. And we need more worker participation in corporate management.
Greider devotes much of his book to this important subject. But I have simply run out of space. I recommend you get the book from the local library or buy it.
There is no better example of how CEOs have captured companies is on the issue of executive pay. This is a hot-button issue where directors have failed to reflect the will of their shareholders.
In Australia the government introduced the two-strikes rule. If a company receives more than a 25 per cent no vote against a remuneration report at two consecutive annual meetings, then shareholders must vote on a board spill.
We have just gone through the AGM season in which a number of companies have earned one strike. CEO hate it. For examples, Don Argus, former chairman of BHP Billiton and Brambles, said that if a shareholders didn’t like executive pay levels or big bonuses, “they can sell the the had shares”. This called the 'Wall Street Walk', that reflects the view that shareholders have no rights as owners.
In Australia the government introduced the two-strikes rule. If a company receives more than a 25 per cent no vote against a remuneration report at two consecutive annual meetings, then shareholders must vote on a board spill.
We have just gone through the AGM season in which a number of companies have earned one strike. CEO hate it. For examples, Don Argus, former chairman of BHP Billiton and Brambles, said that if a shareholders didn’t like executive pay levels or big bonuses, “they can sell the the had shares”. This called the 'Wall Street Walk', that reflects the view that shareholders have no rights as owners.
Regrettably, I completely agree with your assessment. State capture by corporations in America is a done deal and we have come to accept this as the norm. Much of the problem is how we have framed the discussion for the last 30 years, embracing the neo-liberal economic ideal as gospel. In the mean time, corporate governance advocates continue to navel gaze, discussing whether CG is a good thing rather than using it as a real tool (weapon?) for reforming corporate malfeasance.
So where do we start?
Let\'s start with language. Corporate personhood is but one example of the vernacular that we have come to accept, which sets the stage for many of the problems that give rise to overextending human rights to corporations. As applied, we should all start looking at corporate political influence over our democratic processes.
I can go on at length but I wait to see what you are cooking up.
So where do we start?
Let\'s start with language. Corporate personhood is but one example of the vernacular that we have come to accept, which sets the stage for many of the problems that give rise to overextending human rights to corporations. As applied, we should all start looking at corporate political influence over our democratic processes.
I can go on at length but I wait to see what you are cooking up.
Again, I defintely respects your sentiments outlined here, including your books and articles, most of which I have read.
I am also familar, with the fact that you share some of Peter Druckers thinking with responsibilites of Corporate Managment. I am wondering if it is not time to include thoughts from his book, Post Capitalistic Society, and the role and function of Knowledge as the critical factor in production rather that Capital, in the fact that it is "diminishing returns" along with Land and Labor.
There is a lot of new thinking out there about economic and corporate finance, and investment in terms of not only cost of capital, but also how policy makers should view the economy.
I will just add this article concerning Power Laws, which include the pareto distribution principle, as to the drivers of Inequality.
http://akgul.bilkent.edu.tr/extreme-democracy/Chapter%20Three-Shirky.pdf
My point is we need to include some of the ground-breaking thinking that is coming out of Complexity and Chaos Theory when thinking of complex-adaptive systems, which the economy is.
Hope this helps add to the conversation....
ShepherdCall