Good Regulation

One of the great problems with publicly-traded corporations (which, I will never stop pointing out, are a creation of government and not the free market) is what’s known in economics (and political science) as the Principle-Agent problem. Once a corporate entity becomes publicly traded, in most cases those running the corporation do not own it, and thus no matter how honorable they might be, the incentives they are under generally push them toward self-interest, including an understandable desire to limit their own accountability. In theory, this problem is mostly handled by the right of shareholders to vote either directly or through a board of directors, but once you are dealing with large publicly-traded corporations, most shareholders have neither the time nor power to scrutinize everything the corporation does. This problem worsens in an environment where, over the last century, the government has loosened, deregulated, and liberalized the creation, proliferation, and trade in these corporations, to the point where most of the “owners” of these companies are banks, mutual funds, insurance company, investment firms, etc. which are themselves corporate enterprises. If I, through an IRA or 401(k), hold stock in a hundred companies, I do so only by at least two layers of proxy, and have no effective control over governance of these corporations I supposedly own. From my perspective, liberalizing the rules on these publicly traded corporations (popularly known as “deregulation” and lumped in with “smaller government”) has resulted in a lack of accountability and transparency to these paper entities–paper entities that wouldn’t even exist if governments hadn’t created them in the first place.

One of the things that sends chills of fear through me is when I hear the word “deregulation” or “smaller government” and it appears that the speaker means “even fewer restraints on big publicly-traded corporations and the people who run them.” These things are a government imposition on the free market, wield enormous power over countless lives, and you want them even less accountable?

One recent regulatory reform I’m happy about is the 2010 Dodd-Frank bill which the President signed which, among other things, gives shareholder the right to vote on executive compensation. This recently caused an embarrassment for the CEO of Citigroup, and it was nice to see; it’s very tiresome to continually hear that criticism of executive compensation packages is all about “envy” and “class warfare” when to a lot of us it looks like just plain common sense: when there is no effective check on people’s ability to pay themselves with other people’s money, which is how it works with these large corporations, they’ll go often go wild.

What should astonish people in my view is not that this happened to the CEO of Citigroup, but that prior to 2010 it could not have happened. And the irony remains that even with these new regulations (good ones, in my view), the shareholder vote on these matters is still non-binding. It’s merely advisory.

This to me is only the very start of the sorts of reforms in corporate America (by which I mean publicly-traded corporations) we should be looking for from government–which, I will say again, we can only look for from government because it was government that set up all the laws that made these entities’ very existence possible in the first place. It is good to see some CEOs now facing pushback from owners, but it’s ironic that this pushback can still be only advisory. It’s also rather sad that, even still, it has to mostly be the managers of investment firms who can raise these objections, since typically individual stockholders don’t hold enough power to do it themselves.

There’s no undoing the widespread existence of these publicly-traded non-human entities, but it’s nice to see us having more sensible rules put in place for their behavior and the behavior of those put in charge of them.

(This item also posted to Dean’s World.)

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Author: DEAN ESMAY, Guest Voice Columnist

Dean Esmay is a long-time associate of Joe Gandelman and The Moderate Voice. He is Managing Editor of A Voice for Men. He also blogs on a variety of issues at Dean's World, one of the world's first blogs and one of the few that was archived as Historically Significant by the Library of Congress for the 2004 elections. You can also follow Dean via Twitter here.

  • Dr. J

    If I, through an IRA or 401(k), hold stock in a hundred companies, I do so only by at least two layers of proxy, and have no effective control over governance of these corporations I supposedly own.

    Which is to say, your control over corporations is much the same as your control over the government: real but limited (your is just one voice among millions), and expressed mostly through intermediaries. You get a formal vote on directors for companies whose stock you hold, and you get an informal vote every time you visit the cash register. In between, you rely on fund managers, regulators, consumer groups and other agents to lobby for your interests.

    I’m broadly in favor of increasing shareholders’ power over corporate decisions, but that’s rather different from handing that power to the government. And I agree some executive pay is excessive, but I also recognize this is more of a symbolic problem than a macroeconomic one.

    It baffles me that the same people who in one post lament the government’s latest woeful decisions will in the next post call for greater government control over some aspect of all our lives. Do you not perceive the contradiction?

  • RP

    One has to look at each corporation independently to decide what impact that company has on the economy before charging off with more regulations.

    How does a collapse of a GE compare to the collapse of Bank of America or General Motors? Should the regulation of each of these large corporations be the same?

    Deregulation of the banking industry begun by the Democrat controlled congress of the late 80′s and early 90′s allowed banks to grow from state and sometimes regional banks to “national” banks. That created to-big-to-fail. This created the need for tighter regulations since one national bank going down could take down the whole sector. A company such a GE going bankrupt would impact retirement funds, but would not have the impact that the banks have.

    For those industries like oil that have a major impact on everything, maybe it is time the US does the same and Argentina and then the prices could be controlled.

  • dduck

    r.J, said “Which is to say, your control over corporations is much the same as your control over the government: real but limited (your is just one voice among millions), and expressed mostly through intermediaries.”

    Spot on, and what about the absence of any thing in DF regarding the very monsters the authors, Dodd and Frank, tickled under the chin, FNMA and FMAC. Shear hypocrisy and you get your name on one of the biggest laws ever.

    The Dems love regs so much, how about the silence about reinstating Glass-Steagal. More hypocrisy.

  • http://www.deanesmay.com DEAN ESMAY, Guest Voice Columnist

    Dr. J: My control over my elected officials is infinitely greater than my control over any corporation anywhere through stocks in mutual funds, and so is yours.

    Furthermore, these corporations only exist because of the government in the first place. Do you not see the contradiction in attacking the government, but defending these creations of government and calling them the “free market?” Government is responsible for their existence. Government sustains them. Only government can set the rules for their behavior. That I’m afraid is the huge blind spot in virtually all modern conservative/libertarian so-called “free market” economics. It’s astonishing more people don’t point this out.

    Government created this market dominated by these artificial paper legal entities, and now you want them to leave them alone? That’s like breeding a massive herd of buffalo and then declaring you will let the herd of buffalo do whatever it wants because you’re not responsible for its actions.

  • Dr. J

    Dr. J: My control over my elected officials is infinitely greater than my control over any corporation anywhere through stocks in mutual funds, and so is yours.

    How do you figure, Dean?

    Do you not see the contradiction in attacking the government, but defending these creations of government and calling them the “free market?”

    I would, if I defined “free market” as naively as people on the left pretend to when attacking the right. The question isn’t whether government should regulate corporations–it should. The question is what form that regulation should take.

    There are two broad schools of thought. The microregulators want government in the details of corporate conduct, countering every politically undesirable move with a new regulatory countermove. They want the government actively deciding what constitutes reasonable executive pay, appropriate interest rates, acceptable employee policies, proper product performance, and so on.

    The macroregulators believe competition will do a better job of deciding all those details. They want government regulation to focus on the high-level goals of ensuring that markets are open, transparent, and competitive–which is to say giving maximum power to consumers, and letting economic darwinism force corporations to be responsive to them. I don’t see a contradiction there.

  • dduck

    Dr. J, makes good points. IMHO, a “good” government should provide “good” regulation to protect workers and buyers of the company (not everyone is a corporation) and at the same time not inhibit the growth of that company, assuming that growth is not harmful.

    And, of course, not so good governments ignore the elephants in the room, for example quasi-governmental monsters like FNMA and FMAC, because they have been applying the electricity to their neck bolts and forgive their monster’s transgressions while creating ever more regulations for the other companies they didn’t create/control.

  • Zeeuw

    I very much appreciate the coherence & civility of Dr. J’s comments.

    As someone who probably wouldn’t agree with his broad philosophy, I appreciate the opportunity for decent and reasoned dialogue.

    I agree about the divergent schools of thought on regulation. Regarding the proposition that Darwinian self-regulation is favorable, or ‘macroregulators believe competition will do a better job of deciding all those details,’ I’d like to seek your feedback on the following critique.

    The trouble with this is that a lot of innocent people, occasionally generations of them, will always have to pay for this process. For example, a company that pollutes or puts out an unsafe product _ in the libertarian absence of regulation _ will eventually lose customers and be killed or forced to regulate itself by the free market. However, it might have already poisoned the groundwater for 1,000 years or destroyed thousands of lives. Darwinian self-regulation is epochal in its pace.

    As for the way corporations treat employees, I’m interested in the idea, used in some countries, for corporate boards to be required to include employee representatives to be elected by employees themselves. I’ve be grateful for your thoughts.

    Much respect.

  • Dr. J

    Zeeuw, I think it’s appropriate for government to regulate externalities like pollution.

    Product safety is more complicated, because safety is an elastic concept. A product that one person can use safely another person will get into trouble with. Moreover we rely on products like cars that are demonstrably unsafe; safety needs to be balanced against utility, which will also vary from person to person. People should be free to make this tradeoff for themselves. So I’d prefer the government’s involvement to be at the macro level, avoiding dictating specific credit card terms or licensing requirements for babysitters, and relying more on transparency and liability laws.

    I have no opinion on employee representatives on corporate boards. It might be a good idea, I just have no sense of what the likely results would be.

  • Zeeuw

    Thanks for your response. Good points about product safety and flexibility.

    I was thinking more along the lines of food labeling. I’ve heard libertarian arguments that forcing companies to list ingredients is over-regulation that costs them money and is therefore ‘job-killing.’

    These people will maintain that eventually, people with diabetes or peanut allergies will learn to avoid certain brands, or will pay more for specialty brands who cater to them. If you push them far enough, they’ll eventually concede that a few individuals may be wiped out by this process.

    I’ve also noticed that many libertarians consider laws forcing parents to make kids wear safety belts to be an intrusion _ although the same individuals often have no objections to protecting unborn innocents by regulating abortion.

  • Dr. J

    Both sides may be right about food labeling, Zeeuw. It may save lives, and it may cost jobs (or make food a little more expensive).

    I haven’t met many libertarians who are zealous pro-lifers. But the libertarian principle is that government should step in to protect you from actively harming someone else; at whatever point you consider life to start, the government should get involved. Seat belts (or expensive car seats of dubious benefit) aren’t quite the same, because the harm is less direct and possibly only theoretical. This doesn’t necessarily seem contradictory to me.

  • Zeeuw

    Dr. J, Thanks, truly appreciate your reply.

    Though I respect this principle _ only interfering to prevent active damage _ as a solid guide to which the law should aspire, I don’t believe it can be absolute in a moral and practical context.

    For example, allowing a parent to harmfully neglect a child is passive. The issue is not whether the gov’t steps in, but at what point, and seat belts would be at a vague area on this spectrum. A parent withholding adequate food from a child is obviously wrong _ but the issue is a what point it becomes ‘adequate.’ If a kid is allowed to starve it’s wrong, but if he or she is allowed to become morbidly obese, most of us aren’t comfortable with punishing parents.

    Likewise, letting someone drive drunk isn’t actively harming others, but we allow the law to forbid it. The issue is that we have to arbitrarily define what is harmfully impaired.

    My issue with libertarianism is that it demands absolutes in a messy reality, and in its adherents becomes more like a faith than a general guide that should be influenced by practical constraints. Its radical adherents accuse anyone with those practical concerns of disloyalty, treason, insanity and evil, and its radical adherents are the ones controlling much of the political process and cultural dialogue in America.

    I just wanted to express my gratitude for your input, if you happen to be still reading this thread _ I’ve learned much from you, just from this brief exchange. Thank you.

  • Dr. J

    I agree that active harm isn’t a completely clean principle. Between neglecting to feed a kid, which has about a 100% chance of killing him, and allowing him to play on a swing set, which has a tiny chance, there’s a gray area.

    All philosophies will have gray areas. I wouldn’t say libertarianism demands absolutes, but you have probably met a few libertarians who do.

    The libertarian party (like all the others) tends to be dominated by its zealots, and because it’s a minor party even the candidates tend to be drawn from the fringes. I expect if the party were to become more successful, we’d hear more from libertarian realists than we do.

    I’m registered libertarian, which means I get some odd characters calling or even ringing the doorbell around election time. And although I find many of the candidates too kooky to vote for, the libertarian philosophy nevertheless makes a lot of sense to me.

    Thank you for a good discussion too.