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.