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Two Unhelpful Economic Policy Ideas and Two Better Alternatives

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Learn more about J.H. Cullum Clark.
J.H. Cullum Clark
Director, Bush Institute-SMU Economic Growth Initiative
George W. Bush Institute

Corporate capitalism in America is working reasonably well. If it ain’t broke, don’t fix it.

It’s election season, which always brings a menu of ideas from politicians that are at best half-baked and sometimes deeply disconnected from economic reasoning and history. Consider two ideas regarding corporate governance in the news, each of which addresses legitimate policy challenges, but in ways that would almost certainly work against American prosperity.   

Making corporations “accountable” by requiring them to obtain a “charter” and answer to the U.S. government as a condition for staying in business. This proposal would also set aside 40 percent of each firm’s board seats for representatives elected by employees. The rationale? Some claim U.S. corporations over-emphasize the interests of shareholders at the expense of other stakeholders and consequently fall prey to “short-termism” in their decision-making. 

Economic research suggests these concerns are not entirely misplaced. Economist Luigi Zingales has called attention to growing economic “rents,” or profits beyond firms’ cost of capital arising mostly from state-conferred corporate privileges, in sectors from telecommunications to hospitals. William Lazonick and others report evidence that short-termist financial decisions have squeezed research investment in certain industries. 

However, radically overhauling corporate governance would represent a misguided assault on economic freedom and common sense. First, it’s largely a solution in search of a problem. The government already defines the responsibilities of corporations towards society through specific regulations – a more targeted approach than making them answerable to the whims of politicians. Shareholders have rewarded countless companies for long-term decision-making, such as Amazon’s investment in distribution around the world. 

Second, weakening the most effective force against feather-bedding by self-interested management teams – shareholders – is very likely to promote “you-scratch-my-back-I’ll-scratch-yours” bargains between management and workers, undermining profitability but also investment and innovation.

Third, empowering the government to confer or withhold “charters” would hand unprecedented power to the most short-termist of decision-makers: politicians and their appointees. It would overturn two centuries of economic thought and return us to the days in which businesses owed the privilege of operating to the good graces of the king. 

Finally, restricting the already limited power of capital owners to make their own decisions with respect to corporate property would undermine incentives for firms to invest in the future. Richard Epstein of the Hoover Institution predicts that it would “lead to the largest flight of capital from the U.S. in history.” 

A better idea: Promote competitive capitalism rather than crony capitalists through more vigorous anti-trust policy. 

Eliminating the requirement for public companies to file quarterly earnings. This idea, a less dangerous means of addressing “short-termism,” would nonetheless be a mistake. Modern capitalism thrives on information and accountability. Weakening reporting requirements would predictably strengthen the already-strong hand of management. Less information for investors would likely lead to a lower willingness to risk capital on long-term investments. 

Better ideas: Discourage earnings “guidance,” as Warren Buffett, Jamie Dimon, and the Business Roundtable recently suggested. Lighten the burdensome rules imposed by the Sarbanes-Oxley Act. Use the tax code to promote slow vesting of management options and stock grants. 

Corporate capitalism in America is working reasonably well. If it ain’t broke, don’t fix it.