A look at cor­po­rate re­form

The Pak Banker - - OPINION - Lawrence Sum­mers

THERE are not many wholly new ar­eas to open up in eco­nomic pol­icy. But re­cent months have seen a wave of in­no­va­tive pro­pos­als di­rected at im­prov­ing eco­nomic per­for­mance in gen­eral and mid­dle-class in­comes in par­tic­u­lar, not through gov­ern­ment ac­tions but through man­dates or in­cen­tives de­signed to change busi­ness de­ci­sion-mak­ing. The goal is to cause com­pa­nies and their share­hold­ers to op­er­ate on longer time hori­zons and to more gen­er­ously share the fruits of cor­po­rate suc­cess with their work­ers, cus­tomers and other stake­hold­ers.

There are strong grounds for in­ter­est in such ap­proaches. Af­ter the events of re­cent years, the case for re­ly­ing on spec­u­la­tive mar­kets to drive the real econ­omy - to what­ever ex­tent it had va­lid­ity - is surely at­ten­u­ated. In­stances where suc­cess­ful com­pa­nies with strong man­age­ment teams and track records of in­vest­ment have been forced to cur­tail in­vest­ment plans by ac­tivist share­hold­ers are proper causes of con­cern. And all of us would like to see mid­dle-class in­comes do a bet­ter job of keep­ing up with pro­duc­tiv­ity gains than has been the case in re­cent years.

Even as pro­pos­als for cor­po­rate re­form re­spond to le­git­i­mate pol­icy im­per­a­tives, they also tap into the cur­rent zeit­geist in another way. Just as there is wide­spread un­hap­pi­ness with mar­ket out­comes, con­fi­dence in gov­ern­ment is at a low ebb. So the idea of achiev­ing re­form not through tra­di­tional gov­ern­ment pro­grams but al­tered busi­ness be­hav­ior is highly ap­peal­ing. The de­bate on cor­po­rate be­hav­ior is, I be­lieve, a very valu­able one that gets in a fun­da­men­tal way at how Amer­i­can cap­i­tal­ism func­tions. In many as­pects, it rep­re­sents an over­due recog­ni­tion of ba­sic mar­ket prin­ci­ples. Busi­nesses will raise wages to the point where the costs of rais­ing them are bal­anced by re­duced costs of re­cruit­ing and mo­ti­vat­ing work­ers. At that point, a fur­ther in­crease in wages will not ap­pre­cia­bly change their to­tal costs but will cer­tainly mat­ter to work­ers. So there is a strong case for ro­bust min­i­mum wages.

There is also a strong case for reg­u­lat­ing as­pects of com­pen­sa­tion. Usu­ally com­pe­ti­tion re­sults in de­sir­able eco­nomic ar­range­ments, but not al­ways, es­pe­cially when there are risks of races to the bot­tom. A firm that tries to stand out by of­fer­ing es­pe­cially at­trac­tive fam­ily leave ben­e­fits, job se­cu­rity or an egal­i­tar­ian wage struc­ture may at­tract a dis­pro­por­tion­ately risk-averse work­force. So there is a strong case for us­ing man­dates to level the play­ing field. Profit-shar­ing has proven ben­e­fits in terms of in­creased pro­duc­tiv­ity, but a firm that stands out by of­fer­ing profit-shar­ing may en­counter dif­fi­cul­ties in re­cruit­ment among wary work­ers. So there is a strong case for pro­vid­ing com­pa­nies with in­cen­tives to choose this op­tion.

Mat­ters are not as clear as is of­ten sug­gested re­gard­ing short-term-driven "quar­terly cap­i­tal­ism," and I be­lieve skep­ti­cism is ap­pro­pri­ate to­ward ar­gu­ments that hori­zons should be length­ened in all cases. A gen­er­a­tion ago, Ja­pan's keiretsu sys­tem, which in­su­lated cor­po­rate man­age­ment from share price pres­sure by ty­ing large com­pa­nies to­gether, was widely seen as a great Ja­panese strength; yet even apart from Ja­pan's man­i­fest macroe­co­nomic dif­fi­cul­ties, Ja­panese com­pa­nies lack­ing mar­ket dis­ci­pline have squan­dered leads in sec­tors rang­ing from elec­tron­ics to au­to­mo­biles to in­for­ma­tion tech­nol­ogy. Man­age­ments of com­pa­nies that are dis­si­pat­ing the most value, such as Gen­eral Mo­tors be­fore it needed to be bailed out, have of­ten been the most en­thu­si­as­tic cham­pi­ons of long-ter­mism. Mar­ket par­tic­i­pants who will­ingly place huge val­u­a­tions on many Sil­i­con Val­ley com­pa­nies that lack any prof­its and have lit­tle rev­enue may be plac­ing too much, not too lit­tle, weight on the dis­tant fu­ture. That, at least, is the im­pli­ca­tion of the tech­nol­ogy bub­bles we have seen.

Cor­po­ra­tions that are hoard­ing cash earn­ing noth­ing in the bank or in Trea­sury bills would be cheered, not jeered, by the mar­ket if they could be per­suaded to put those funds to pro­duc­tive use. Most cor­po­ra­tions are in this sit­u­a­tion. The chal­lenges are usu­ally that com­pa­nies do not have pro­duc­tive uses avail­able for the cash or that they do but can't con­vince in­vestors of those projects' va­lid­ity.

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