Monday, April 12, 2004

More on corporate obligations

I see my link from yesterday has gotten some attention. To respond to the interesting responses... First, it could be that I've misunderstood (I often do), but I think Carey and Heidi are speaking orthogonally. Heidi seems to be focusing on the corporation qua corporation and Carey seems to be talking about corporate officers. Let me start by responding to Heidi, although I think that my previous post really dealt with Carey's category (even if I missed his main point... sorry!). Heidi writes:

...I don't think there's a lot you can do to change the fact that corporations serve their shareholders. So far we agree!

But this doesn't mean that you can't manipulate what's in the shareholder's best interest.
We agree on this too -- this is the basis for my comment that I don't think you really need to worry about corporate directors following the law -- just set the penalties right and their obligation to shareholders will take care of the rest.

Continuing, "As an example: a corporation may want to maximize shareholder profit. In the absence of rules about taxation, it may very well choose not to give the government any money. Shocking? Not quite. And yet--rules about taxation exist. They punish corporations for the "honest mistakes" that Ben finds so shocking to the conscience. Screwing up on your taxes is essentially strict liability."

Now this is totally wrong, unfortunately. I have no problem with punishing the corporation -- obviously that's necessary to my non-regulatory approach (discussed more below). But, Carey was talking about punishing corporate officers, not corporations. To quote the man himself (I've now learned that Carey is, in fact, male): "It's a sad fact of human frailty and intellectual limitation, but the sad result is that the human beings running the corporation are too often not held accountable for even their honest mistakes--let alone their calculated misdeeds."

There's a huge difference between what Carey is saying and what Heidi is saying. Punishment of the corporate officers carries with it the whole parade of horribles I mentioned before (principally, that no one is going to lead the corporation). Punishment of corporations is, as I said above, just fine (so long as we recognize the costs to society). Those issues aside, Heidi's approach ignores the disconnect between punishments and benefits: When one cheats on one's taxes, the benefits redound to the cheater. If GM's CFO cheats on GM's taxes, he benefits only obliquely -- but if you adopt Carey's approach, he takes the whole brunt of the punishment. That, I think, is bad policy. At the least, we should avoid talking at cross purposes.

Moving on to Carey's point, made here. I quote: "But accountability requires more than mere openness. In the case of government, it requires an active electorate who will take note of the behavior of officials and respond to mistakes and misdeeds in whichever way they think is most appropriate. This response can vary from simply noting the mistake and filing it away in memory, to writing a letter expressing disapproval, to voting against an elected official in the next election, to starting an impeachment drive or a campaign to have an appointed official fired."

Fair enough -- I'll agree that corporate managers should be "accountable" to their shareholders, to the extent that that means that they should be punished for poor performance. But let's be very, very careful here: The differences between corporate governance and political governance are, to put it mildly, big. The political values that we care about (equality, for example) just don't matter when we're talking about corporations (and for good reason). We care, for example, that individuals in a democracy are treated according to a one-person, one-vote rule. But there are no large corporations that have adopted such an approach. Rather, corporate governance is about getting those with economic incentives to make the corporation's decisions, as we (reasonably) think these people have the right set of incentives. My point simply is that in the end, it's not clear what "accountability" is left that is appropriate for the corporate setting. Largely this is because corporate law is founded on the "Wall Street Rule" -- you don't like a corporation, you sell your shares. It's easy, and if enough people do that, it will punish management sufficiently (because stock values go down and the company becomes vulnerable to takeovers). The main point, lest we lose the forest for the trees, is that accountability, while good in politics functions differently with corporations.

This slides nicely into my last point, which is simply that we should control corporations through incentives. Let me explain what I mean: Say we want GM to stop polluting some river -- and we decide as a society that we're willing to sacrifice greater wealth, more jobs, higher pay, etc. in order to stop this polluting (we should always recognize trade-offs!). There are a variety of ways to approach this situation, but as I read Carey he would at least partially advocate some sort of "accountability" for corporate officers who decide to pollute despite the law. My point is simply that there's no need for this. If the corporate officers decided to pollute, this simply means the penalty is too low. Rather than setting criminal penalties, or something that distorts other behaviors, just raise the penalty. At some point it will become wealth-maximizing not to pollute, and as long as the managers recognize their first duty is to shareholder wealth-maximization, everyone is the better. Once we start with individual punishments, community allegiances, etc, we get into a world where the whole purpose of a corporation is put at risk -- we no longer know what managers should do (obey the law, or listen to shareholders?), what corporations are (entities which are required to obey the law, or a series of contracts, in which case the duty is still to maximize wealth), etc.

So those are some thoughts... I'm very curious to hear responses.

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