The real need is for a cadre of trusted, tough-minded investors that will support strong management teams
August 9, 2015
There are not many wholly new areas to open up in economic policy. But in recent months there has been 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 to change business decision-making. The goal is for companies and shareholders to operate with longer horizons and to more generously share the fruits of their corporate success with their workers, customers and other stakeholders.
There are strong grounds for interest in such approaches. After the crises 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 records of investment have been forced to curtail investment plans are a cause of concern. And we would all like to see middle-class incomes do a better job of keeping up with productivity than they have in recent years.
Such proposals for corporate reform are responding to legitimate policy imperatives, but they also tap into the zeitgeist in another way. At the same time as there is widespread unhappiness with market outcomes, confidence in government has reached a low ebb. So the idea of achieving reform through altered business behaviour, rather than government programmes, is appealing.
The corporate behaviour debate recently taken up by investors, management consultants and even presidential candidates is a very valuable one, which speaks fundamentally to the way in which American capitalism functions. In many aspects it is an overdue recognition of basic market principles.
Businesses will raise wages to a point where the cost is just balanced by the reduced bill for recruiting and motivating workers. At that point, a further increase in wages does not appreciably change their total costs but higher wages certainly makes their workers better off. So there is a strong case for robust minimum wages.
There is also a strong reason for regulating aspects of pay. Usually competition drives desirable economic arrangements. But not always — especially when there is a risk of a race to the bottom. A company that tries to stand out by offering especially attractive family leave benefits , or job security, or egalitarian wage structures faces the prospect of attracting a disproportionately risk-averse work force. So there is an argument for using mandates to level the playing field.
Profit sharing, too, is an area where there are demonstrable benefits in terms of increased productivity — but an individual company that stands out by offering it may encounter difficulties in recruitment because workers are too risk averse. So there is a strong case for tax incentives to spur profit sharing.
At the same time scepticism about whether all horizons should be lengthened is appropriate. A generation ago, the Japanese keiretsu system of cross ownership of corporate shares — which insulated corporate managements from share price pressure — was seen as a strength. Yet, Japan’s manifest macroeconomic difficulties aside, companies lacking market discipline have squandered leads in sectors from electronics to automobiles to IT.
Managements of companies that are dissipating the most value, such as General Motors before it was bailed out by the US government in 2009, have often been the most enthusiastic champions of long-termism. Market participants who are willingly placing high valuations on Silicon Valley start-ups that lack any profits and have little revenue may be putting too much, not too little, weight on the distant future. That, at least, is the implication of those who see the inflation of a “technology bubble”.
Corporations hoarding cash that is earning zero in the bank or in Treasury bills would be cheered not jeered by the market if they could be convinced that the companies were putting it to productive use. Many corporations are in this situation of having cash piles but often do not have productive uses for the money. Either that or they cannot convince investors of their projects’ validity. Pushing corporations without good projects to invest is wasteful. Stopping or discouraging them from distributing funds to shareholders is dangerous if it encourages mindless takeovers as an alternative.
The real need is for a cadre of trusted, tough-minded investors in any given company who can credibly commit to support strong management teams and to provide assurances to a broader investment community so that productive investments are made. Accomplishing that, while maintaining market discipline, is the crucial challenge.