Tuesday, August 28, 2012

Barry Eichengreen Plays Flute with my Sister-in-Law

Barry Eichengreen is another successful El Cerrito High School alum from the David Shearn generation.  He receives high praise from his UC Berkeley colleague Brad DeLong :
“Barry Eichengreen of the University of California at Berkeley, the National Bureau of Economic Research, and the Center for Economic Policy Research is without a doubt the world's leading expert on the international monetary economics of the Great Depression of the 1930s and, by virtue of that expertise, an expert on today. He is the only one still living of the four economists--Bagehot, Minsky, Kindleberger, and Eichengreen--whom last year Larry Summers told Martin Wolf knew the most about what has happened to the world economy since 2007.”
Wow. And my sister-in-law Wendy gets to play flute with him. Cool.

Thanks to Wendy and her husband Pat I just ran across his article in The National Review reviewing the Ron Paul arguments for why we should return to the gold standard.  Although the Ron Paul delegates are acting up at the GOP convention today, Paul Ryan, of course, is the current poster child for this brand of nonsense.  So, although the article is a year old, the arguments are timeless and the GOP adoption of a proposal to study a return to the gold standard at the current convention gives it fresh currency.

Eichengreen is very, very polite.  But the inescapable conclusion he leads us to is that the Paul Ryan school of economics which advocates a return to the gold standard is bankrupt of good ideas. After examining the pro-gold standard arguments with patience to a fault, Eichengreen's bottom line is that there is no argument to be made for it. He is the kind uncle to Krugman, DeLong, and Reich’s more hot tempered (and entertaining) manner of family feuding.

The Ryan prescription for stimulating the economy--and is it or is it not Romney's now--is for government to do nothing.  Romney/Ryan want to be the do nothing team!  Boehner/Cantor want to lead a do nothing Congress. Trouble is, as Eichengreen points out, doing nothing in time of economic depression inflicts pain on everyone through severe unemployement.   Economists actually do know some things, and one thing they know is that inflicting pain by severe unemployement is not the best way to curb the over-exuberance of financial markets.  They also know that precipitating depression, as Ryan's medicine would do, is not the most expeditious way to cure bank and corporate balance sheets. 

It's better for government to act proactively to stabilze economic activity and to encourage strong expansion of the economy so debtors can grow out of bad debt.  It's better for government to help the economy recover now and regulate better later. 

The modern GOP prefers for government to regulate worse now, regulate less in future, and precipitate deflation now through deep spending cuts.  They would like to enact measures, like returning to the gold standard, that would prevent future Fed holdings and that would prevent significant Fed involvement in the economy in future.  So says the news.  So says Eichengreen, politely.

These people don't deserve such politeness. 

Saturday, August 11, 2012

Corporate Management: Monkey in the Middle Between Shareholders and the Public Good

Nick Nocera in the NYT has an article that points to the new movement in business schools that turns the paradigm of corporate purpose on its head. My friend Victor says:
Not sure where I stand on this. It would be easy to wrap every failure with the term stewardship in the short to medium term.
Victor’s friend Mark gets his dander up, but in a very nice corporate lawyer kind of way:
Victor: Corporations are legal fictions by which investors (“shareholders”) turn over their money to others (directors, officers and employees) to earn a profit without the investors being liable for the obligations of the corporation. The only purpose of a corporation is to make money for the shareholders, and that is very clear in Delaware corporation law. However, in order to do that the corporation must properly incentivize management, employees and the communities in which the corporation operates.

This is not a debate about “shareholder value;” it is a debate about how best to incentivize the management, employees and communities to help earn that profit. There is no “one size fits all” answer to this incredibly complex question. It depends on the nature of the business and the corporate culture that best suits the shareholders’ long term interests. For example, the incentives at Proctor & Gamble or Pacific Gas & Electric should be different from the incentives at the latest Silicon Valley tech company to go public. Current SEC regulations make it very difficult to shape different incentive arrangements, but it can be done.
Mark says there are questions of how best to incentivize management, and the short, medium, or long term maximization of shareholder value, and ancillary benefits, like jobs, and payment of taxes flows from the enterprise—but it’s all about shareholder value.  But Nocera references the debate in my last post which questions the gospel conflating corporate interest with shareholder value.

One reason we can't conflate corporate interest with shareholder value is that shareholders come and go on a short cycle, whereas corporations have long term existence. Shareholders jump on the bus for a time while the ride is smooth and quick, but they soon jump off when it gets too bumpy or curvy, even as the bus lumbers on down the road, or gets stuck in the mud for a time. Another reason is that shareholders receive immunity from personal liability for their investment in a corporation courtesy of the state, and that is ultimately a political question.

It is by the grace of our social contract that shareholders receive immunity by investing in corporations. By dint of that social contract we can shift the emphasis of what corporations are about. That's what Lorsch at Harvard business is doing, as quoted by Nocera, when he says that “the function of business in a society is not just a return to investors, but to provide goods and services, provide employment, pay taxes, and so on.” He is questioning the conflation of corporate purpose with maximization of shareholder price.

Nocera suggests that the gospel of conflating corporate purpose with maximizing shareholder value started with T. Boone Pickens and other corporate raiders in the 80’s. The first English joint stock company was the The Russian Company, formed to search for the Northwest Passage. If it failed, the stockholders would not be personally liable for debts (loans for the outfitting of ships and so on); if it succeeded it would make them fabulously wealthy. However, the reason this protection was granted to The Russian Company is that discovery of the NW Passage would also be of great benefit to English trade and English society. So is was the company’s purpose purely private (shareholder price maximization) or was it partly private and partly public (because discovery of the NW passage would also be of great benefit for English society as a whole)?

The Hudson’s Bay Company, founded in 1670, is reported to have served as a de facto government in parts of North America for a time. That sounds like partly public, partly private. Today, the company continues to operate as a retail trade empire in Canada. Is that a purely private purpose, or does a larger public stake in this company continue?

The “movement” identified by Nocera, and reflected in my last post, argues that in exchange for receiving protection from shareholder liability, corporations must serve a public purpose. The state grants the corporate franchise because the corporate business provides rewarding and good paying jobs and other socially positive things, not because it maximizes shareholder value. The creation of shareholder value is a necessary condition for long-term corporate health. A Corporation won’t be around for long unless it makes money for shareholders. On the other hand, a corporation can take the long view and create meaningful work, pay taxes, be a good stewart of the environment, and all the rest, and be around for the long term, without necessarily maximizing shareholder profit.

Both society and shareholders have a claim on corporations. Corporate managers, therefore, must mediate between the two. One small way to do this is, as my friend Will Cummings points out, is for corporate management to take the long view and not be driven by short term shareholder value.

The corporate raiders of the world, or (euphemistically speaking) Romney and Ryan, would take corporate mangagement to task for failing to maximize shareholder profits in the short and medium term.  In order to give cover to corporate mangers from shareholder lawsuits complaining about this, social do-gooders have started the Benefit Corporation movement.  (Hat tip to CMF)

Here's the Wikipedia entry:
Benefit corporations must create a material positive impact on society, and consider how their decisions affect their employees, community, and the environment. Moreover, they must publicly report on their social and environmental performances using established third-party standards.

The chartering of benefit corporations is an attempt to reclaim the original purpose for which corporations were chartered in early America. Then, states chartered corporations to achieve a specific public purpose, such as building bridges or roads. Their legitimacy stemmed from their delegated charter, although they could still earn profits while fulfilling it.  Over time, however, corporations came to be chartered without any public purpose, while their purpose degraded to one of being legally bound to the singular purpose of profit-maximization for its shareholders. Advocates of benefit corporations assert that this singular focus has resulted in a variety of societal ills, including the thwarting of democracy, diminished social good, and negative environmental impacts. 
Maryland was the first state to adopt such a statute in 2010, and several states have adopted them since.  However, it is unlikely that your average Fortune 500 company will change its charter to a Benefit Corporation anytime soon.

The point of the movement identified by Nocera in his article today, and by the articles and talk discussed in my last post, below, is that ultimately all corporations are public benefit corporations.  Corporate management owes a duty to the public good as well as to shareholders.

Stay tuned whether Romney's selection of Ryan will move this discussion forward, or not.