Collective Action in the Boardroom

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Over at his new home at the Harvard Business Review, Justin Fox writes about the relative silence of nonbanking corporate executives on financial regulatory reform:

It’s nonfinancial businesses, not financial firms, that create lasting wealth. This is not a moral distinction. It’s just the way the world works. The finance sector enables wealth creation, but the innovations that make the economy grow over time come from elsewhere. The financial industry really ought to be seen, and treated, as a servant of the real economy. It’s when finance takes the lead and begins to drive economic activity, as it did during the Internet stock bubble of the late 1990s and the mortgage lending craziness of 2003-2007, that we get into big trouble. And even when it’s not blowing bubbles, the financial sector can be too successful for the rest of the economy’s good.

….So while the rest of the business world needs a financial sector that’s healthy enough to extend credit, it also ought to favor a regulatory structure that keeps the financiers from getting too big for their britches. Explicit restrictions on pay tend not to work, so the real goal should be to rein in financial-sector profits, especially the phantom profits that come from inflating speculative bubbles. That’s where leverage limits come in, and restrictions (like the “Volcker rule” that’s kinda/sorta included in the Dodd bill) that try to wall off riskier financial activities from those deemed so essential that they’re backed up by government guarantees.

Justin argues that this corporate silence is basically an agency problem: Wall Street frothiness is actually good for top CEO pay even if it’s bad for business as a whole. True. But I’d add another thing: business executives tend to stick together. Partly this is ideological — they really are a conservative bunch and they really do believe that excessive regulation is bad — and partly it’s just plain logrolling. An airline executive might believe that financial sector reform would benefit the airline industry, but he also knows that someday he’s going to want help fighting some kind of government regulation of the airline industry. The best way to ensure this is to stick together and oppose government regulation no matter which sector it’s aimed at.

You see the same thing at work in healthcare. Most big corporations would benefit from healthcare reform — in fact, they’d benefit from a root-and-branch government takeover of healthcare — but ideologically they don’t like the idea, and in any case they don’t want to abandon their fellows in the healthcare industry. This kind of tribalism broke down a bit this time around, but not a lot. For the most part, corporate executives either stayed on the sidelines or actively opposed healthcare reform. In the corporate world, it’s all for one and one for all.

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