The America Institution of Crony Capitalism

The way a free market works that I learned long ago in Economics class is the people that put up the money hire managers for the business and the managers hire labor.  The three legs of this stool have roughly equal bargaining power so are able to work out an agreement that allows them all to profit from the enterprise.

This idealistic theoretical notion has never worked very well in modern reality for labor absent strong unions and in modern life large business enterprises that dominate the economy also have disenfranchised ownership somewhat.   In large business enterprises managers have developed disproportionate power.  Ownership is diffuse and inattentive.  Corporate management has become an exclusive club that looks after its own.  Every Corporation is run by a Board of Directors composed mostly of top managers from other corporations.  The Board of Directors govern how much top managers get paid, and often the road to becoming a member of the board of directors is through management.  Since shareholder power is diffuse and difficult to organize the typical Board of Directors is pretty free to run the company as they see fit.  And the evidence suggests for the last 20 years or so they seem to believe that showering money on their fellow club members is the best was to run the company.

Financial publications like the Economist have been noting for years the extraordinary rise of wages for corporate management in the United States.  This isn't because companies are rewarding managers who have performed spectacularly, raising their company above all of their competitors, after the fact.  Its all top managers.  Management that run companies into bankruptcy got multi-millions in annual compensation, then make millions more with their golden parachutes.  Managers whose companies muddle along in the middle of the pack of competitors make millions of dollars.

Government has failed to structure financial incentives in a manner that keeps the relative power of owners, managers and workers in alignment.

Evidence for this theory?

Even in this recession big corporations are making piles of money.  But neither owners nor workers are benefiting.

Owners get little - big Corporations pay peanuts in dividends to their shareholders (the owners), many tech corporations don't even pay dividends.  The only way to make money on stocks is by clever buying and selling of stocks, there is little money to be made in the next decade or so by buying and holding stocks since decades of rising stock prices have pushed stock prices well above their historical averages.  When you do own a stock you face the risk management is pursuing short term policies to pump up stock prices so they can pay themselves millions, even though they are destroying the long term viability of the corporation.  How many corporate bankruptcies in the last couple years have been accompanied by news of corporate CEO's parachuting out with their multi-million dollar severance packages?

Workers are perhaps the biggest losers.   Managers use the Company's financial clout to undermine the bargaining power of workers.  Managers use the threat of job loss to drive down wages for workers, then lay them off anyway to ship production overseas.

The law has been twisted to coddle this form of crony capitalism that is hollowing out our middle class and enriching anybody who can glad hand their way into the club.  Management has used the financial power of the corporations to control the political debate in this country and set the rules in their favor.  Their influence sends the US military around the globe to protect the commercial interests of large business enterprises on borrowed money they want taxpayers to repay.  When big enterprises make stupid mistakes they get bailed out by Government, or run into the bankruptcy court to dump losses on investors, suppliers and workers, but I have never heard of a bankruptcy court requiring top management to return some of their salary.  Corporations pour money into candidates who protect the ability of wealthy folks to make as much money as possible from large business enterprises at the expense of security for old working people.  They undermine efforts at reforming our ridiculously expensive and inefficient private health care system.

Crony Capitalism will always be with us.  Business will always largely be run by those among us who are the most obsessed with money, status and their own self interest.  They will never control their own tendency to choose what is best for them in the short term.  Their cleverness, energy and ambition can be a benefit to all, but we need to channel it.

That is government's job - to set rules that insure a fair and prosperous future for all.  Government best tool for controlling business excess is not through dictating how business behaves, Governments role is to structure the law in a manner that aligns financial incentives away from short term get rich quick thinking and maintains a balance of power between the stakeholders.  For example:

1.  To re-balance the power of owners and management government should create a graduated tax structure for corporate taxation.  Companies with fairly flat compensation plans that spread wealth broadly across the whole range of employees pay lower taxes than companies that are used to enrich the top management.  Use a mean, median and mode test that will insure the Board of Directors won't be able to indulge in handing out excessive compensation to management without bumping up the Corporate tax rate - with all the negative ramifications that will have on the stock price and corporate profitability.  So in the end the market of owners will have the power to control managers.

2.  To remove the extraordinary political power management has developed through the use of corporate funds, we have to make an end run around the nonsense notion that the Supreme Court has burdened us with that Corporations have the same rights as people under the Constitution.  Corporations don't exist in nature, they are created by law.  Congress could pass a law linking the limited liability that makes Corporations such a valuable tool for business to limitations on political activities.   So if a corporation wants to engage in political activism the owners and/or managers are no longer exempt from personal liability for any damages they cause in their business activities.

3.  Restructure the personal income tax law to go back to something like the 1954 tax code.  Lots of marginal tax rates, some so high as to be confiscatory as a disincentive to folks seeking to pad their pockets through corporate cronyism.  Then allow companies to create a "stock trust" for their executives, where as compensation to entice good performance the Board of Directors can reward managers by depositing a special class of stock into trust for the managers that is lower priority than regular stock and the first wiped out in bankruptcy.  The trust holds the stock until 5 years after the manager leaves or retires at which point it can be transferred directly to the retired manager as ordinary common stock.  The goal is to align the managers self interest with the long term interests of the company.

4.  Reform the Bankruptcy Code to make top managements perks as vulnerable as labor retirement obligations, and/or make bankruptcy automatic anytime top management does not to fully fund promised worker wage or retirement obligations.