Monday, February 16, 2009

Recession Special Series: Three for Biz (Part 2 of 6)

NEW YORK, New York -- We continue our series about improving America, budget-style, with three ideas on improving the business climate in the US.

1. Bring back corporate governance. We at the WDR like transparency. It improves business climates, political processes and tight dresses. The United States was long a pioneer in corporate governance, and this became a bedrock reason for its reputation as a safehaven for investment. We've fallen behind on this count in recent years, though -- as we are now seeing with shock as John Thain buys $35,000 wastebaskets or Jimmy Cayne dives into a bowl of snuff, both men seemingly untethered from their boards.

What's to be done?
a) Firstly, corporate boards of directors (who represent the investors that own a corporation and are distinct from the chief executive officer, or CEO, and other executives who run a company's day-to-day business, at the behest of the board) should have mandated independent members. Boards have grown cozy to management, leading to warped priorities, reluctance to call bad execs to account, and huge bonuses for execs despite poor performance. Another interesting idea that has never been a part (to my knowledge) of Anglo-American corporate structures but exists in Germany and to a degree in Japan, is the bifurcated board model. In Germany, the management board essentially does what a US board does, representing shareholders but also taking on executive roles. Overseeing the management board is a supervisory board that represents employees and shareholders. In the US, employees have no real representation, other than through sometimes-counterproductive unions, at the management or board level. This dual-board structure may make German or Japanese companies less nimble or profitable, but it arguably makes them more competitive. It's not an argument to say that German and Japanese companies produce some of the world's best products (which they do), but corporations in those countries do tend to have better risk management and quality control over their operations, in part because they don't outsource vast swaths of what (at least in customers' eyes) they are responsible for. I don't know if one model beats the other, but a mix of the two might be best of all. Martin Wolf explores the issue much better than I can here, as part of a fascinating Bill Gates-inspired project to determine what and if such a thing as "creative capitalism" could be.
In this vein, a law proposed in recent years by Democrats called "say on pay," which would give boards say over executives' salaries (ridiculously, the people who own a company are not currently legally given the right to determine how much their caretakers are paid), is gaining ground and should be passed.
Another important stakeholder in corporate governance is the auditor, who reviews a company's financial information to ensure it is correctly accounting for its expenditures and revenues. The US is currently abandoning its own set of accounting rules (US Generally Accepted Accounting Practices) in favor of the international practices in place almost everywhere else -- that's a good start. But auditors, while technically banned by the post-Enron Sarbanes-Oxley act from providing management consulting services, provide a panoply of consulting services to clients. While I don't know of any harms that have already resulted from this, it creates an obvious lead-up to conflicts of interest between an auditor under pressure to please management and a team of consultants hoping to land a big project and should be stopped. Auditors should audit, and no more.
Finally, while public companies are forced in the US to make quarterly filings of their financial situation, private companies are not. With private equity groups of investors, sometimes led by banking groups (most banks, from Goldman Sachs to Citigroup, have one or many private equity groups that make money for them), companies do not have to report anything publicly. You want to know lots and lots about publicly traded Microsoft? Go here -- one of the best services provided by the US government (and something that many European countries fail to provide at all). But what about privately run Cargill, one of the biggest producers of what we eat? You won't find a thing, ever. This leads to a lack of transparency that leaves the public, and investors, unclear how industries -- and the larger economy -- are faring. The US should follow England and Western Europe's leading economies and mandate public reporting of results and guidance on expected future performance by all companies. Cost to the federal government: $0.

2. Get a national jobs database online. This would be timely now, when many are out of work. The government, with minimal overhead, should create a nationwide jobs database, enabling people to understand what kind of market there is out there for their skills. As a highly mobile society, we should be interested in getting people jobs, wherever it may be. Thousands of idle Ohioans would be well served to know Montana needs them. Cost: $10 million?

3. Create government VC funds and consulting firms to help entrepreneurs. With credit in short supply, new entrepreneurs -- from Silicon Valley start-ups to vegetable sellers -- are going under in record time. Why not funnel money to help local and municipal governments or charities put together not-for-profit venture capital partnerships to help struggling entrepreneurs with loans of a few thousand dollars? As in the private sector, the VC arms could also provide some consulting services on starting a business. Cost: $1 billion?

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