Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Thursday, January 12, 2006

Plumer vs. Crook on American Corporate Governance

Bradford Plumer has smart things to say about what the very keen-witted Clive Crook writes in the Atlantic about corporate governance:

Bradford Plumer: As short overviews of the problems with corporate governance in America go, you could do worse than Clive Crook's piece in this month's Atlantic. But after pointing out that shareholder oversight is often ridiculously lax, that many mangers and CEOs have had carte blanche to loot and pillage the companies they're supposed to be running, and that the "division of capitalism's spoils has become more lopsided in recent years," Crook strangely argues that we shouldn't worry too much:

Beyond [Sarbanes-Oxley], what [should be done]? "First, do no harm" is a good rule. Modern American capitalism has charges to answer, but it is best to keep a sense of proportion. The U.S. economy remains the most productive--and by almost any measure the most successful... in the world.... America's economic pre-eminence must have something to do with its distinctive business model, the very model many people now question--which in different ways continues to reward success more generously and punish failure more brutally... than the milder systems to be found in, for instance, Europe and Japan.

And then says "it all comes down to traditional values," whatever that means. No major reforms necessary. The system that produced Enron and Tyco basically works and we should leave it in place. Now I'm no big fan of... "modern American capitalism," but if it's what we're stuck with, we may as well get it right.... There's no need to get into "business model" comparisons with Europe and Japan. These things tend to go back and forth anyway... it's... more instructive to compare companies within the United States.

A 2003 Harvard University/Wharton School paper entitled "Corporate Governance and Equity Prices" ranked 1,500 companies in terms of management power, sorting firms into a Democracy Portfolio (firms in which shareholder rights were strongest) and a Dictatorship Portfolio (firms in which managers were subject to less oversight). Shockingly--or not--the democratic firms outperformed the dictatorship firms by 8.5 percentage points per year throughout the 1990s. If you believe that's a good thing, then stronger corporate governance doesn't just make things "nicer" or "fairer" and stick it to "greedy" CEOs--it actually makes better economic sense in many cases. It's hard to believe, as Crook suggests, that "lower standards of corporate governance" is the price we simply must pay for high productivity growth in the United States...

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