What Do You Think Is the Best Way to Improve Corporate Behavior So as to Prevent Things Like the Opioid Crisis?

(image via The Democracy Labs)

One idea is to reform corporate governance away from focusing narrowly on shareholder interests and instead take into account the interests of broader stakeholders. As defined here, stakeholders are “any third party that has some level of dependence upon the corporation” and can include employees, customers, suppliers, and the larger community.

You can read more about it here, as it’s an idea that the United Kingdom is experimenting with, and I believe this is the model currently used by Germany and Japan. The downside of this approach as I see it is that none of these economies can be characterized as particularly vibrant or healthy, particularly in comparison with the U.S. (Update 8/31/21: since I wrote this, the stakeholder model has been gaining momentum with the Business Roundtable endorsing it, and at least 30 states under both parties passing a public benefit corporation statute or equivalent).

A map of the US showing states passing benefit corporation legislation since 2010. The map is coloured according to the party of the affiliation of the governor at the time of the legislation. It shows that red states and blue states agree on the benefits of benefit corporations as most states have passed legislation
(image via Financial Times)

A second idea I have is to for the government to penalize corporations in ways that actually matter to them. When investors try to determine the valuation of a company (and thus its stock), they generally try to project its cash flow out into the indefinite future.

In the face of practically infinite future revenues, this means that investors will write off almost any one-time fine for misbehavior as simply a one-off that has little-to-no effect on the company’s value. What would really matter is a penalty that impacts all future cash flows, meaning an indefinite recurring penalty (akin to garnishing someone’s future wages).

A third idea is something that appears to be happening in the wake of the opioid crisis with the Sacklers, which is to hold the officers and management personally responsible for their role in company decisions that create bad outcomes for broader society. Currently, “piercing the corporate veil” only occurs now in extreme cases or when the courts believe the corporation was formed for fraudulent reasons, and perhaps corporate behavior would improve if managers were more worried about the possibility.

A fourth possibility that is already ongoing is for investors to hold corporations more accountable by measuring how they do on environmental, social, and governance criteria (or ESG, sometimes referred to as sustainable investing). I am watching this development closely, but I am dubious that most investors would adopt this if it means sacrificing some return. There is also very little agreement on how companies should be scored (Update 8/31/21: ESG investing has been huge, with ESG and sustainable ETFs and funds seeing enormous inflows of assets. Lack of standardization is still a problem, but the Big Four accounting firms and the SEC are working on this issue).

Chart showings soaring sustainable funds sales
(image via Financial Times)

Lastly, it might just be that corporations worry too little about the broader implications of their behavior simply because they have disproportionate influence upon policy-making despite the fact that they do not have the write to vote — namely their ability to donate to political campaigns, 527s, PACs, policy research institutes (i.e., think tanks), and also hire lobbyists. The main objection to restrictions on such behavior is to cite First Amendment rights, but as corporations are not people, it is not clear to me why they should enjoy the same rights. The death of a person is a tragedy. The “death” of a corporation is simply creative destruction that helps propel economic progress and innovation. That being said, some kind of public campaign financing might work better than any type of restriction that money would most likely find a way to flow around.

Originally posted at Quora. Disclosure: I was also the one who posed the question. Updated on 8/31/21 to add additional commentary and images.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s