As a budding economist, I was initially awed by the market mechanism: the invisible hand that encourages innovation and leads companies to efficiency levels that grow our nation’s wealth. Observing underlying economic principles at work never ceased to amaze me as a college or graduate student. My learning journey in economics was not unlike that of a science student seeing beauty in the laws of nature.
What I have learned in decades of practice and observation however is that outcomes are only as positive as the underlying motives of decision makers in the private and public sectors. And in this regard, “Houston, we have a problem.”
Over the holidays I read a Wall Street Journal article, “Counterfeit Cancer Medicines Multiply.” As the price of cancer drugs rose, they moved to being 8th among the top 10 drugs targeted by counterfeiters, according to the Pharmaceutical Security Institute. Many of the fake or diluted drugs originate in China and have caused deaths directly or indirectly (by not performing as doctors expect).
To what end are US and European pharmaceutical company decision makers willing to risk some patients’ health and impose a worry on all patients that drugs about to be injected in their bodies are tainted? To gain incremental profits from production in a lower-cost country— lower cost in large measure because the nation lacks strong regulatory controls.
It’s not just cancer drugs that are affected by the profit motive. We’ve recently seen fungus-filled compounded pharmaceuticals from a supply chain that earned reduced FDA monitoring likely through heavy lobbying, and US sales reps illegally promoting off-label use of drugs to generate higher commissions. Yes, selling off label generates multi-hundred-million-dollar penalties for their companies, so many that I’ve concluded that some companies make a cost-benefit calculation that the risk of a penalty is worth the incremental profit gained from selling more of the drug.
Banking, credit assessment, and oil drilling are among other industries in which we’ve seen leaders make profit-motivated decisions that later imposed huge expense on our nation. AIG even threatened to sue the US Government- a move thankfully off the table in the face protests.
I view these instances as the early waves forewarning a coming storm. Economists are predicting a period of slower long-term growth in the developing world, making profit-generation that much harder in these markets. Financial services, pharmaceuticals and energy have already consolidated, removing acquisitions as a route to driving financial performance. What will their leaders do next to generate predictable earnings growth?
We can’t regulate our way out of this mess. Sending C-Suite leaders of companies engaged in egregious actions to jail might dissuade others if personal penalties shape individual behavior, but there are many legal protections granted corporations. Hence low-level BP officials are in court, rather than the C-Suite that created the culture in which lower level talent made what they likely thought were the right business decisions.
So the only answer is a transformation of financial markets and governance, moving corporate leaders from a focus on short-term profits to a focus on long-term value creation. Taxing short-term capital gains as ordinary income, restricting use of machine-driven trading, separating board membership from management positions and encouraging large institutional investors to become more active in governance are but a few of the policy changes we could adopt.
Ask mid-level leaders of publicly traded company how much time is spent “managing” quarterly numbers and how often decisions are made for short-term profit that hurt long-term value. You’ll get a sense of the kick-start our nation might gain from moving financial markets to focus on longer-term performance.
I was not surprised that GE’s Jack Welch claimed “foul” when election eve unemployment levels came in low, helping Obama. How, after all, did Jack manage to meet his quarterly estimates year-after-year-after-year in a company as complex as GE?
I’d add breaking up the too-big-to-fail banks to the list as well. They are too big to understand (according to a recent exposé in The Atlantic) as well as to manage, and our nation would be better served by our pre-Clinton banking system. It kept banks from using government funds and guarantees to make bets in which the banks win on the upside but impose the loss on taxpayers on the downside. No wonder talent flocks to the financial markets – who wouldn’t want to play the post-Clinton game?
How do we create needed change? Term limits and non-political redistricting – which would end the influence of today’s unlimited money in our political system. We’d get legislatures voting for policies that advance a better set of incentives for business leaders.