Justin Fox is editorial director of the Harvard Business Review Group and author of The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.
Buy it now » How to Get the Right Work Done Buy it now » HBR's Must-Reads on Managing Yourself Buy it now »Senate Banking Committee Chairman Chris Dodd has unveiled the latest version of his financial reform bill. Despite the fact that Dodd decided to go it alone (that is, without the endorsement of Republicans Dick Shelby and Bob Corker), It's very much a compromise plan, meaning that we'll be hearing a lot from both consumer advocates and banking lobbyists about its flaws.
But what about corporate America? What does it think about financial reform? It's actually really hard to say. The U.S. Chamber of Commerce has focused on opposing the creation of a Consumer Financial Protection Agency, which it claims could end up pestering retailers, colleges, utilities, real estate brokers in the name of protecting consumers. Apart from that, its reform recommendations have remained vague. The Business Roundtable has kept an even lower profile on the subject. Its only substantive contribution to the the discussion, as best I can tell, has been to protest provisions of Dodd's bill that would give shareholders of public companies more say over executive pay and elections to corporate boards.
The likeliest explanation for this abdication is that the Chamber and the Roundtable represent financial corporations as well as nonfinancial ones, leaving them tongue-tied on legislation that potentially pits the banks against the rest. Which means there's no unified voice for the nonfinancial corporate world.
That's too bad, because it's nonfinancial businesses, not financial firms, that create lasting wealth. This is not a moral distinction. It's just the way the world works. The finance sector enables wealth creation, but the innovations that make the economy grow over time come from elsewhere. The financial industry really ought to be seen, and treated, as a servant of the real economy. It's when finance takes the lead and begins to drive economic activity, as it did during the Internet stock bubble of the late 1990s and the mortgage lending craziness of 2003-2007, that we get into big trouble. And even when it's not blowing bubbles, the financial sector can be too successful for the rest of the economy's good.
Take, for example, the by now well-documented phenomenon (it began in the 1980s) of financial workers making substantially more money than those with similar skills and educational backgrounds in other industries. For a while it was possible to contend with a straight face that this was okay because all those brilliant, highly paid financial sector workers were doing such a great job of allocating capital and making the rest of the economy run smoothly. You can't really say that anymore, and we're back to the argument — made by a few economists in the early 1990s but then largely abandoned — that by draining talented workers from the real economy the financial sector's high pay is actually a drag on long-run economic growth.
So while the rest of the business world needs a financial sector that's healthy enough to extend credit, it also ought to favor a regulatory structure that keeps the financiers from getting too big for their britches. Explicit restrictions on pay tend not to work, so the real goal should be to rein in financial-sector profits, especially the phantom profits that come from inflating speculative bubbles. That's where leverage limits come in, and restrictions (like the "Volcker rule" that's kinda/sorta included in the Dodd bill) that try to wall off riskier financial activities from those deemed so essential that they're backed up by government guarantees.
When will we hear nonfinancial business leaders making these arguments? Well, maybe never, and not just because of the conflicted nature of the big business groups. A frothy and powerful financial sector is probably bad news for business as a whole, but it's generally good news for top executives. The spectacular boom in CEO pay that began in the early 1990s has been very much a Wall-Street-driven phenomenon. So it's not really in the short-term interest of individual corporate executives to crack down on the financial sector. That conflict between executives' interests and those of the corporation of the whole is what you'd call an agency problem — the kind of problem that, Mike Jensen repeatedly argued in HBR's pages in the 1980s, could best be resolved by ... forcing CEOs to listen to Wall Street. Which I guess leaves us back where we started, listening to the consumer advocates and the banking lobbyists debate Dodd's bill. Sigh.
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var zflag_nid="675"; var zflag_cid="424/414/391"; var zflag_sid="5"; var zflag_width="300"; var zflag_height="250"; var zflag_sz="9"; Recently from Justin Fox What Business Should Want Out of Financial Reform Mar 16 The Difference Between Political Journalists and B-School Profs Mar 9 We Don't All Want the Same Thing From Health Care Reform Feb 26 What Sort of Checklist Should You Be Using? Feb 23 Google's Buzz, Twitter, and the Semi-Public Life Feb 11 Most Read Most Commented Keep Up With HBR Follow us on Twitter » Become a Fan on Facebook » HBR on YouTube » Get Email Alerts From HBR Harvard Business Review Daily Alert Management Tip of the Day The Daily Stat Weekly Hotlist See all newsletters » var zflag_nid="675"; var zflag_cid="423/414/391"; var zflag_sid="5"; var zflag_width="300"; var zflag_height="250"; var zflag_sz="9"; var L_VARS = {}; L_VARS.publisher_key= 1566926132; L_VARS.zone = 6; var anchor=document.getElementsByTagName('HEAD')[0]; var script= document.createElement("SCRIPT"); script.src="http://widget-cache.loomia.com/js/onewidget_clix.js"; anchor.appendChild(script); Explore HBR Topics Change Management Competition Innovation Leadership Strategy Skills Emotional Intelligence Managing Yourself Measuring Business Performance Project Management Strategic Thinking Industries Finance & Insurance Health Care Services Manufacturing Media & Telecommunications Professional Services HBR.org Today on HBR Blogs Books AuthorsSenate Banking Committee Chairman Chris Dodd has unveiled the latest version of his financial reform bill. Despite the fact that Dodd decided to go it alone (that is, without the endorsement of Republicans Dick Shelby and Bob Corker), It's very much a compromise plan, meaning that we'll be hearing a lot from both consumer advocates and banking lobbyists about its flaws.
But what about corporate America? What does it think about financial reform? It's actually really hard to say. The U.S. Chamber of Commerce has focused on opposing the creation of a Consumer Financial Protection Agency, which it claims could end up pestering retailers, colleges, utilities, real estate brokers in the name of protecting consumers. Apart from that, its reform recommendations have remained vague. The Business Roundtable has kept an even lower profile on the subject. Its only substantive contribution to the the discussion, as best I can tell, has been to protest provisions of Dodd's bill that would give shareholders of public companies more say over executive pay and elections to corporate boards.
The likeliest explanation for this abdication is that the Chamber and the Roundtable represent financial corporations as well as nonfinancial ones, leaving them tongue-tied on legislation that potentially pits the banks against the rest. Which means there's no unified voice for the nonfinancial corporate world.
That's too bad, because it's nonfinancial businesses, not financial firms, that create lasting wealth. This is not a moral distinction. It's just the way the world works. The finance sector enables wealth creation, but the innovations that make the economy grow over time come from elsewhere. The financial industry really ought to be seen, and treated, as a servant of the real economy. It's when finance takes the lead and begins to drive economic activity, as it did during the Internet stock bubble of the late 1990s and the mortgage lending craziness of 2003-2007, that we get into big trouble. And even when it's not blowing bubbles, the financial sector can be too successful for the rest of the economy's good.
Take, for example, the by now well-documented phenomenon (it began in the 1980s) of financial workers making substantially more money than those with similar skills and educational backgrounds in other industries. For a while it was possible to contend with a straight face that this was okay because all those brilliant, highly paid financial sector workers were doing such a great job of allocating capital and making the rest of the economy run smoothly. You can't really say that anymore, and we're back to the argument — made by a few economists in the early 1990s but then largely abandoned — that by draining talented workers from the real economy the financial sector's high pay is actually a drag on long-run economic growth.
So while the rest of the business world needs a financial sector that's healthy enough to extend credit, it also ought to favor a regulatory structure that keeps the financiers from getting too big for their britches. Explicit restrictions on pay tend not to work, so the real goal should be to rein in financial-sector profits, especially the phantom profits that come from inflating speculative bubbles. That's where leverage limits come in, and restrictions (like the "Volcker rule" that's kinda/sorta included in the Dodd bill) that try to wall off riskier financial activities from those deemed so essential that they're backed up by government guarantees.
When will we hear nonfinancial business leaders making these arguments? Well, maybe never, and not just because of the conflicted nature of the big business groups. A frothy and powerful financial sector is probably bad news for business as a whole, but it's generally good news for top executives. The spectacular boom in CEO pay that began in the early 1990s has been very much a Wall-Street-driven phenomenon. So it's not really in the short-term interest of individual corporate executives to crack down on the financial sector. That conflict between executives' interests and those of the corporation of the whole is what you'd call an agency problem — the kind of problem that, Mike Jensen repeatedly argued in HBR's pages in the 1980s, could best be resolved by ... forcing CEOs to listen to Wall Street. Which I guess leaves us back where we started, listening to the consumer advocates and the banking lobbyists debate Dodd's bill. Sigh.
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Submit CancelPosting Guidelines We hope the conversations that take place on HarvardBusiness.org will be energetic, constructive, free-wheeling, and provocative. To make sure we all stay on-topic, all posts will be reviewed by our editors and may be edited for clarity, length, and relevance. We ask that you adhere to the following guidelines. No selling of products or services. Let's keep this an ad-free zone. No ad hominem attacks. These are conversations in which we debate ideas. Criticize ideas, not the people behind them. No multimedia. If you want us to know about outside sources, please point to them, Don't paste them in. We look forward to including your voices on the site - and learning from you in the process. The editors
var zflag_nid="675"; var zflag_cid="424/414/391"; var zflag_sid="5"; var zflag_width="300"; var zflag_height="250"; var zflag_sz="9"; Recently from Justin Fox What Business Should Want Out of Financial Reform Mar 16 The Difference Between Political Journalists and B-School Profs Mar 9 We Don't All Want the Same Thing From Health Care Reform Feb 26 What Sort of Checklist Should You Be Using? Feb 23 Google's Buzz, Twitter, and the Semi-Public Life Feb 11 Most Read Most Commented Keep Up With HBR Follow us on Twitter » Become a Fan on Facebook » HBR on YouTube » Get Email Alerts From HBR Harvard Business Review Daily Alert Management Tip of the Day The Daily Stat Weekly Hotlist See all newsletters » var zflag_nid="675"; var zflag_cid="423/414/391"; var zflag_sid="5"; var zflag_width="300"; var zflag_height="250"; var zflag_sz="9"; var L_VARS = {}; L_VARS.publisher_key= 1566926132; L_VARS.zone = 6; var anchor=document.getElementsByTagName('HEAD')[0]; var script= document.createElement("SCRIPT"); script.src="http://widget-cache.loomia.com/js/onewidget_clix.js"; anchor.appendChild(script); Explore HBR Topics Change Management Competition Innovation Leadership Strategy Skills Emotional Intelligence Managing Yourself Measuring Business Performance Project Management Strategic Thinking Industries Finance & Insurance Health Care Services Manufacturing Media & Telecommunications Professional Services HBR.org Today on HBR Blogs Books Authors Magazine Current Issue Subscribe International Editions Guidelines for Authors Customer Service Subscriber Help Products and Website Help Keep up with HBR RSS Feed Email Newsletters HBR on Twitter HBR on Facebook HBR on YouTube Podcasts: Audio and Video Harvard Business Mobile Store HBR Article Reprints Case Studies Books Book Chapters CDs and Audio Special Collections Events Balanced Scorecard Report About HBR Contact Us Advertise with Us Newsroom Guidelines for Authors: Magazine Guidelines for Authors: Books Information for Booksellers/Retailers Harvard Business School Harvard Business School HBS Executive Education Harvard Business Publishing About Us Careers Higher Education Corporate Learning Harvard Business Publishing About Us Privacy Policy Copyright Information Trademark Policy Harvard Business Publishing: Higher Education | Corporate Learning | Harvard Business ReviewCopyright © 2010 Harvard Business School Publishing. All rights reserved. Harvard Business Publishing is an affiliate of Harvard Business School.
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Copyright © 2010 Harvard Business School Publishing. All rights reserved. Harvard Business Publishing is an affiliate of Harvard Business School.
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