Also be sure to read a preview of the new report Rewriting the Racial Rules.
Our new report, Untamed, builds on the analysis and agenda contained in Rewriting the Rules, in which we argued that changes to the rules of trade, corporate governance, tax policy, monetary policy, and financial regulations were key drivers of growing inequality. By rules we mean the laws, regulations, institutions, norms, and protections that create, define, and structure our economy. The policy agenda detailed stems from the belief that we cannot reduce economic inequality and spur productive growth in America unless we rewrite and properly enforce the rules shaping the corporate and financial sectors. Currently these rules drive an ever-greater share of national income to the largest corporations and the wealthiest, whose untamed power and success comes at the expense of average workers. This is not only unfair and unnecessary but can lead to weaker growth and a less productive economy.
The release of Untamed comes at a pivotal moment for American politics in general and the study of inequality in particular. A wave of new data and research has bolstered our argument that the “rules” of our economy have been a major driver of both rising inequality and declining investment in long-term growth. News stories and recent research have shed new light on the current status of monopoly power, tax avoidance, continuing financial risk, and regulatory capture. Both the political debate and the academic debate have shifted focus from the deficit and skills toward rules and market power. These recent findings inform our agenda.
Our report is also designed to complement other explicitly progressive agendas aimed at boosting growth, building a strong middle class, and supporting the most vulnerable through investment in public goods and social insurance, labor rights, and anti-discrimination laws. We consider this traditional progressive approach to be one blade of a scissor designed to cut through the barriers that weaken the economy and drive inequality. However, we argue that this approach alone will not be sufficient to improve the economic outcomes of average Americans. The “rules” agenda provides the second blade of the scissor.
Because trickle-down economics still influences much of our public debate, efforts to rewrite the rules are often dismissed as “envy economics” or “class warfare.” We instead view Untamed as an agenda to rebalance the economy, restore overall economic health, and deepen our thinking about regulations and rule-making in the fast-moving 21st century economy. The policies we propose complement other important projects, such as raising revenues, increasing public spending for schools, and investing in infrastructure, but there is very little increased spending associated with our proposals.
Ways to Curb Short-Termism
In spite of the declared end of the Great Recession, the U.S. economy continues to function well below potential. One factor contributing to sluggish economic growth is short-termism, a corporate philosophy that prioritizes immediate increases in share price and payouts at the expense of long-term business investment and growth. Abetted by a series of policy changes that increased the power of shareholders and the financial sector over the past 30 years, corporate managers have shifted their focus from stable long-term returns to short-term profits. The result has been not only a marked increase in inequality, but a decline in productive investment as these payouts consume resources once devoted to growth.
Short-termism is the inevitable result of the growing power of finance over the real economy. However, policy choices can push back against this excess of corporate power and curb the incentives that currently shape corporate myopia. This section documents the evolution of the problem and proposes two broad approaches: limiting the known drivers of short-termism and increasing the power of long-term stakeholders. Within these categories, two recommended policy changes are below. Our whole list of recommendations can be seen in the full report.
Establish Proxy Access
The SEC should rerelease its proxy access ruling, authorized through the Dodd-Frank Act, and make the rule stronger by reducing the ownership requirement and lengthening the holder time requirement to target long-term institutional investors.
In order to reorient firms toward long-term value, long-term stakeholders should have greater participation in board nominations. Corporate boards are responsible for supervising executives and making important company decisions. Board members are usually nominated by independent committee and are placed on a company ballot for shareholder vote. Shareholders who wish to place their own nominees on the ballot for election are required to spend their own resources to mobilize other shareholders behind their desired candidate, which is costly. The proxy access rule would remove this barrier.
The Dodd-Frank Act affirmed that the SEC has the authority to develop a proxy access rule, and in 2010, the SEC passed Rule 14a-11, which stated that if a shareholder holds at least 3 percent of a company’s shares for at least three years, that shareholder could nominate either 25 percent of a board or one member, whichever is greater. This rule was struck down by the D.C. Circuit Court of Appeals, largely due to lobbyists claiming that the economic impact of the rule was not fully considered. 207 The SEC should appeal this ruling and make the rule stronger by reducing the ownership requirement and lengthening the holder time requirement to target long-term institutional investors.
Allow Alternative Share Approaches
Listing requirements on stock exchanges should be changed to allow more innovative experimentation with these and other approaches. Firms need the ability to innovate new approaches to shares. Loyalty shares are one innovation that would link more votes to longer-held shares. Dual-class shares empower long-term management by granting them more votes per share. Listing requirements on stock exchanges should be changed to allow more innovative experimentation with these and other approaches. Research shows that efforts to expand alternative, innovative ways of structuring shares can help orient a firm toward long-term value. Though this does not require legislative effort, it does show that regulators should incentivize market-based alternatives. Small efforts from regulators and institutions can bolster this.
As the regulator of the exchanges, the SEC could support these efforts by changing listing rules to be more inclusive of time-varying shares. The SEC could directly try to give long-term shareholders more power by requiring investors to hold company stock for longer periods in order to obtain certain voting rights. In the past, the SEC has “proposed a one-year holding requirement for each nominating shareholder or member of a nominating shareholder group.” Congress could also pass legislation similar to France’s Florange Act, which states that, unless shareholders vote against it, any shares held for two years will receive twice the voting rights.
Labor is particularly disadvantaged by current corporate governance structures, but strengthening labor is in the best interest of companies. “Co-determination,” or involving workers in company decision-making, has the potential to greatly increase the productivity and representation of the labor force by adding necessary long-term stakeholders. Congress should investigate adopting the German model, with the long-term goal of mandating employee representation on company boards to supplement more traditional forms of labor organizing.
To see the rest of our recommendations, read the full report.