Sunday, 3 April 2011

Corporate governance and reactionary rhetoric

As I've blogged previously, I'm a big fan of Albert Hirschman's Rhetoric of Reaction. Aside from providing a really straightforward taxonomy of small c conservative arguments it is also essentially makes the case for... ahem... evidence-based policy making. We can all make assertions that policy X would cause Y to happen, but what grounds do we have for such a claim, and if we don't enact X will Z happen instead?

It's a really useful book to read IMO if you are at all involved in corporate governance policy, for both the reasons above. All kinds of dire predictions are regularly made about any significant departure from the UK's historical course (either at the general level of moving away from 'comply or explain', or on numerous individual issues), and far more often than not very little evidence is provided in support of them.

I was reminded of all this recently having witnessed yet another retread of one of Hirschman's trio as applied to bankers' pay. If shareholders put too much pressure on, the argument went, they risk damaging the banks (because talent will flee), thus reducing returns for everyone ( which sounds like Hirschman's 'jeopardy' model to me). Again it's a reasonable-sounding argument. Why risk killing the goose that laid the golden egg (leaving aside the fact that some of these eggs have recently turned out to be bad ones...) over pay when everyone benefits if you just steer clear?

But but but... we don't know that taking a tougher line would have such a significantly detrimental effect. I have no doubt that at some point the tax/regulatory burden can become too much and people move. But where is the evidence that we are at that point? And, I think more importantly, what are the risks of not trying to restrain pay? I would say the latter is the bigger question actually. Because currently there are two propositions being put forward simultaneously. One is that if we put too much pressure on the 'wealth creators' they will either leave the UK or slack off. This is behind some of the recent noises being made about the top 50% tax rate, for example. At the same time though we are also being told that we must cut the deficit swiftly even if it hurts. In other words, we must take it on the chin but the bankers must must not feel unloved. That, I reckon, is a risky course of action, but hey.

When I look back over the time I've been involved in corporate governance it is clear that these types of arguments have been deployed over and over and over again. At each point when reform is threatened out come the claims that, whilst the intention might be well meant, action risks upsetting the delicate balance of the existing corporate governance model. Essentially such arguments betray a Panglossian view of the world. You might think the situation looks unfair but actually because it 'works' and has spontaneously arisen it's the best available, and mucking about with it will only cause trouble, not improve the situation, so don't upset the gentle, natural equilibrium.

In general I'm not that surprised. Despite some loony claims to the Right, and misplaced optimism to the Left, corporate governance is generally a pretty conservative affair. What genuinely is surprising is how quickly these lines of argument have re-emerged in the governance community such as it is, given the recent near-death experience. The banks nearly took us all down, but already those seeking to push on with reform are being presented as the threats to the equilibrium.

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