> You want to hurt the company and it's owners...
The owners of big companies include lots of pension plans, index funds, etc. Hurting those owners, who didn't have any say in the bad decisions, is probably not what we want.
Jail for executives who approve or have knowledge of illegal activities sounds good to me.
> Jail for executives who approve or have knowledge of illegal activities sounds good to me.
But then who would write the campaign contribution checks on which our government depends to survive?
> The owners of big companies include lots of pension plans, index funds, etc. Hurting those owners, who didn't have any say in the bad decisions, is probably not what we want.
I mean... Shareholders are ultimately responsible for the company, they elect the board etc. If shareholders were impacted by this, maybe it would make more folks think twice about "passive investing"?
I don't see this doing much unless everyone stops at about the same time. The largest shareholders have a disproportionate amount of power to influence the direction of most companies.
For much of SP500, the largest shareholders are the passive investors. It's common that an activist hedge fund can influence decisions with a mere 3% or so stake because the likes of BlackRock and Vanguard support them or abstain.
If you properly punish the shareholders, then it doesn't matter if they stop or don't. If they stop, the bad behaviour stops; if they continue, the onerous penalties continue. Anybody who wants to sponsor bad behaviour with their AUM can pay the appropriate fee.
I love when people bring this up. I passively invest by which I mean I take a couple of bucks every couple of paychecks and throw them into an index fund or buy one or two shares of stock of a company. Not to mention my 401k. How about we hold the people making the decisions accountable all the way up and down the chain instead of letting the go with the whole "following orders" defence.
How about we don't let companies control their dividends. Excess profit that's not reasonably ear-marked for growth, should be mandated to be distributed as dividends. And that's probably just one item we can start doing to make the stock-market less of a gamble and hedge against inflation, and more of just "people owning portions of profit-making entities".
Companies need to have to name someone who is criminally responsible for the companies actions.
Institutional shareholders actually play a strong role in governance over companies, both in choosing where to invest, and in directing companies (and their boards) as to how they should operate.
Pension and hedge funds finding that their assets are at risk due to changes in perceptions around privacy are actually among the most effective market mechanisms for changing corporate behaviour. Far more so, it seems than the consumer/retail side of the market, where leverage is effectively nil.
Investors can effect leverage because they're not stuck with a monopolistic / oligopolistic market with a small number of vendor choices for a particular good. Investors have the entire market of stock corporations as potential investments, and can enter into or exit from those which pose attractive opportunities or undue risks with very few additional concerns.
Except institutional investors ARE restricted based on what kind of investment they need to fill out the specific portfolio they're administering.
Oftentimes these restrictions limit them to a subset of companies in a certain market to fill a specific niche in the name of diversification. Are they artificial limitations? Sure, but only in the sense that there is no regulation saying they cannot find a different company to invest in.
All that to say that things are not nearly as cut-and-dry as it may seem.
With regards to the ultimate thrust of my comment, to a greater or lesser degree than ordinary "consumers" (I hate that term) within monopoly-dominated product or service fields?
Is there any investment category in which an institutional really has only, say, 1--3 options? Because that is the relevant comparison.
I'm going to posit that investment markets are overall more competitive than consumption markets.
(They may have other issues, including some that, of all people, Matt Ridley's pointed out. I believe it's somewhere in this discussion with Johan Norberg and David Runciman, which I've listened to previously but not just now in referencing it: "The New Optimism" on Intelligence Squared, <https://www.intelligencesquared.com/events/the-new-optimism-with-matt-ridley-johan-norberg-david-runciman-and-laura-kuenssberg/ https://www.intelligencesquared.com/events/the-new-optimism-...>. It's worth listening to on its own. I'll admit to being partial to Team Runciman myself, but Ridley's comment on asset markets has been bouncing around my noggin for a while.)
> Jail for executives who approve or have knowledge of illegal activities sounds good to me.
I suspect one possible outcome is many people wouldn't want to take the risk to become an executive, and the percentage of executives who wouldn't mind taking risks of going to jail will increase, which is not a desirable outcome.
Then don't commit crimes? I'm usually pretty sympathetic to executives being used as sacrificial lambs by constantly being put in the position of having to bet their jobs on a coin flip they're calling in the air. But this really isn't defensible.
Jailing people with only knowledge isn't the right move compared to having a fully anonymous whistleblower program, with fine sharing. It sucks that there has to be zero transparency but you don't want some unfortunate schmuck doing the right thing and then getting blackballed for the rest of their career for it. But jailing the people with authority and accountability is completely doable-- if you didn't know that's on you because it's literally your job to know and that lands you 3rd degree $crime. If they can prove you knew that's 2nd degree, and if they can prove you ordered it or signed off on it then that's 1st degree.
> Then don't commit crimes?
But that's the problem. Crimes are profitable.
Suppose there are two insurance companies. One is following the law, the other one is bribing a mid-level employee of a car company to give them driver info and then using it to set rates and solicit policies. The CEO of the car company doesn't even know it's happening and the CEO of the insurance company does, but isn't telling anyone about it and it just looks like they have above-average margins on their policies.
As long as they don't get caught, the ones breaking the law are not only making money for themselves, they're the ones investors will choose to invest in when all they can see is the bottom line. The honest CEO of the other insurance company gets deposed because investors want someone who can get the same returns as the cheating one, so they cycle through executives until they get one that posts better numbers because they're cheating too.
Some of them will never get caught and come out ahead. The others expect that to happen, which is why they're willing to do it, and if they do get caught then they get replaced by someone else who thinks they won't get caught.
The underlying problem is the structure of the system. The owners want higher profits but are also a diffuse group without the capacity to pay detailed attention to how it happens, so you create evolutionary pressure to cheat. What you actually want is for companies to be operated by their owners because then the owners know what's happening inside the company and can distinguish between a company which is making more money because it's well-managed and one which is making more money because it's cheating and putting their investment at risk. But then we need to stop having megacorps with diffuse passive investors and instead have small and medium businesses which are operated by the owners.
If they are willing to accept the profits than they must also accept the risks. Otherwise you're just vouchsafing the hostage negotiation because of one level of indirection.
Ideally, the people responsible for managing the money on behalf of these institutions end up bearing most of the responsibility.
Pension plans are nearly gone and the whole point of index funds is to weather volatility. We have unemployment to assist workers (or we would if workers had modern rights to begin with). meanwhile whole draw of market investment to everyone but the shareholders goes tits-up if failure is weathered by the market as a whole rather than the incompetent or malicious actors.
I mean, people will put up with a lot, but eventually they'll realize that the market isn't magic and its continued failure to address our the economic and social conditions can be blamed on a specific enumerable class of person.
> Hurting those owners, who didn't have any say in the bad decisions
Why do you think this? Executives have a fiduciary responsibility to their shareholders, so if these actions are more profitable, they are legally required to perform them. Moreover, the primary beneficiaries are the owners.
Indeed, if you harm the shareholders by reducing the price of shares, you are harming them in the most fair way possible: In proportion with their share of the responsibility.
>Executives have a fiduciary responsibility to their shareholders, so if these actions are more profitable, they are legally required to perform them.
Zero percent of this is correct, and even if they had a legal responsibility to make "as much money as possible", which they don't, that would definitely not force them to commit crimes
The "fiduciary responsibility" is NOT "to make every dollar possible", it is a "don't purposely hurt the company" rule.
Surely it must be at least fifty percent correct, since you grant the first clause :)
Of course the duty does not extend to committing crimes. I was being a bit cynical. You are right that profit maximisation and fiduciary duty are distinct concepts. In practice, though, the owners are profit maximisers. Companies that do not profit maximise are less attractive to investors, attract less investment, and are outcompeted.
To advocates of the market system, this is a feature and not a bug. But its effect is that companies operate "optimally" within the bounds of the law - said differently, the line between legal and illegal conduct is generally skirted as closely as possible. And when, as other commenters have noted, punishments for breaking the law are on average less than the profits incurred by illegal activity, selection bias means you are left with lawbreakers in the long run.
You are right that this is not a (direct) consequence of the fiduciary duty of an executive. I stand by my main point, though, that this behaviour is a consequence of the owners' selection criteria, and they deserve to be punished for it.
> Jail for executives who approve or have knowledge of illegal activities sounds good to me.
Life hack: make your activities so complex and distributed that it's impossible to tell who, exactly, is responsible for what. And then also just delete communications when you can.
Simple solution: You're held liable regardless of if you knew or not. It should be your responsibility to do everything possible within your power to make sure the company you're heading isn't committing illegal acts. If it is and you can't prove you tried everything you possibly can to have control over the situation, tough luck buddy.
Maybe then the inflated CEO salaries will make some form of sense for once, instead of the current system where there's 0 actual risk for them other than a golden parachute waiting for them at the end of the road after having fucked millions of people's lives irrevocably.
> Hurting those owners, who didn't have any say in the bad decisions, is probably not what we want.
It's definitely not what we want in the short term, but thinking longer term, it's index funds and such that need to remove these actors from their portfolios if we really want to start reshaping the economy.
> The owners of big companies include lots of pension plans, index funds, etc. Hurting those owners, who didn't have any say in the bad decisions, is probably not what we want.
It is exactly what we want. Otherwise the only deciding factor for what to invest in is maximum profit and that just incentivizes companies to skirt the law as much as possible.