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The American Business Community's Collective-Action Problem

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The Occupy Wall Street movement has not been kind to the American business community. Among other things, OWS highlights the income disparity between the top 1% of U.S. income earners and the 99% "rest of America." Guess who's among that top 1%?

Too many Americans see Wall Street and American business as gaming the system to promote personal profit. CEO compensation is now at least 400 times the average employee compensation in many companies. Thirty years ago, that multiple was 40. Certainly neither productivity nor performance explains this disparity, so populist rhetoric turns to the simplest rationale: greed.

Many observers question whether today's business leaders have a heart when it comes to their role in the country's growing income disparity. Far too many business leaders also turn a blind eye to the nation's urgent needs: on fiscal and deficit policy, health care, education, the environment, and our campaign finance system. A more appropriate question might be to ask whether they have a head.

What is surprising is that the reluctance of business leaders to pay serious attention to these policy issues cuts against their own self-interest. Doesn't every CEO care about the cost of capital, health care inflation, whether the workforce has sufficient skills, whether energy costs can be reduced, and whether their organizations are being shaken down by the taxpayer-funded professional politicians who dominate our Congress? (Insider trading can send business leaders to prison. In Congress, it appears to have been tolerated for years.)

Now, Gillian Tett in the Financial Times observes that former Clinton White House Chief of Staff and North Carolina businessman Erskine Bowles -- co-chair with former Republican Senator Alan Simpson of the Simpson-Bowles deficit-reduction panel created and then ignored by President Obama -- has convened at Harvard a new "CEO fiscal reform council" to see if a business voice can help break the Washington political logjam.

Erskine Bowles is an exceptionally thoughtful, energetic, patriotic, and optimistic business leader. He should be a model for every U.S. CEO, along with Honeywell's CEO Dave Cote, who served on the Simpson-Bowles panel, and Dow Chemical's CEO Andrew Liveris who is trying to address many of the issues highlighted above.

For much of the last year, the 70-year-old Committee for Economic Development has been trying to mobilize American CEOs to address our fiscal-health challenges. We now have some 85 endorsers of the standards by which we felt the now defunct Super Committee should have been judged. These endorsers included Dave Cote, PIMCO's Mohamed El-Erian, BlackRock's Larry Fink, George Conrades of Akamai Technologies, former Blackstone co-founder Peter G. Peterson, and even Erskine Bowles himself. But the effort has been slow-going when it should have been much easier.

Why the difficulty?

The answer lies in what economists call the collective-action problem, where a wedge exists separating a company's or a CEO's private interests from their public interests. Cornell University economist Robert Frank explains how individual incentives often conflict with those of the larger group in a terrific new book, The Darwin Economy: Liberty, Competition and the Common Good.

How the collective action problem plays out to frustrate CEO engagement in sound public policy can be seen clearly in the way one major business association addressed health care reform in 2009 and 2010.

America's employer-sponsored health care system has been a key factor in weakening the global competitiveness of our large companies. A few years ago, General Motors reported that more than $1,000 of a new car's sticker price went to cover the health insurance costs of its existing and retired workforce. Today, fewer U.S. companies are offering health coverage, and the employer-sponsored system faces inexorable decline. It was clearly in the collective interests of all American businesses to move to an incentive-based, market-oriented health care system and jettison the model that emerged during World War II by accident as a way to skirt wartime wage and price restrictions.

Instead of abandoning this anachronistic, uncompetitive approach to health care costs, this business association blocked reform and supported the status quo. The rationale offered for this position was interesting: since many of their member companies could afford the costly premiums, they saw providing gold-plated health insurance benefits as a way to compete for scarce talent in the workforce.

If this zero-sum rationale was so compelling, then why did General Motors file for bankruptcy? On the day General Motors filed for bankruptcy protection, one of their former senior officers told me that two reasons accounted for the company's sorry situation: taking the focus off quality and the consumer, and health care costs.

In a private conversation, this association's president admitted what everyone knew: that the employer-sponsored system was doomed but the association's individual members preferred to stick with the shorter-term goal of attracting talent. They chose to ignore the longer term, more fundamental, competitiveness issues that are harming their interests.

The collective-action problem explains why so many companies and their leaders often behave in this manner. Additionally, other factors reinforce this shortsightedness. Ms. Tett notes that many U.S. corporate leaders today think of their companies and employees as being more global than American. She writes: "American companies might spend heavily to lobby special interests; but it is unclear whether they have [a] similar incentive to change wider American policies."

The Committee for Economic Development is betting that they do -- but the headwinds are, indeed, strong. Corporate leaders and their boards are still bewitched by quarterly earnings reports, and CEOs often face shorter tenures at the top. So much of short-term behavior in corporate America is rationalized in the name of "maximizing shareholder value." Perhaps a rejuvenated shareholders' rights movement can make a needed, and positive contribution by stiffening the spines of more CEOs and their boards to follow the splendid example of leaders like Dave Cote. We need more American business leaders who put their country first rather than bend to narrow short-term pressures.

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Charles Kolb is the President of the Committee for Economic Development in Washington, D.C. He served in the first Bush White House from 1990-1992 as Deputy Assistant to the President for Domestic Policy and in the Department of Education as Deputy Undersecretary for Planning, Budget and Evaluation (1988-1990). The views in this article are solely the author's.