Ask most people if they should have a say in our political process and in the compensation of government employees and they will invariably say 'yes.' After all, our taxes pay for the running of our government so why shouldn't we dictate the terms?
Now ask the same people if they should have a say in corporate governance and executive pay and the answer is invariably 'no.' The public has no business interfering in private enterprise since it does not subsidize it.
But they are wrong about that. Not only does the business sector get subsidized by our taxes, but relies on it for its very existence.
This happens in multiple ways. One is through subsidies that our government provides to industries that require assistance to remain profitable, usually through artificial demand to bolster prices, such as for sugar, dairy, and corn. Another is by offering tax credits to a variety of sectors to encourage innovation, production, and hiring, such as the pharmaceutical and oil companies. A third is by allowing businesses, especially large multinational corporations, to minimize their taxes on income from overseas operations, such as technology companies.
But none of these compare to the biggest subsidy of all - public infrastructure and services, which include our robust highway system, buses, long distance trains, subways, water, electricity, and even our courts, police, and fire departments. All these are essential to the successful functioning of commercial activity on our shores and are subsidized (more or less) by the American government.
Take away these things and the private sector could not function: their plants would not be able to run, their employees would not be able to get to work, their goods would not be able to be transported cheaply and safely, suppliers could not be held accountable for delivery or buyers for payment, warehouses and shops could not be secured from theft, inventory could not be saved from fire. It is not hard to recognize that if these services were the sole responsibility of the private sector, they would be prohibitively expensive and would render all commercial activity unprofitable.
And who ultimately funds all these subsidies and services? The American taxpayers. Collectively.
All these benefits that businesses enjoy are the result of the sacrifices of all Americans, not just of their own limited tax contributions, and so it is not unreasonable for the public to demand accountability. Whether it is on matters of executive pay or general corporate governance, the private sector is accountable to all of us, and to our elected public officials who we have tasked with the job of protecting our interests.
Additionally, the larger the business, the more disproportionate their benefit from public infrastructure, due to the fact that their operations are larger and also because larger companies are able to take advantage of offshore tax loopholes not available to smaller businesses. In other words, proportionally speaking, these companies contribute less to the tax base themselves and piggyback on the larger share provided by others.
The implication of all this is that when companies overpay their executives, fritter away money on frivolous expenses, gamble their future on ill-conceived mergers, or take excessive risk, they are not simply harming themselves but wasting the money of all taxpayers who make their business activities possible. The fallout from bad business decisions does not just effect shareholders and employees, but everyone who is part of the financial ecosystem, and that makes it pretty much everyone's business.
The private sector should be held to the same standard of scrutiny that the government itself receives from the people, and corporate governance should be as much a matter of public debate and law as political governance.
SANJAY SANGHOEE has worked at leading investment banks as well as at a multi-billion dollar hedge fund. He has an MBA from Columbia Business School and is the author of the financial thriller "Merger" which Chicago Tribune called "Timely, Gripping, and Original". Please follow him on Twitter and Facebook (Candid Politics & Business Blogs).
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