Forcing Fiduciary Responsibility
The Cossack: Where Free People Reign!
Rosalyn (fictional) was promoted to CEO recently, from her CFO post for the automotive supplier. Her company makes axles and other parts for large trucks. She knew that she would only be in her new role for 4 years until her retirement. After meeting with her financial advisor, she decided to increase her investments dramatically to reach her financial goals.
After coming home, she performed an analysis of her financial situation and came to the conclusion that maximizing her stock options would be the only path to meeting her goals. The next day at work, she perused the company’s financial statements to determine how she could increase company earnings dramatically over the next four years.
The automotive supplier had been around for over 90 years, having been founded during the Great Depression, just prior to World War II. The high quality axles, spindles, shock absorbers and other fundamental car parts were key components of trucks sent to Russia as part of the Lend Lease program fashioned by FDR.
Rosalyn decided the only meaningful way she could improve the company’s stock position now would be to reduce its research and development (R&D) costs to zero, in additional to cutting back dramatically on selling and advertising costs designed to get their products into new markets. Rosalyn would have to figure out the correct messaging to the board of directors and to company executives.
Roslyn sold the company on increasing the stock price by cutting such long term viability costs as R&D and sales. She took the decision to increase the company’s debt to fund current operations and raised the dividend by 50%. The result? The stock price rose by 40% in each of the 3 years after she took these actions. Over time, she exercised her stock options to increase her personal financial position. In the fourth year of her administration, the board of directors fired Rosalyn as they determined that her course of action was the wrong one: a dearth of new products, decreasing sales of existing products and a large debt servicing responsibility. Seven months after Rosalyn’s firing, the proud company that had been around for over 90 years went into receivership. A sad day indeed.
One of the common problems for any organization’s leadership is the balance between short term and long term goals. If an organization is disproportionately and incorrectly long term focused, it will cease to exist in the short run. If an organization’s focus is on the short run exclusively, it will not invest in the organization’s future. Investment in business is crucial for long run viability.
The major driver in the short term/long term balance is the degree to which organizational leaders are committed to the long run viability of the organization. Leaders can be committed to the organization they serve, or they can be committed to their own, personal remuneration, using the organization as a conduit to achieve their own, selfish goals.
At The Cossack, we know that there are dozens of inappropriate incentives that drive government to short run thinking, wrongheaded decision making and the continuance of organizational defensive routines that thwart government accountability. A unique problem of democracies is the massive incentive to focus uniquely on a series of short run decisions. In the American case, for example, a member of Congress who wants to be reelected has two major courses of actions: vote to increase government spending to his or her constituents or vote to lower taxes dramatically to benefit his or her constituents. Putting money into the pockets of your constituents drives support and, therefore, reelection.
The long run cost of this, of course, is massive debt. We have seen what the long run problem is in countries who fund their countries on total debt. Argentina is one of those countries. Peronism is perhaps the foundational political ideology of Argentina, the supporting economic system being socialism. Juan Peron started this in the 1950’s, the ideology has been reinstated in 1973 and, more recently, in the 2010’s. The core component of the ideology is massive social spending to prop up what is a minimal private sector. The long run concern is the massive borrowing that it takes to sustain the ideology. The result from massive social spending is the poverty-creating inflation. Americans consider double digit inflation to be horrific, imagine 114% inflation.
As we turn to the United States system, what incentive is there for Congress and president to manage beyond the 4 or 6 years of their terms of office? Currently, the political system lacks any incentive to balance the short run with the long run, a real problem. Spending by the government is so pervasive, drunken sailors talk about spending like Congress. Even those who follow Keynesian economic policy know that John Keynes prescribed decreasing government expenditure in economic expansions, yet politicians, particularly on the political left, tend to ramp up spending in good times and in bad. Spending seems to be such a habit by the government that a majority of it is mandatory and Congress does not even have to vote on it.
Spending has been so integrated into the governance process, as well as limits on taxation of citizens. The result, higher and higher debt. At some point, it will be impossible for regular taxation to pay the service on public debt. Over time, the government is highly incentivized to print currency, often resulting is the massive inflation indicative of a failed state.
What should be done about the inability to balance short run decisions with long run policy? Members of Congress and presidents will.must have personal, fiduciary responsibility without time limitations. Imagine a law on the books that specifies triggers, such as a debt default or an egregious debt-to-GDP ratio, that directs the Internal Revenue Service to seek out former presidents and Congressional Members for 100% wealth tax. Of course, the law would be limited to those Members or presidents who actually voted or signed into law previous budgets that resulted in deficits (we only punish those who contributed to the problem). The law would not have any time limitation and, if the president or Member died, the IRS would confiscate their estate.
Breeches of fiduciary responsibility in the federal government are met today with indifference. There are too many systemic defensive routines to punish wrongdoing in the federal government, as we have discussed previously. Government wrongdoing is so rarely investigated and punished, it is big news. This would be yet another opportunity to punish wrongdoing by the Congress and presidents. Of course, the people would have to do this using the Convention of the States channel, but it must be done. Otherwise, the United State will go the way of Cuba, Venezuela and Argentina.
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