Rethinking Public Governance after Private Governance Failures


THE CORPORATE SCANDALS of the past few years have taught us many lessons about the principles of corporate governance. Behind the poor management, unchecked fraud and rampant wealth destruction were uninformed decision-makers. Sometimes this included board members. Always this included the great mass of stockholders. Unsurprisingly, reforms have expressly targeted this problem, championing the cause of an informed shareholder base. Effective disclosure has come to be seen as an essential component of any functional corporate finance system, instead of just another transaction cost. And rightly so, given that shareholders ultimately control the levers of the corporate machine. Now it is time to step back and ask whether the changes in private governance can be extended to the public realm.

If informed decision-making is good, and effective disclosure informs decision-makers, why don’t we demand a similar modernization of the public governance disclosure regime? Yes, there is the Freedom of Information Act. But most people don’t have the time, energy, or inclination to troll government records and produce useful summary documentation that would better inform their participation in our deliberative democracy. If General Electric instituted a FOIA-like system and stopped sending useful summary tools,such as annual reports to shareholders, the Securities and Exchange Commission would have senior GE executives doing the perp walk before too long. The potential for public governments to eviscerate personal freedom merits at least as strong a system of continuous improvement for public information disclosure as mandated for private entities.

One place to start might be an annual “Net Contribution Report” that is issued to every American filing a federal income tax return. The content is conceptually simple. Add all federal taxes paid by the individual and then subtract a median estimate of the cost of services provided thereto. Granted, the reported figure would not be perfect and the report itself would not reach non-filers. Nevertheless, some information pertaining to this critical measure is better than none. The “Net Contribution Report” would not be expensive to produce since it could be included alongside existing tax paperwork and mailings. Assuming the limits of the NCR are accurately conveyed to the recipients, the result should be a more informed populace. Many Americans would no doubt be surprised to find that they are net recipients rather than net contributors to the federal coffer. Others might perhaps find their payment of taxes less burdensome if they could mentally associate payment with the receipt of their share of federal government services. Since the NCR is about information, it need not make any judgment about the rightness or wrongness of the policy that determines the reported figures.

Of course, social engineers might appreciate the NCR as a tool to create positive social utility. An NCR report might include other information to place the reported figure in perspective. For example, net taxpayers might be provided true-to-life equivalency descriptors. A person might be informed that a reported $10,000 excess was sufficient to provide prescription drug coverage to 10 uninsured children for the year. Similarly, the NCR could be used to police government inefficiency. The report might include metrics, such as those demanded of charitable institutions, that measure the portion of every dollar received that funds administrative costs as opposed to the actual provision of services. What to include and where to draw the line between information and propaganda are open questions best resolved through political and public debate.

In the end, the point is not so much to advocate a NCR or any particular summary information tool. The point is that we should at least be talking about the merit of such tools. It is time to demand the same effective disclosure from our public governance system that we require from our private governance system.

Frederick E. Pollock’s financial news-analysis appears weekly.

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