In watching recent news commentary regarding Mitt Romney's alleged departure date from Bain Capital, it occurred to me that we are focusing on the wrong element of this story. The discussion thus far has been about Mitt Romney's role as head of the investment company, and in what decisions did he participate during those questionable years from 1999 to 2002. To me, this misses the larger point and the more important role Romney played - the investor. Romney remained as an investor to this day, and therefore I believe he has always maintained responsibility over Bain's actions. My view is not currently the mainstream view.
Our system is set up today in a way that I believe fundamentally corrupts our capitalism, economy and society - we have separated business ownership from management and liability. For some reason we believe in a principle that individual investors, regardless of the size of their investment, have no liability, responsibility or accountability for the investments into which they put their money. It is this notion which has supported laws and regulations that entrench this belief in our financial, legal and economic systems. We have laws which insulate and indemnify investors against the improper actions of the companies in which they invest, yet at the same time, these owners benefit from increased return on their investment when management takes unethical or even criminal actions to unfairly game the system and increase profit. These executives are incentivised to do this by outrageous compensation schemes. It is arguable that such large compensation packages are required to subtlely persuade executives to cross ethical or legal boundaries that will increase investor returns. Thus, investors are indirectly responsible for the actions of these companies, and I believe we, as a society, need to move that responsibility from the indirect category to the direct category. It is time that we accept as fact that the simple action of putting your money into a company is an explicit approval of its business practices, its products, its investments, its politics and its ethics.
Mitt Romney argues that because he no longer was running Bain Capital that he is not responsible for its actions. I argue that because Mitt Romney was simply an investor in Bain Capital he WAS responsible for everything it did, as is every other investor in the company.
I believe we need to re-examine our basic assumptions about the relationship between ownership, management and liabilities of a company. If investors are made fully liable and responsible for the actions of the companies in which they invest, would they take a more active interest in the behavior of their executives? I am pretty sure they would. Such an action would arguably completely and quickly re-shape the market, as investors would no longer search for companies that promised the biggest return on investment in the shortest time possible (a clear recipe for fraud and other criminal and unethical behaviors), but they would instead search for honest, integrous companies that provide real value over the long term. Day traders would be put out of work because no one would be interested in the liability associated with purchasing stock in questionable companies if they knew they had a liability tied to that purchase. Learning about companies in this depth takes time - time day traders dont have to invest. Accordingly, investment would become a long-term activity and would involve identifying stability, ethical leadership, good business decisions, long-term trends, and a sense of the collective good, rather than individual riches at the expense of everyone else.
If a company has debts, the investors, owners and managers should all be responsible to pay it.
If a company commits a crime, the investors, owners and managers should all have legal criminal liability.
If a company goes bankrupt, the investors, owners and managers should all be liable to creditors.
If a company produces a defective product or harms the public, the investors, owners and managers should all be liable.
While argument on this point is sure to be extreme, the fix is relatively simple. By making investors responsible and liable for the actions of the companies in which they invest, the entire investment market would dramatically change for the better overnight. This one simple correction to an erroneously held long-standing principle will improve our entire economy and the future of our country.
Whether the law imposes this liability or not, it is still up to each investor to consider their investment carefully. We will be better investors and have better returns over the long term if we invest as if we ARE legally liable for everything that company does starting as of the date we invest until the day we sell our last share. I encourage everyone to invest with this mindset, and if enough people do it will be a simple matter then to change the law to be in accord with our new collective understanding. When we invest in a company because we want to earn the maximum return possible without regard to their ethics, leadership and long-term value we are attempting to increase our wealth at the expense of everyone else (and even ourselves in some cases such as gross pollution of public resources, outsourcing and downsizing), and this is our personal decision. Its time that we each individually take responsibility for that decision, and stop pretending that our investments are irrelevant to business behavior. The truth is that our investments drive and create business behavior, and until we realize that and take responsibility for it, our economy will continue to falter and fall into croney capitalism like we see at Bain Capital and virtually every other capital investment operation in existence.
Opponents will argue that such a proposed change would cause investors to stop investing completely. This is unlikely, but it is likely that investment would decline dramatically in the short term while investors recalibrate to the new conditions of the market, but investors still want to make money, they will just be more careful about investing in the future. New tools will be developed and enhanced to respond to these changes, such as increased access to internal documents, meetings, processes and decisions within companies so that investors are directly aware of their actions in a timely manner. Bad decisions will result in quick de-investment by sensitive and savvy investors, and companies and executives will no longer be rewarded for making bad decisions. My ultimate argument to opponents of my proposal is that if you are too lazy to learn about the company in which you are considering investing your money, then you have absolutely no business investing any money in any business.
If implemented, this idea would result in investors having a more active role in the management of companies, and this would be a good thing. Power corrupts and absolute power corrupts absolutely. The solution is to share power between different entities. However, power and responsibility go hand in hand. Yes, investors need more power in relation to executives but with it comes more responsibility and liability, it cannot be avoided.
