Tuesday, June 23, 2009

A letter sent to the retirees of a large company ends with
[The company] reserves the right to change, amend, modify, suspend or terminate its employment practices, policies, employee benefit plans or programs at any time…

One can easily understand why this company includes such warnings in its employee communications. Over the years they have been sued many times.

But consider the message this sends to salaried employees: You can’t count on any future benefits from the company. Forget about all the enticements we offered you to join us. They aren’t worth the paper they’re printed on. It’s no wonder people graduating from college today often go into business for themselves. There’s no point working for someone else for 30 or 40 years if he fails to keep his promises.

Eventually this trend will take its toll on large companies. People involved in design and engineering are salaried, so they don’t have the protection of a union contract. The absence of any guarantees that would entice such people to stay on board long term will lead them to job hop or work as independent consultants. But design, engineering, software development and other technical functions need continuity, and continuity is lost when the work force is constantly shifting.

One solution might be for these people to unionize, but professionals are generally too independent to work under the constricts of a union, and experience has shown that most unions are not good for the employer, either. Another solution is 401(k) programs that don’t require employees to invest in their employer, and medical savings plans. In both these programs the money contributed to date is under the employee’s control – within the strictures of the laws governing such programs.

It’s clear that some solution is needed if our large companies intend to remain competitive and in business.

Wednesday, June 17, 2009

Why regulation fails

An article reported by AP June 17, 2009 says in part:

Obama's sweeping change of business regulation also embraces new powers for the Federal Reserve and new rules that would reach into currently unregulated regions of the financial markets. An 85-page draft details an effort to change a regime that Obama's economic team maintained had become too porous for the innovations and intricacies of the today's financial markets.

This of course is not the first attempt to close up loopholes in the regulatory structure. Sarbanes-Oxley was supposed to improve reporting on corporate governance and prevent disasters like Enron and MCC. Before that many other regulations were published to deal with other loopholes.

But people are resourceful. Whenever a strategy that makes money for its practitioners is prohibited by regulation, people put their lawyers to work to find workarounds, or entirely new strategies. Over time the regulatory structure begins to look like Swiss cheese, because it’s impossible to anticipate and evaluate every strategy an innovative investor or his lawyer will devise. Some of the strategies of course are perfectly reasonable and perhaps even benefit society. Legislators and regulators don’t always make that distinction.

So what’s the solution? I argue for minimal government regulation and lots of transparency in the conduct of business affairs. The transparency ought not to be achieved by government regulation however, or we will end up with another expensive nightmare like Sarbanes Oxley. Transparency can be best assured by the most basic of laws, trade associations, and customer due diligence. With less regulation customers will realize enough additional profit to more than make up for the occasional shyster that slips past law, trade association policies, the Better Business Bureau and customer due diligence.