Political Governance vs. Corporate Governance

A New York Times columnist says it may be a mistake to try “to make government run more like a business.” Citing research by Matthias Benz and Bruno S. Frey, summarized by Larry Yu, the Times says that government works better than the private sector:

The authority over government is split among the branches of government. In business, Mr. Yu writes, “even if directors have stepped up their governance in recent years, institutional norms still stack the deck in favor of C.E.O.’s.”


And while chief executives and directors can serve forever, politicians need to face re‐​election regularly.


When it comes to corporate governance, maybe there is something to be learned from governments.

Well, let’s see. According to a Booz Allen study, dismissals of corporate CEOs have risen sharply in the past decade. Among the world’s 2,500 largest public companies, “CEOs are as likely to leave prematurely as to retire normally. Continuing a pattern from 2004, in 2005 nearly half of all CEO departures were due to poor performance or mergers.”


Meanwhile, almost no members of Congress are removed from office involuntarily. As this chart shows, House reelection rates are approaching 100 percent.


Does that mean that the U.S. government is performing so much better than the average company that there’s no need for change? It seems unlikely that even the Times columnist would make that claim. No, if you read the links above from Booz Allen and the Washington Monthly, you can see some of the differences between politics and business: Business is competitive, to begin with. There are 2,500 large companies in the survey, all competing with one another and with millions of upstart challengers. If Sears and K‐​Mart don’t stay on their toes, Target and Wal‐​Mart will take their business. Wikipedia lists pages and pages of defunct companies, all of which failed to satisfy customers. Executives lost their jobs, and shareholders lost their money, and those realities are a powerful incentive to executives and shareholders of other companies. Corporate boards are getting more aggressive, and different companies are testing different rules for governance — outsider CEOs, separating the jobs of CEO and chairman, acquisitions, divestitures, going public, going private — in an attempt to find the rules that will produce the greatest customer satisfaction and thus the greatest profits.


Contrast that with government. Failed bureaucrats are almost never fired; indeed, the standard response to bureaucratic failure is to appropriate more money for the agency. Gerrymandering, campaign finance restrictions, and taxpayer‐​funded constituent service and propaganda make it almost impossible for a member of Congress to be turned out of office. People spend other people’s money far less efficiently than their own.


I think the Times got it backwards. It would be more appropriate to say, “When it comes to government, maybe there is something to be learned from corporate governance” — such as the value of decentralization and competition, retirement ages or term limits, and real penalties for poor performance. Since those factors are unlikely to occur in political systems, the best lesson is to keep as much of life as possible in the private sector.