Regulation and Sustainability

An interesting point in favor of tighter regulation of companies is that investors, who control and direct the activities of firms have little interest in the health of the company or the welfare of customers, employees, or others affected by the actions of the firm but are only interested in short-term profit and have historically shown little regard for ethics or the law in pursuing the highest return possible.  It's an intriguing argument, but is based on the premise that all investors behave in this manner - which is not entirely true.

The structure of a corporation is particularly vulnerable to this accusation, as the "owners" are a faceless mass of shareholders whose intentions cannot be accurately gauged, so any intention can be conveniently ascribed to them for the sake of supporting an argument.   But a proprietorship is less vulnerable because it is assumed that the owner has some level of interest in the long-term welfare of the business and recognizes that relationships with stakeholders (customers, employees, and the community) must be served in a sustainable fashion.

But even in the corporate structure, there are those who are interested in the long-term welfare of the firm and take a similar position on sustaining relationships with stakeholders.  The majority of shares of most corporation is held by institutional investors, who seek a long-term profit on an investment they intend to maintain for decades.   These investors likewise maintain functional control of the firm, as they are not only the majority owners but are also the most active in participating in the governance of the firm itself, as opposed to short-term investors who seek to profit but are seldom involved in governance, whether by virtue of the brevity of their involvement or by their inability to form a sufficient bloc to overpower the majority of institutional shareholders.

Neither is there much incentive for short-term investors to organize a coup within an established firm.   These investors are attracted to opportunities for rapid growth and short-term profit, which are not characteristic of firms that are operated in a sustainable and conservative manner by long-term investors.  As such, the short-term investor is guided by his own profit motives to seek a different kind of vehicle for his investment: generally a smaller and less established firm that has the potential to provide a high short-term reward but whose long-term prospects are uncertain.

This does not invalidate the argument, but merely relegates it to a small minority of firms in the economy - specifically, smaller firms who have far fewer employees, far fewer customers, and whose operations constitute a negligible threat to the general welfare of the public at large.   This in itself is a safeguard against misconduct, as individuals are largely reluctant to engage with a such firms: customers are suspicious of unknown brands and recognize the risk they are taking in engaging with them, employees also recognize that a small firm is unstable and cannot be relied upon, and there is greater exposure of individual actions in a smaller organization, making it far easier for regulators to influence against or react to situations of misconduct.

In all, I'm left with the distinct impression that the argument that firms must be regulated to ensure their sustainability is half-baked and applies only to a negligible proportion of firms in the economy.   The test of whether a firm will become viable is in its ability to consider the broader impact, beyond immediate financial returns, and establish sustainable and mutually beneficial relationships with long-term stakeholders whose own behavior in interacting with the firm is supportive of such.

That said, there will always be incidences of dysfunction in some sectors, and even large and established firms will on occasion go astray - but in the larger picture such incidence will be uncommon and the damage that results will likely be negligible to the health and welfare of a large and established economy.   And so, the notion seems plausible but is unlikely to hold.