What Governments Can Learn From Companies

The performance of municipal governments and publicly-traded companies has become a study in contrasts. Governments in the U.S. have been, in a word, uninspiring. Fiscal profligacy is a problem, with many city and state governments running up pension debt in the 5-figures per capita. There are whole organizations now dedicated to criticizing the chronically-dumb infrastructure decisions cities make to worsen those problems. Once stuck digging these holes, it is hard for cities to provide quality services, much less innovate. When San Francisco officials held a “toilet paper cutting” to celebrate the reopening of a long-shuttered subway station bathroom, it symbolized how low expectations have become for urban American governance. Yet there is an alternate governing culture that is thriving in America: publicly-traded companies. Investor markets overall have proven efficient, as companies that are corrupt (Enron) or obsolete (Toys ‘R’ Us) go bankrupt. Companies that survive produce wonderful returns for investors and innovations for society. Since 2012, the S&P 500’s overall shareholder returns are 177 percent, while the companies therein have driven advances in clean energy, digital technology, banking access, medicine, and more. ESG—a self-policing corporate metric—has driven strides in workplace safety, equity, and philanthropy. Furthermore, specific companies have become known for their operating culture, from the decentralization of Berkshire Hathaway to the employee creativity fostered by Google. Given these successes, there is much that municipal governments can learn from corporate America. It may, in fact, be worth considering whether the entire way cities are run—with elections, councils, etc.—is ideal. Public companies have an alternate structure that often produces better outcomes due to the following traits.Aligned incentives: the main goal of public companies is to produce stuff people want to buy, i.e. to profit. Everyone’s interests within the company advance through greater profit, so there is a laser focus on this goal. Municipalities, by contrast, have scattered and ill-defined goals. You will never hear an official say their city’s goal is to “profit,” and they seldom champion things that would produce profit, such as population growth. Community “goals” are instead listed in opaquely-worded Comprehensive Plans, while the actual goals of a given official or bureaucracy vary based on self-interest. Nobel economist James Buchanan described this phenomenon of self-conflicting goals as Public Choice Theory, using it to explain why governments perform sub-optimally. Corporate Boards: relatedly, corporate boards of public companies—which often group large investors in the company—are aligned in mission. While they are not without toxic politics, the overarching goal is to profit, and boards are filled with credentialed people who can contribute to this goal.In city governments, the “board” is a resident-elected council. The councilors, to reiterate, do not have a unifying goal for the city that all of them could easily put into words. Many of them get elected by appealing to interest groups whose goals run counter to the city’s broad interests, and councilors pander to them to advance their own political careers (just look at how public employee unions have captured city services, at major cost to taxpayers).Shareholder voting: Public companies are not devoid of democratic features, however, but it differs. “Unlike the single vote right that individuals commonly possess in democratic governments, the number of votes a shareholder has corresponds to the number of shares they own,” writes Investopedia. This speaks to a “user pays” principle in which investors get a say in big company decisions commiserate with the stakes they’ve bought. In municipal governance, the word “stakeholder” is distorted to include interest groups that have no major financial stake in or monetary contribution to the city. Elections are an example: every adult resident gets equal representation regardless of the taxes they pay. This prompts a tragedy of the commons wherein certain citizens vote for benefits that other constituents pay for, contributing to the above-mentioned debt problem. Bankruptcy: this may be the most useful distinction between how cities and companies operate. Bankruptcy has proven to be a self-correcting mechanism in the corporate world. Poorly-performing companies can fail, investors lose money, and future mistakes are avoided. Corporate bankruptcy is common (ranging from 20,000 to 60,000 in the U.S.), meaning corporations borrow at higher rates and are thus less compelled to use reckless leverage. For municipalities, bankruptcy is complicated. Lots of cities should go bankrupt to erase their unsustainable debts, but some states make it legally difficult. In the rare cases that it happens, it’s not really “bankruptcy.” There is a non-traditional order for creditor payoffs, and bailouts for the city from higher levels of government. This means that failing governments are propped up; lessons go unlearned; and other cities make similar mistakes. Perhaps the biggest reason for the “lack of innovation” in cities is that they are not subject to market discipline, including true bankruptcy. This means that nobody living in or governing them faces the consequence of fiscal malpractice, nor has an incentive to drive improvement.  

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The idea that government municipalities should reflect publicly-traded companies may sound extreme, but it is not. The U.S. has a well-developed culture of HOAs—over 370,000 representing 53% of owner-occupied households—and being private entities, many of them mirror corporations. For example, The Woodlands, Texas, is a 114,000-person city that blends public and private management. It is owned by the publicly-traded Howard Hughes Corporation and has a professional executive team, but also a democratically-elected board of directors.   In the future there should be more advanced versions of privatization. Wyoming and Texas are seeing separate cities experiment with a Web3 technology called Decentralized Autonomous Organizations. Akin to a publicly-traded company, residents will manage land via shareholder voting. The larger point is that there is much diversity in how public companies run—often to great success—and there is no inherent reason municipalities cannot copy them. While political activists find romance in the raw democracy common in most cities, many consumers prefer HOAs with more private management. As publicly-traded companies show, there’s no limit to the operating structure that these private HOAs can or should test.