Business, Power & Democracy - Why Investors Should Welcome Wikileaks

People who spend a lot of time thinking about business often find themselves thinking about two important very unrelated subjects: psychology and economics.  At a macro level, over long periods of time, I believe that markets are largely rational and that the principles of free markets drive the best results and growth.  But that's over the long run.  In the short run, markets can be irrational and results truly bizarre if not actually counterproductive.  And, unfortunately, the short-run can last for distressingly long period of time.

Overall, the life span of most companies is amazingly short.  Brand names like AT&T may endure, but the AT&T of today has little in common with the AT&T on 10, 20 or 30 years ago.  Companies are more likely to collapse or be acquired than manage change effectively.

Democracies, by contrast, seem to endure for a very very long time.  There are lots of reasons for this that don't bear upon how business should be conducted, but there may be some very salient ideas.  Indeed, the major industrial democracies have track records that far exceed that of any company - they deliver growth and stability through periods of enormous change.  Governments that are not democracies, by contrast, don't seem to last nearly as long.

So why are dictatorships and corporations more likely to collapse while democracies tend to reform?  Because power corrupts and democracies have the most effective methods for controlling and limiting the corruption that result from abusing power.

First, let's deal with power corrupting people.  It's long been suspected but increasingly psychology and experimentation have proven that the corrupting impact of power is immediate, universal, and almost impossible to resist.  In ways both big and small, people in power seem unable to control or contain themselves.  Once a person gets power, they almost instantly become more selfish, lie more, and believe that their abuses of power are worth forgiving while transgressions by the weak are not.  The idea that power corrupts used to be a clever cliché, now it's proven fact.

So, let's assume power corrupts people in ways big and small.  That means Presidents, of companies and countries, are, from the day the become powerful, on a painful, slow slide to irrelevance brought on by their own corruption.  The more powerful you get, the more corrupt you get.  Corruption really just means helping yourself to whatever you want in a way that gives you unfair advantage over other people.

And corruption inevitably leads to impaired judgement.  When people don't disagree with you, when everyone likes your ideas, when you always get a raise even when other aren't - you lose track of what works and what doesn't.  And once your judgement is impaired, it's only a matter of time before you take your whole organization or country down with you.

People who acquire power in democracies get corrupted as well.  But with a difference: they get held accountable.  Not quickly, not perfectly, and not always, but frequently enough to make a difference.  The balance of power between legislative, executive and judicial branches as well as the strength of a free press all combine to restrain and limit abuses of power and prevent those in power from changing the rules to suit themselves once in power.  Data dumps like Wikileaks, messy though they are, help drive accountability when they get plugged into a free press and an independent judiciary.

All that accountability is very inefficient in many ways.  It makes democracy slower than dictatorship and it has a high overhead cost.  But it works very well over the long run and it responds extremely well to big, existential challenges like wars (the real kind, not the pricing kind).

Governments in modern democracies have already applied quite a few of these ideas to companies.  They demand ever increasing levels of disclosure from corporations.  And all that disclosure has, in fact, improved corporate governance substantially and brought ever more investors into the market.  Beyond that, the bigger the company, the more they could probably benefit from increased levels of transparency and accountability.

Investors could demand it, but boards are usually too timid and insider-ish to provide it.  Instead, governments will need to force more and more disclosure.  But they are slow too.  So count on technology to deliver it instead.  Imagine the impact it would have if the expense reports of every top GM executive suddenly were released online.  Investors might demand to see more results and less waste.  What if the internal memos of Chrysler executives were to be made public?  The petty internal politics of positioning and budgets might suddenly look very very stupid and short-sighted in the cold light of day.

Some of these revelations might be very important, others quite trivial.  People would say "yes, we pretty much knew this was already happening." But the the full revelation of the truth is quite different from a supposition.  Facts made public are different fundamentally from guesses made in the dark, even if they are directionally the same.  In short, it's difference between a whisper that a government is corrupt and a brutally honest diplomatic cable.  And it's the difference between cocktail party gossip and Wikileaks.