10/19/2005: Interesting commentary on the "Fristgate" insider trading scandal...
Let's consider why it might generally be considered a conflict of interest for Frist to own so much HCA stock. The main concern would be that Frist might be in a position to use his public power to improve the financial condition of such hospitals; for example, he could push for some kind of increased coverage for the uninsured or even universal health care. He might have a public motive for doing so, but he might also have a private motive, since it would hugely benefit a hospital chain like HCA. That's the reason for putting all his stock in a blind trust, so that he won't know, and we know that he won't know, whether he would benefit privately.What I find fascinating here is that the result dictated by the normal conflict of interest analysis--increase the number of insured--is actually the socially more desirable action that Frist could have taken. One of those cases where the profit motive might well have motivated Frist to "do the right thing", as it were. Instead, he's willing to dump the family business at a profit, letting someone else take the inevitable loss.
But when the uninsured ratio goes up, and Frist actually knows that this will affect his own portfolio, paradoxically his reaction isn't what the normal conflict-of-interest analysis would assume. Rather than use his official power to reduce the number of uninsured, he takes a private action, and just dumps the stock. And not just any stock, this is his patrimony he's selling out. It's the stock of his own family's company. But he washes his hands of it. Leaves it to some bigger sucker.
And that, to me, is telling, and it's about more than Frist's despicable character. Because it goes to the great paradox of what is currently called "conservatism." The central constituency of the modern Republican machine is, broadly speaking, business. Yet there are dozens of policies, passive as well as active, large and small, that are going to be a disaster for American business in the medium- and long-term. Some are disasters for specific companies and sectors, others for business generally: the fiscal debacle, the burden and unpredictability of health care costs, climate change, income inequality, short-sighted energy policies designed only to boost supply, chaos in the Middle East, hostility to the U.S. everywhere, lack of access to higher ed, collapsing infrastructure, etc. Somehow, in a way that would not have been the case in previous decades, business leaders and many investors seem bizarrely unconcerned about these trends.I did my master's degree in management information systems; technically, that's a business degree, and the school I attended was a graduate school of business administration. And this is something we discussed in a few of my classes. Unfortunately for American capitalism, the system of corporate public stock ownership has bred classes of "owners" and "managers" who aren't concerned with the long term health of their companies, because they don't feel any connection with their companies. For most corporate managers, even those who own large blocks of stock in their companies, don't really view their association as a commitment to an ongoing organization, but rather as a ticket to be punched on their career path.
And why is that? I suspect it's integrally related to the "pump and dump" culture that has infiltrated business, a mutation of the cult of "shareholder value." (Pump and dump refers to the practice of talking up a stock or making earnings appear high, then selling just before the inherent weaknesses in the company become apparent. On the Yahoo! Finance message board discussing HCA, Frist is referred to lovingly as the "Pump and Dump Drama Queen.") Investors as well as executives don't look at a company as something to build for the long term; they need to beat their numbers in the current quarter. And for the most part they assume that by the time things get tough, they'll be out. The insiders will bail out before the suckers; the CEO will move on to some other company. Or, if worst comes to worst, he'll retire with a nice package guaranteeing health care, use of the company plane for life, and a nice package of stock to sell when someone else turns the company around.
That may be one of the most serious problems with American capitalism today.
Credit: Thomas Nephew at Newsrack for the pointer.
Len on 10.19.05 @ 08:51 PM CST