The Law and Other Anomalies

THIRD OF THREE POSTS BASED ON NACD PROGRAM ON BOARDS AND COMPANIES IN TODAY’S ECONOMY

• Discussion of whether public companies, now legally required to report their financial and business condition each quarter, should rather be called upon to report every six months (President Trump recently has suggested this semi-annual practice).  Substantial disagreement.  All agreed that it is very time consuming for management and tends to emphasize short-term results as against more important long-term success.  Given the importance of the long term it was suggested that quarterly reports also misled investor.  On the other hand, one panelist noted that US securities markets are dynamic and current reporting supports that dynamic and also supports related operational disciplines; European markets are on a six-month report and their markets were characterized as less dynamic and robust.  Further, given the increased pace of change (political, geopolitical, business), six months is too long to wait for disclosures of impact of and response to change.
• In response to a question as to whether today was the highest  point of business uncertainty, it was noted that there was a lot of noise and fast changes in policy but nonetheless and so far American companies were doing well operationally, this was nothing like the real crisis of 2008.  Further, there always are uncertainties.  Boards need to be “nimble and agile.”
• So how can boards in fact be nimble and agile?  Today board members stay in touch with each other, between meetings, much more often than in the past, with paper going back and forth.  At meetings, old practice was a rigid agenda by topic and time allocation; today meetings are/should be based on topics which get the time they need.  Old boards were like a photograph (static) and modern meetings should be like a movie (interactive, all over the place, broad discussion).  One panelist, noting that today some questions come to the board of a highly technical or complex nature, suggested use of subject-matter experts starting board discussions to facilitate discussion of what really are the key points.

Each panelist was asked for “last words” to boards of directors:

• The board must stay current and use AI to do that
• Since we are in competition, watch China
• Keep talking strategy and opportunity, don’t use five-year plans
• Foster diverse viewpoints and zoom out in discussions and ask important questions where there are no answers

FIRST OF THREE POSTS BASED ON NACD PROGRAM ON BOARDS AND COMPANIES IN TODAY’S ECONOMY

The world economy is moving from globalization to national focus, with government industrial policy becoming more important.  This is true in the US, Europe, and has long been true in China. Companies need to consider effect of tariffs, export controls and restricted market access.  One effect is that companies are shortening their supply chains to ensure continuity.  Moving manufacture of parts and finished product to the US, in face of tariffs and restrictions of offshore supply or parts, is changing how US businesses staff and operate.

Tariffs are going to create US inflation.  This effect, delayed to some degree by US company planning in stocking up parts and changing some sourcing of parts, will assert itself over years and current lack of huge impact is not an indicator of future inflation impact.

Current US policy will not necessarily build US industry, as intended. If a company sells overseas it may well establish production overseas to meet offshore competition in those markets.  One panelist noted, in considering US tariffs as designed to drive US industry, the effect of tariffs may not be as anticipated: “It’s tough to confirm policy to logic.”

Bring industry to the US also will require more labor and that too is a problem: we do not have enough labor, and we train people not to work in production but rather in services or in intellectual capacities.  By 2033 the US will need 3.8 million more manufacturing employees and we cannot ramp up that fast.  Our educational systems need to redefine the training needed to fill these slots. And the nature of these slots is itself changing: more tech skills will be needed even in production functions (see post hereafter on AI impact).  This is referred to as a move from blue-collar work to “new-collar work.”  The US bias in many quarters to prefer white-collar jobs to the general labor force needs readjustment. The educational response is needed by companies informing high schools, trade schools, and institutions of higher learning as to the training needs of the new economy.

The current immigration policy in face of these labor needs is of course a problem.

Finally, the US has been in a decades-long decline in industrial production and other fall-outs include lack of experience in building new large-scale production facilities.

I am not expert on this subject but am posting to recommend a great article in the Weekly Economic Commentary of Northern Trust (forgive lack of direct link but you can no doubt access it via www.northerntrust.com)

Outline of key points to hopefully tweak your interest in this pretty complex issue:

The push by the Administration to tie the Fed to political policy is not new and the US Fed did not split from the Department of Treasury until 1951.  Though there are arguments for independence and though most advanced economies do have an independent national banking system, it is by no means universal.

The argument to tie the Fed to the Executive is to have the government as a whole aligned with policy set by persons named by the electorate. The argument to keep the Fed separate is that it acts as a check on economic policy, much as courts act as a check on other executive actions.

Large government deficits and inflation historically often align with banking systems tied to the executive.

A politically aligned Fed will control membership in the regional Reserve Banks, could result in parking assets supportive of an Administration’s industrial policy, could alter general approach to inflation, could effect swap lines with other central banks and thus affect ability to respond quickly to crisis situations; could track Project 2025 agenda items (eliminating the Fed’s mandate to maximize employment, consider moving to a gold or commodity-backed (eg currency) standard to back up currency).

Financial market negative reaction might harness the current Administration drive to align the Fed, although this point seems to me to be wholly fact-dependent and presently unclear.

Whether you the reader agree with the Northern Trust position in favor of independence or agrees with the thrust of the current Executive, I recommend this article as putting meat on the bones of what to me had felt just like a simple line drawn between liberal and conservative political camps.