Law and Public Policy

Beyond the Revolving Door

January 5, 2016  • Lucy Marcus

LONDON – “Honestly,” said Bill Gates during the COP21 meeting in Paris earlier this month, “I’ve been a bit surprised that the climate talks historically haven’t had R&D on the agenda in any way, shape, or form.” So am I, and the question Gates raises goes to the heart of the relationship between business and government in solving our societies’ toughest problems, from ensuring the planet’s continued habitability to fostering stable and inclusive economic growth.

To be sure, in some areas, government authorities simply don’t consider making business a part of the solution early on. The most striking recent example is the ongoing refugee crisis: Governments in Europe and around the world still don’t fully include business in early-stage thinking about how to manage the flow of asylum-seekers. Granted, in many cases business leaders have chosen to remain on the sideline; but both they and governments need to adjust their thinking.

But in other areas, companies are more than eager to step up, be seen and heard, and exercise influence. When it comes to technology, R&D, trade talks, and the like, the benefit for companies’ bottom line is direct and clear, and here Gates’ surprise is understandable, because corporate leaders typically lobby to participate and change the way governments think and act.

And yet dangers arise when business gets too close to government. Sometimes the risk entails the proverbial “revolving door” between government and business, through which personnel glide from senior private-sector jobs to top official posts and back again. It is a cycle that often resembles the fox guarding the henhouse, with those who regulate too close to those whom they regulate.

The most obvious example of this is finance and banking, where former employees of a single firm, Goldman Sachs, hold some of the most senior regulatory and monetary positions – and not just in the United States. Mario Draghi, the president of the European Central Bank was Vice Chairman and Managing Director of Goldman Sachs International, and Mark Carney, the governor of the Bank of England, worked for Goldman Sachs for 13 years.

But simply closing the revolving door in finance is not a solution. Research by the Federal Reserve Bank of New York has shown that regulation and legislation in this area must strike a balance, lest it undermine “the ability of regulatory agencies to seek and retain talent.”

In areas like defense, the revolving door moves swiftly. According to the Boston Globe, from 2004 through 2008, some four-fifths of retiring three- and four-star US generals went to work as consultants or defense executives. Likewise, the US-based group Citizens for Responsibility and Ethics has shown the extent to which careers lead from the US Department of Defense to the defense industry.

Corporate scandals often reveal where business and government are too close for comfort, as when senior members of Toshiba’s executive team and board, for example, sit on Japanese government panels and commissions. Likewise, Volkswagen’s close relationship with the German government has led to accusations that regulators went easy on the company, setting the stage for the emissions-testing scandal in which the carmaker is now embroiled.

But close ties between business and government are also necessary. Strong economies need strong businesses and strong trade, and that requires good relationships with policymakers. When government officials travel abroad to encourage economic cooperation, CEOs of some of the country’s biggest companies should go along. The question is whether such companies are so important to the country’s economy and reputation that the government cannot regulate them properly. They are given excessive leeway because they, like many financial firms, are too important to fail.

This complex dance between business and government is never-ending and always evolving. It is the stuff of gatherings like the World Economic Forum, where business leaders and governments talk tough on panels and make nice in back rooms. And the need to do both has become more obvious than ever in an era of slow economic growth and privatization of services once provided by the public sector. The working relationship is important and should not be condemned, but it must be recognized openly.

This brings us back to Gates, who announced in Paris an initiative to spend a total of $20 billion on climate-related R&D over the next five years. Gates’ plan highlights a frequently noted component of the relationship between government and business: governments’ vital role in funding early experimental research, which business then often turns into commercially viable solutions. All of this is necessary to build stronger economies.

But, though Gates was right to ask why climate-change negotiations have not included R&D, let’s not pretend that any of this is simple. The need for revolving doors, whether of personnel or ideas, between government and business cannot be a reason to allow companies to gain undue influence on public policy or for regulators to be kept weak. Nor can it be a reason to give failing businesses a safety net for their own bad behavior or poor decisions.

This is especially true at a time when public trust is at a low ebb. Rather than pretending that this symbiotic relationship doesn’t exist or, worse, that it isn’t necessary, both business and government must err on the side of transparency. As Gates’ question made clear, in our fear of allowing the relationship to go too far, we risk not allowing it to go far enough.