Over and over again, executives make decisions that aren't in their
companies' best interests, in response to pressure from Wall Street.
Though many believe this happens because firms have a "fiduciary duty"
to maximize shareholder returns, U.S. executives do not, as a matter of
law, have any such obligation. Yet it's hard for them to resist demands
from a quarter that has amassed such a huge and disproportionate share
of power. In the past few decades, as legislation that put controls on
Wall Street was largely undone, the size and profits of the financial
sector grew enormously. That increased its influence, particularly its
ability to sway the government by spending billions of dollars on
lobbyists and political contributions. Even after the financial crisis,
Wall Street was able to slow down and weaken new regulations meant to
rein in its risky practices. This "financialization" of the economy has
serious downsides: It increases volatility, inhibits growth, and
misallocates resources, such as talent and capital, away from wealth
creation and toward wealth distribution. It distorts thinking. Restoring
the balance of power is critical to the competitiveness and the health
of the rest of the economy. Limits on the size and leverage of banks and
changes to the tax code could promote better equilibrium--but courage
will be needed to put such reforms in place.