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Comment by michaelt | Hacker News Reader

The thing is:

Imagine there are two planemakers, each has a computer system to record when they removed the door bolts. One company uses it 95% of the time while the other uses it 100% of the time.

For the market to assign a different price to those companies, shareholders have to be able to tell which is which.

Investors cannot tell. The official reports don't include anything that wasn't officially reported. People who know first-hand have insider information, and are forbidden from trading on it. Shareholders have no power to enter the assembly floor and carry out spot checks. And "independent" auditors like Accenture are even bigger clowns than Boeing themselves.

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If you step back a bit, and look at the problem more broadly, it becomes clear that a major cause is the current level of consolidation, across the board.

In particular, just in your comment, you name the planemakers—Airbus and Boeing—and the "independent" auditors.

If there were two dozen different companies manufacturing planes, all of which were required to comply with the same regulations, and two dozen different major auditing companies, the chances of any given manufacturer getting away with this level of illegal corner-cutting for any length of time drop precipitously. At the same time, the costs of doing so rise, as it becomes much, much easier for the US government and various airlines to cut a manufacturer out of their contracts the next time they come up.

I think that however flawed, capitalism might prevail here. If enough money was on the line, institutional investors might get actual permission to [hire experts to] enter the assembly floor and do spot checks. Not welcoming such a thing would cause a huge stock hit. etc.

I’m not sure what we should be waiting for. The time for the free market to fix Boeing and “capitalism” (read: don’t regulate us please) to save the day would have been before Boeing killed 400 people in plane crashes.

I get that the idea of self-correcting markets are very appealing. But there are a ton of situations where they don’t work or don’t fix all of the problems they cause. Those situations are under the general umbrella of market failures. This particular market failure would probably be classified as adverse selection or more general information asymmetry.

I'm not advocating for less regulation in the slightest.

I'm saying that when a corpo breaks laws (don't follow regulations and lie about it), the fines need to substantially hit their shareholders, so that shareholders are generally aligned with following regulations and will demand additional diligence. Otherwise the game will be as it is - commercial aviation is highly regulated, but Boeing is so big that the fines don't matter to them or their owners (i.e. shareholders).

To summarize my objections, it seems like a “punish the shareholders” strategy has at least three problems:

1. Punishing shareholders doesn’t sufficiently discourage corporate management. They are usually fine even if the stock price takes a hit. The fact that corporate management may not act in the best interests of shareholders is a known example of the Principal-Agent Problem.

2. Shareholders might not know that bad behavior is happening, and even if they do, we want to discourage bad behavior that regulators might not find out about, and before it happens.

3. Many investors are not actively investing, but using robo investing services like Vanguard for their 401k. That means that even if you’re technically an “investor” you’re not actively investigating companies for fraud.

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