Was the GSA scandal really scandalous?

Steve Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy.

I’d like to take a moment to reflect on a debate that is occurring at the fringes of the tumult over the General Services Administration’s conference spending. It’s an issue that is raised in enough contexts to make it worth talking about more generally.

Some observers have noted that the kind of lavish conference spending that got GSA into hot water is a common phenomenon in corporate America. Indeed, one wag noted that if the government really wanted to act like a business, it should do more GSA-style events.

The typical response is that when companies spend money on those kinds of perks, they are spending their own money, while GSA was spending taxpayers’ money, making the comparison is invalid.

The riposte about spending their own money would apply to executives of a company owned by an individual or a family. It is questionable, however, whether it applies to perks given at large, publicly traded firms. Managers there are not spending their own money, they are spending the shareholders’ money. And there is much academic literature on corporate governance arguing that it is often difficult for shareholders to monitor spending that managers claim is in the company’s interest but in reality might just be benefits taken at shareholders’ expense.

Because the sums involved could be rounding errors in the budget of a large corporation, it’s often not worth shareholders spending a lot of time worrying about. In addition, it is difficult for shareholders to get accurate information about whether the perks actually do improve morale, productivity and hence profits enough to justify their costs. Managers have much better information about such things than shareholders do, and it’s not easy to challenge their claims.

That brings us to a second point about the government/industry comparison. There might indeed be good business reasons for making such perks available at companies — namely that by improving morale, building team cohesiveness and making the company a more attractive place to work, the perks improve productivity and thus profits. If that is true, then the relatively trivial costs are justified.

However, that argument would apply to government as well. The only difference is that government doesn’t measure improved performance by profits but through productivity and the public value generated by agency activities. To state that perks are by definition unjustified because government doesn’t produce a profit is to overlook the possibility that they pay for themselves in some mixture of improved productivity and better service.

However, it should be noted that it’s not easy to prove the positive effects of perks in the private sector or in government. Indeed, it is the difficulty of proving their effectiveness that is behind shareholders’ concerns that perks represent an expropriation by managers.

I’m not sure whether perks at the level of GSA’s conference spending are justified in industry or government. I do agree with the notion that, when times are tough for a company, it is likely that there will be greater scrutiny of perks, and this should apply to the government as well. But I also believe that focusing only on the government’s lavish conference spending or other perks is a distortion of an issue that could be just as worrisome — if not more so — for the private sector.