The Laws of Economics are Sovereign, Even in Pennsylvania

It’s a shame that King Canute never ran for office in Pennsylvania.

King Canute was the mighty English ruler who, tired of the ceaseless flattery of his advisors, had them bring his chair to the seashore and then asked if they believed that he could stop the tide. Naturally, his fawning courtiers said yes – and when the tide failed to obey his command, the wise king imparted a lesson about the limits of even the mightiest sovereign’s power.

Sadly for Pennsylvanians, the General Assembly and Governor Ed Rendell’s recent actions concerning another mighty “Sovereign” – in this case, Sovereign Bancorp – show that they desperately need a similar lesson. They need to learn about the limits of government’s power over the economy, its role in stimulating economic growth, and the negative consequences associated with overstepping those limits.

In January of this year, faced with shareholder opposition to a pair of transactions worth $6 billion, Sovereign sought changes to Pennsylvania law that would help it withstand challenges to the proposed deals. According to press accounts, within a week of Sovereign lobbyists’ contact with legislators, the General Assembly amended an existing bill to include the desired changes and approved it in both houses with no opportunity for real debate.

Not only was the deal done in less than two days, but in their haste to do Sovereign’s bidding, both the Senate and the House trampled on their own rules. The bill was passed in the Senate by “ghost voting” whereby 33 of the 45 “yea” votes were not present on the floor or even in the Capitol, and the House failed to hold a rules suspension vote, as required, for the bill to be considered. Despite the outcry against the backroom deal, Governor Rendell signed the bill on February 10.

On March 2, Relational Investors – Sovereign’s largest shareholder – filed suit in Commonwealth Court, arguing that the process used to pass the law violated the Pennsylvania Constitution. But while the General Assembly’s disregard for proper legislative procedure is a serious matter, the broader message it sends, both to existing Pennsylvania companies and to firms considering investing in the state, is even more deleterious to the state’s economic future.

The Sovereign bill is just the latest attempt by Pennsylvania politicians to “protect” select corporations from the workings of the market. In 1990, Pennsylvania enacted what was considered the “most aggressive” anti-corporate-takeover law in the country. And less than four years ago, then-Attorney General Mike Fisher’s legal maneuvering effectively stopped the Hershey Trust from selling its controlling interest in Hershey Foods – despite a reported offer from Wrigley that would have preserved company jobs.

Pennsylvania businesses already face a business climate characterized by high tax rates, rapidly increasing government spending, costly regulations, increasingly militant labor unions, and a substandard public education system. The Sovereign case shows that those companies have another worry – that the state’s laws, under which they have made investments, may change at any time at the behest of an influential firm, threatening the continued viability of those investments.

All the spin from Governor Rendell and other supporters of his taxpayer-funded “economic stimulus” plan (which itself favors certain Pennsylvania businesses over others, and through which Sovereign is providing $250 million in low-interest loans) can’t obscure the devastating effect of measures like the Sovereign deal on investors’ confidence.

For their part, Gov. Rendell and other backers of the Sovereign deal discount the notion that their actions will harm Pennsylvania’s economy. But people who are operating in that economy – or who can choose not to operate in that economy – have a different point of view. Upon filing suit on behalf of Relational, Ralph V. Whitworth, the firm’s principal, remarked that the actions of Sovereign and the General Assembly “dealt a devastating blow to Pennsylvania’s shareholder rights and made a mockery of our system of representative government.”

Lest this comment be dismissed as the complaint of a dissatisfied investor, consider the following quote from Greg Taxin, chief executive of Glass, Lewis & Co., a firm that advises institutional investors on matters of corporate governance:

Institutions from around the world have invested billions of dollars in Pennsylvania’s public companies with the expectation that as investors they would be treated fairly. This sort of mid-game rule changing to benefit the home team makes Pennsylvania a dangerous place to invest.

“A dangerous place to invest” is not the label that most states seek for their business climates. Yet the actions of the General Assembly and Governor Rendell continue to earn Pennsylvania that unenviable reputation.

It’s time for Pennsylvania’s lawmakers to finally learn their version of King Canute’s lesson: they cannot hold back the forces of the market any more than they could hold back the Susquehanna River.

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Grant R. Gulibon is a Fellow with the Commonwealth Foundation (, an independent, non-profit public policy research and educational institute located in Harrisburg, PA.