Don’t Jeopardize the Core of California’s Success

In this election, there is at least one thing on which Bill Clinton and Bob Dole agree: Proposition 211, the so-called securities fraud initiative, is bad for California and bad for the country. And how the state’s voters respond will significantly influence what California will be like for many years to come.

California has always been a magnet for America’s entrepreneurs. Since the first gold rush, adventurers, innovators and risk takers have been attracted by the state’s abundant natural resources and other advantages. California in turn has developed a well-educated work force, sustained by the country’s greatest university complex, extensive public infrastructure and a unique entrepreneurial culture. From the development of the motion picture industry in the 1930s through the creation of the aircraft and aerospace sectors in the 1950s and ‘60s, the semiconductor industry in the ‘70s and the present-day proliferation of biotech and software innovation, Californians have led the nation and the world in creating whole new economic sectors.

But Proposition 211 strikes at the very core of the state’s economic foundation and animating spirit by threatening entrepreneurs and workers with frivolous class-action lawsuits.

Economists agree that the best way to ensure sustained economic growth is through continuous innovation. Innovative companies, particularly in the high technology sectors, need to take risks to venture into uncharted territory. This is the only way to develop new technologies and revolutionary products.

In recent years, a cottage industry has grown up around a type of destructive class-action litigation that seeks to capitalize on the unpredictable performance of companies like those in California’s Silicon Valley. By suing companies when they fail to meet expectations and their stock prices decline, class action lawyers are able to reap large fees. It is noteworthy that a principal provision of Proposition 211 is to prohibit limits on these fees.

Congress acted to stop this abusive practice last year when it passed federal reforms aimed at discouraging such short-sighted litigation while protecting consumers and investors against real fraud. But a small group of lawyers got a proposition on California’s November ballot that would make it easier to bring such suits in California.

By doing so and thereby raising the penalty for taking risks, Proposition 211 threatens investment in innovation. The irony of 211 is that the long-term interests of the very shareholders the initiative claims to help may actually be harmed, since companies will take, or fail to take, actions that protect themselves against stock price fluctuations in the short term but hurt their growth in the long term. Threatening an extra financial penalty for failure does not guarantee success. It merely increases the cost of trying something new and reduces the incentive to innovate.

If Proposition 211 passes, all highly innovative, job-producing companies in California will be placed in jeopardy. Some will be driven out of business, and more will be discouraged from starting up in the first place. A clear signal will go out to entrepreneurs that California does not want your business or your jobs. Make no mistake: The high tech and other high-growth sectors of the economy are the future. If California turns its back on these innovators and job creators, they will go elsewhere, even outside the United States.

Public policy must support those efforts that encourage innovation and human capital development, not introduce more unnecessary costs and hurdles. The authors of Proposition 211 are putting their own narrow self-interest ahead of the state’s and jeopardizing the future of hundreds of thousands of California’s highest paid workers.

Some say, as California goes, so goes the country. And as the state’s high technology and high-growth sectors go, so goes our information age economy for the 21st century. California voters should reject 211. That’s something on which Democrats, Republicans and independents can all agree on election day.