Corporate Governance
Corporate governance is the achille’s heel of American capitalism. The headlines over the last several years have been full of stories about senior executives run amok completely unchecked by boards of directors packed with their cronies.
One suspects that Osama is a bit chagrined. In retrospect, he should have sent his young disciples to business school instead of flight school. Not only might they have done more actual damage to the US economy but they’d have got rich in the bargain. And instead of risking death or an indeterminate stay at Guantanamo, they’d only have faced a few months in a nice, low security, federal prison.
In theory, of course, the executives of a company are responsible for maximizing shareholder value while providing a good working environment for employees, and good products and services to customers. The board is meant to monitor the actions of the executives and the financial state of the company and make sure that the executives are competently and effectively meeting their responsibilities.
In fact, as we all know, the board of directors is handpicked by the senior executives primarily for their complacency. They are either long-time cronies or they are “people of prominence” (e.g. retired government officials, university professors, etc.) who are happy to pick up a six-figure salary for, in essence, a “no-show” job.
If the board members just rubberstamp the decisions of the senior executives they continue to get significant amounts of money for showing up at a few board meetings each year. And if the executives get caught doing something scandalous?… What’s the worst thing that will happen to the board members?… They might be forced to resign or not have their board membership renewed…. Not much of a disincentive.
Again, in theory, the board is supposed to be elected by the shareholders but we all know that most shareholders either ignore their proxy votes or blindly vote for the management slate. (Heck, I own stocks and mutual funds and I seldom vote my proxies either.)
The other facet of the Corporate Governance is that of the legal protection that incorporating provides to both the senior executives and the board. There have been a number of recent cases involving Wallstreet firms where the companies involved paid millions of dollars in fines for crimes committed by their executives. Which, of course, means the fines were paid by the shareholders… not the executives who actually committed the crimes. And, of course, it is unheard of for board members to face any kind of fines for malfeasance that happens on their watch.
And we have seen the astonishing spectacle of CEO’s who made $100 millions per year saying that they were, shocked! shocked! to find out that their company’s accounts were being cooked into a fine bankruptcy stew. And saying, without apparent embarrassment, that they really couldn’t be held responsible for these mundane details.
So what to do?
- We need to remove most of the civil and all of the criminal protections that incorporation provides for executives and board members. The protection of incorporation should apply solely to the shareholders.
- We need to do what we can to require that board members be independant of the executives.
- We need to make the criminal and civil penalties for white collar crime much tougher. If there ever was a type of crime that would be affected by deterrence it is white collar crime. These are clever well educated people with lots of other lucrative options than resorting to crime.
- We need to have some automatic penalties for large corporate bankruptcies. For example, all senior executives and board members of a large corporation which enters into bankruptcy should should have to show cause as to why they should not forfeit all the compensation they received from the corporation. If they can convince the court they were not negligent, they can keep their compensation… Otherwise it goes to into the bankruptcy pot. (I suspect this will be the most controversial of my suggestions…
- We need to encourage large shareholders (mutual funds, pension funds, etc.) to be more activist in their relationship with the board… And by extension, management.
- We need to hold the external accountants responsible when companies they are auditing are found to have behaved fraudulently. Again, whenever a major account fraud is found, the external accountants should have to automatically re-imburse the company for all fees they received for auditing the books.
- We need to encourage, rather than discourage, State Attorneys General to be activist in their pursuit of corporate crime.
Capitalism is all about incentives and opportunities. Corporate executives have huge financial incentives and opportunities to commit crimes… And Boards of Directors and Auditors have similar incentives to aid and abet them. We need similarly weighty disincentives to discourage them.
{Finally, has anyone been keeping track of which business schools produce the largest number of corporate felons? Why don’t some of the business correspondents run through all the folks that have been convicted or plead guilty at Adelphia, Worldcom, Healthsouth, Enron, etc. etc. and see where they got their MBA’s. And then go to the two or three leading miscreant-producing institutions and ask the deans about their “business ethics” classes.}
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