Thursday, March 19, 2009
The corporate rules don't work
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Alexandre Rourk
Rourk is a law student at Washington and Lee University in Lexington.
Looking for someone to blame in this economic downturn seems to be everyone's favorite pastime. CNN, Time Magazine and the like all came out with their own lists of perpetrators. Featured prominently in those lineups are the infamous CEOs of America's largest companies.
The CEOs are rich, arrogant, Ivy League-bred and, worst of all, they are responsible for the crisis we are all in right now. They make tens of millions of dollars, fly private jets to congressional hearings and aren't in the least ashamed to ask for the taxpayers' money when things go badly. Or at least those are the things the conventional wisdom will have us believe.
However, before we pin any of the blame on the CEOs, we ought to know who they are and what they do.
The way a corporation works in principle is as follows. Shareholders of a corporation elect the board of directors at a general meeting. The directors appoint the executives of the corporation, among them the CEO. The directors oversee the performance and compensation of executives, major risks the corporation might be facing, and the auditing process.
Directors may be removed at any time by the shareholder vote. The executives are in charge of the day-to-day business operations and can be removed at any time by the board of directors. Both the directors and the executives are fiduciaries of the corporation and are supposed to make informed, rational and impartial decisions for the benefit of the corporation and the shareholders. So long as these criteria are met, there is no legal liability.
What in principle sounds like a straightforward, transparent and even democratic process led to such paydays as Michael Ovitz making nearly $140 million after only 16 months as Disney's CEO; Richard Fuld taking home $38 million in 2007, one year before his Lehman Brothers closed its doors for good, and Alan Fishman receiving $19 million from Washington Mutual for 18 days of work. It is only natural to wonder what went wrong.
The answer is simple: The reality of American corporate governance does not live up to the expectations set out in its theory.
The directors meet only a few times a year for several hours. When they do meet, they base their decisions on the information obtained from presentations and reports prepared by the executives who the directors are supposed to be overseeing. Shareholders are too dispersed and too numerous to bring about a collective action, and few are invested enough in a corporation to really care.
As a result, unless there is a blatant case of malfeasance by the corporate insiders, nobody is held accountable for anything. The threshold for legal action is very high and very few have the resources or the knowledge to initiate it. Any untrained eye can see that the system is broken.
So, before we stitch scarlet letters onto their Armani suits and run them out of town, we ought to realize that the embattled CEOs were merely the point men (and women) of our broken economic system.
Populist sentiment is at its highest level in decades, and an ordinary citizen has the rare opportunity to be heard by his or her lawmaker. It is our duty to capitalize on this opportunity and to bring about the changes necessary to resolve the current crisis and to prevent it from recurring.
It took fraud scandals of Enron and WorldCom proportions to bring about a change in the way corporations were audited. Hopefully, it will not take much more than a global financial meltdown to bring about changes in the way corporations are governed.
