Blame boards of directors for financial
mess
- Nell Minow
As big Wall Street firms topple like dominoes, there is plenty
of blame to go around. Failure this broad and deep takes a
village, and regulators, lawyers, compensation consultants,
auditors, executives, shareholders, and the press all played
a part.
But the people who are most responsible for the massive meltdowns
of these institutions are the boards of directors. Their sole
responsibility is to act as fiduciaries for the shareholders
in managing risk. They not only failed to perform this task but
indeed, in their approval of outrageous pay plans with perverse
incentives, they all but guaranteed the current disaster.
I am a capitalist. I love it when executives earn boatloads
of money. But it infuriates me when they get it without earning
it.
At
Merrill Lynch, former CEO Stanley O'Neal
received total compensation of more than $91 million
for 2006, according to The Corporate Library's calculations.
He was given that package based on performance numbers
that came out before nearly $23 billion in write-downs
by the company. O'Neal received more than $160 million in stock and retirement
benefits while shareholders lost more than 41 percent
of their investment value over the year.
Three executives
brought in to Merrill less than a year ago will share
a $200 million payment as they turn over the company
to Bank of America in a last-minute deal to help it survive. |
American
International Group (AIG) replaced CEO Martin
Sullivan after the company posted losses for two
consecutive quarters totaling $13 billion. Sullivan's
contract entitled him to about $68 million. His replacement,
a board member who served as CEO for three months
before the company was taken over by the government,
will get as much as $7 million.
The boards of directors approved pay that was completely
disconnected to performance. This, after all, is
the world of the ultimate oxymoron: the "guaranteed
bonus." So we should not be surprised that executives
took the money and ran. |
Fewer than 13 percent of public companies have claw-back policies
requiring executives to return bonuses based on inflated numbers.
All of the incentives are for them to inflate the numbers, take
the money, and run.
And that is why companies whose names used to be synonymous
with stability and trustworthiness will live on through history
and business school case studies as discredited, greedy and corrupt.
The people who insisted that government regulation interfered
with the perfect efficiency of the markets are now getting bailed
out by taxpayers with some walloping welfare checks. Full
article >>
Nell Minow is editor and chair of The Corporate Library,
an independent research company specializing in corporate governancee.
P.S.
Despite the post-Enron adoption of the most extensive protections
since the New Deal, a survey released this week by Kroll and
the Economist Intelligence Unit found that corporate fraud
rose 22 percent since last year.
How to prevent the next Wall Street crisis
- Joseph E. Stiglitz The current disaster on Wall Street is just another one of those
financial crises based on excess leverage, or borrowing, and
a pyramid scheme.
First, Key regulators like Alan Greenspan didn't really believe
in regulation; when the excesses of the financial system were
noted, they called for self-regulation -- an oxymoron.
Second, the macro-economy was in bad shape with the collapse
of the tech bubble. The tax cut of 2001 was not designed to stimulate
the economy but to give a largesse to the wealthy -- the group
that had been doing so well over the last quarter-century.
The coup d'grace was the Iraq War, which contributed to soaring
oil prices. Money that used to be spent on American goods now
got diverted abroad. But in order to keep the economy going,
the Fed did this by replacing the tech bubble with a new bubble,
a housing bubble. Household savings plummeted to zero, to the
lowest level since the Great Depression. It managed to sustain
the economy, but the way it did it was shortsighted: America
was living on borrowed money and borrowed time.
Finally, at the center of blame must be the financial institutions
themselves. They -- and even more their executives -- had incentives
that were not well aligned with the needs of our economy and
our society. They did what their incentive structures were designed
to do: focusing on short-term profits and encouraging excessive
risk-taking.
And they were amply rewarded (presumably for managing risk and
allocating capital, which was supposed to improve the efficiency
of the economy so much that it justified their generous compensation)..
but they misallocated capital; they mismanaged risk -- they magnified
risk. Full
article >>
Joseph E. Stiglitz, professor at Columbia University, was
awarded the Nobel Prize in Economics in 2001 for his work on
the economics of information |
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