Stocks have been a lousy investment in the US for a long time. The S&P 500 closed at 1108 today--the same level it was at 12 years ago (as shown in the above chart). Nor is that 12 year period of zero returns aberrational. What was aberrational was the very high returns of the 1990s, which was one of the highest returns by decade on record, if not the highest. Since 1981 bonds have crushed stocks. Buy and hold is a myth.I suggested in 2007 that a major problem is corporate governance, and cited evidence in support of inferior corporate governance standards. There is little doubt that some of the prime movers in the recent financial meltdown suffered from very weak boards. And a major problem with weak boards is that they are stacked with the CEO's cronies. Distinguished commentators such as Stephen Bainbridge long ago recognized the problems with CEO cronies populating many boards.
So, here is an idea: instead of having vast amounts of social wealth controlled by the CEOs' cronies, and dedicated to the infinite enrichment of CEOs, why not legally mandate that those governing the modern corporation do so professionally in accordance with professional standards similar to lawyers, doctors, stockbrokers, and any other number of regulated professions.
Recently, two Harvard Business School professors proposed just that. Their proposed code of conduct would require, among other things, that: managers "enhance the value of the enterprise to create wealth for society in the long term;" "uphold laws and contracts;"and "do not allow gender or race to influence decisions." All of these professional standards would be enforced through professional sanctions imposed through judgment of peers. In other words, directors could be disbarred. In 2005, I argued for a model based upon stock broker regulation including entry examinations and continuing education requirements. The essential point is that only those professionally qualified to be directors would be directors.
As I have written on this blog earlier, I believe that the Citizens United case makes corporate governance more important than ever. I have also written about the myth of the American meritocracy in light of the financial crisis--I posited that our corporate leaders lack ability as well as character. I also argued that all members of traditionally oppressed groups should be suspect of Citizens United because it shifts power from a more diverse body politic to a culturally monolithic group of corporate elites.
This all suggests a potential interest convergence among those in favor of superior corporate governance and those currently excluded from the ranks of board directors and officers. Both of these groups should be interested in a legally mandated regime of professionalization of corporate governance. This would open board membership to all comers based upon merit--and eliminate the need to be a crony of the CEO.
The U.S. Supreme Court granted corporations a First Amendment right to expend unlimited resources to influence political campaigns in Citizens United. The dissent, by Justice John Paul Stevens' argues that Citizens United fails to protect shareholders' First Amendment rights not to have their money used to fund a message of which they are not in agreement. Perhaps if corporations are required to receive shareholder approval to fund political speech then it will insure that it is the voice of the corporation that is speaking, and not that of management. If state law, where the corporations are incorporated will mandate approval for corporate political expenditures then that will go further to ensure that shareholders' rights are protected.
ReplyDeleteJustice John Paul Stevens' argues that Citizens United fails to protect shareholders' First Amendment rights not to have their money used to fund a message of which they are not in agreement. Perhaps if corporations are required to receive shareholder approval to fund political speech then it will insure that it is the voice of the corporation that is speaking, and not that of management.
ReplyDeleteThe same argument could be made concerning the political advocacy of unions who use members dues, without regard for their individual political beliefs, to promote a political agenda. Perhaps union members should have to approve spending on political advocacy.
I believe that the Citizens United ruling is just a microcosm of the problems we will have in the future with CEOs and other head officers of corporations if there is no governance or rules in place to require some ethical conduct on behalf of the officers in charge. The need for a standard ethical business code for head officers would alleviate some of power of corporations. The question now becomes how will this ethical business code be implemented and what governing body will enforce it on businesses. Corporate officers generally would not want this type of review if they could avoid it so while I believe in corporate ethics and an ethical oath for business officers, I do not see it being implemented without some federal or state interference/nudging.
ReplyDeleteI believe that corporate governance could potentially help alleviate some problems with the corporate structure; however, there will always be a power struggle in business. It is a result of capitalism. The logic behind creating a governing board to regulate a governing board is inherently flawed. Leave the power with the stockholders to influence the decision making process of directors.
ReplyDeleteThat is a very interesting concept--regulating corporate officers similar to a true profession. I believe that there are great arguments in its favor. However, one problem is that these officers do not "profess" their dedication as do lawyers, doctors, and reverends. Corporate officers fiduciary duty is to the corporation, not the general public.
ReplyDeleteWhy not just put more pressure on the Board of Directors? It is their duty to oversee chief officers. If the public is injured by a public company, blame the board. I understand the capitalist argument for not scrutinizing directors unreasonably, but let some directors go to jail and watch accountability increase with a blanket application.
I also believe that corporate governance could alleviate some of the problems we face with the corporate structure. Although this system will not totally solve all of our corporate issues, it is most definitely a step in the right direction. We must hold the decision making members of a corporation to a higher standard than that of an ordinary citizen. All of their policies or decisions will have some impact on the consumers no matter how big or how small.
ReplyDeleteHowever, like Mr. Kelly, I am very skeptical as to how we will enforce these professional standards. There are a lot of questions that need to be answered before this “idea” can become a reality. We will have to determine whether this will be a state or federal regulating entity? How much power will this regulating body have? What processes can this regulating entity implement to ensure that boards are following professionalism standards? All of these questions are fundamental in deciding whether this idea will be successful. I am only in favor of a system that is practical and effective not one that will be unrealistic.
If the officers and directors owe a fiduciary duty to the corporation and the shareholders in general, then why shouldn't they be held to as high a standard as lawyers and doctors. As long as the relationship is based on a fiduciary duty and trust law, then there is probably a need for some type of corporate governance. The problem then becomes who maintains and regulates a system of corporate governance. The federal government solely or satellite state agencies which report to a larger national agency? With the amount of money in these huge companies, it is imperative that there be some form of restrictions.
ReplyDeleteIt has been claimed that poor corporate governance and lack of corporate social responsibility was a primary actor in the financial crisis that has consumed the globe. Corporations effect more than just merely their shareholders, but stakeholders (all those affected by corporate actions) as well. As the financial markets hit bottom, a window opened for developing stricter corporate governance laws that would be embedded in each corporate infrastructure. The problem is that we did not seize that opportunity to rectify unethical actions of certain corporations and have left ourselves open to a similar situation happening again.
ReplyDeleteOfficers and directors should be held to higher standards and have more legal responsibilities. Ethical codes of conduct should be enforced, and corporate actors should hold themselves to a higher standard with self-regulation where there are gaps in domestic and international law. This would include such actions as increasing transparency, accountability or adhering to the 10 principles of the United Nations Global Compact.
In a recent article by the national jurist reporters ask the question" why aren't ethics being taught at business and law schools?" The problem isn't that these directors aren't aware of ethics it's that their allegiance is to protect eachother first. When you step into a system that bigger than yourself you can be easily influenced by what the seniors are doing. For acceptance you'll look the other way. Corporations should have a hiring process which requires more diversity of background. I also agree with the other posts that corporate governance is necessary but shareholders should do better research beofre investing in companies with skeptical leaders. It would be difficult to enforce a lot of ethics violations, but there should be some kind of due diligence so that directors can't say they didn't know or that wasn't company policy before.
ReplyDeleteWhat are other countries doing?