I am going to jump in again, this time by simply snipping-in segments from the newsletter of tech-industry pundit Mark Anderson, perhaps his best missive yet!
I had dinner last week in Washington, D.C., with a top lobbyist, who told me proudly that she had led the charge in repealing the Glass-Steagall Act. (This allowed banks to get involved with non-bank, high-risk activities.) I had heard that the bankers spent $1B to get rid of this iconic piece of learning from the Great Depression; she confirmed it. Ten years later she is 38, and she laughingly told me over hors d’oeuvres that she now recognizes it was a huge mistake, adding that she no longer represents the banks.
Oops. I guess that’s how you destroy empires. Which leaves the obvious unfortunate impression: the banks themselves must have known what a mistake this would be.
Yesterday, in a lunch discussion with serial entrepreneur Al Davis, we covered all this ground in about an hour, and then he said, “You know, this all comes down to the board of directors.” ...We can blame the regulators who really came from industry, we can blame the bankers and CEOs and their lobbyists, we can blame the politicians who pretended that no regulation was good regulation, we can blame co-presidents George Bush and Dick Cheney. But, with the exception of the last two, there is another layer of governance that should take most, if not all, of the responsibility: the board of directors.
Let me start by breaking the neck of the good-old-boy scheme: most board members are friends (or even relatives) of the CEO, or work for him or her. Those who are not – even the most independent “outside” directors – tend to be selected on a rank of the CEO’s ability to direct, manipulate, or intimidate them; OR because they are guaranteed not to look too closely at the company.
example: AIG wrote insurance in amounts far greater than its total book value, or the value of all its reserves, creating liabilities infinitely beyond its ability to pay. Today, the now-defrocked longtime CEO Hank Greenberg continues to “protest too much” on TV: that he is the good guy, the government got it all wrong, if only he were still in charge all would be fine, the government wrecked his company, and so on.
How did Hank and his short-term successor, Milton Sullivan, get away with it all? It would appear, among other things, that they used the usual tricks: find famous, busy people who make you look good and have no time to dig deeply into company affairs; and make sure your board is too large, so that nothing ever really happens at board level. In AIG’s case, that number was 17, or about eight more than are really useful.
What about the board of Lehman Brothers? Or Bear Stearns? Who exactly authorized 30/1 leverage on contracts that no one could understand, in numbers beyond count? Some board members, from the Old Model, would say: Well, that’s a level of detail beyond what we were asked to look at.
Great companies don’t fail because of one madman; they fail because of one too-timid board. And great civilizations don’t fail because of one company gone awry; they fail because core beliefs and values fall away, which we’ve seen in the U.S. recently.
Terrific insights. Wish I could pass on the whole thing. Some followup questions, though.
1) What about the antitrust laws against interlocking directorates? Have you seen evidence that members of one board cozy up to their CEO in part because he can do the same on their boards? If so - and even if it is done third-hand, to mask things - should not people go to jail?
2) To what extent has CEO compensation skyrocketed because of what boils down to a "cartel"?
If a small clade of a few thousand golf buddies control and corner a market -- in this case for "top managerial talent" -- can't they thereupon curtail supply and create the appearance of scarcity, boosting prices just likeOPEC & deBeers?
The very theory of capitalism that these guys praise should have corrected these compensation packages by attracting fresh supplies of new talent into management, bringing competition and hauling prices down again. When something quacks like a cartel, waddles like a cartel, and smells like a cartel... should not some ducks be carted off to jail for restraint of trade?
More important, should not their praise of capitalism and markets be exposed as hypocrisy?
3) I have long felt that "corporate democracy" can be reformed with one simple change. Instead of current proxy-based stockholder voting, in which a vast majority of stock owners simply don't get involved -- favoring whoever is currently in charge, let blocks of stockholders self-organize. Any group that comes up with 20% of shares can send a director to the board. Ideally, you'd get five very different activists. But this way, you'll at least get two.
Hence the danger. If our present crisis lasts too long, the U.S. and the world and its people will suffer badly. But if it ends too soon... then not enough tumbrels will roll, things will remain the same, and civilization will fail to right itself with enough reforms.