Thursday, April 16, 2009

Blame the corporate boards... and change them.

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is 38, and she laughingly told me over hors d’oeuvres that she now recognizes it was a huge mistake, adding that she no longer represents the banks.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.

For 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?

See also my article: The Contradiction of Capital Markets.

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.

25 comments:

Woozle said...

It seems to me that the whole pseudorepublican meme of "government interference in private business" can be refuted with one sentence: The more a business takes on power equivalent to that of government, the more we have the right to demand accountability from it just as we would from government.

Or, in other words, power demands accountability.

The more we come to depend on any business -- for any reason, be that vital services or goods or simply because the failure of a "too big to fail" business could take the economy with it -- the more we have the right (!) to oversee it and "interfere with" it.

Rob said...
This comment has been removed by the author.
Rob said...

They Rule
Data from 2004, but the concept is still relevant.

Woozle said...

There's got to be a way to do a TheyRule using more current data, or even tracking changes over time... where does the data come from?

Tony Fisk said...

Hi Woozle.

Statistics do seem to take a while to become available (need more data entry operators!) Gapminder currently seems to go to 2006, and it shows histories.

The comments about board sizes reminds me of a NS article on Parkinson's Law. Two observations: Britain's 'council of state', over 700 years, has cyclically grown in size until just over 20 before promptly imploding. (so 25 is definitely a no-no)
The *worst* possible size for a committee is 8 (the only time this happened was during the reign of Charles I...).

My own observation: make it a prime number.

Stefan Jones said...

I have stock in . . . well, two dozen companies. (Not a lot of each, mind you! Diversity . . .) As a result, I get dozens of proxy mailings each year, either by email or in the post.

This is the chance for the stockholder to have a say, but really, when it comes to board elections, what am I supposed to do? Big list of guys I never heard of.

What I DO do is vote FOR just about every stockholder motion that the board recommends a vote AGAINST. These generally involve ethical or environmental issues, or (gasp!) proposals to investigate executive pay.

And I vote AGAINST every proposal to extend or increase executive compensation.

Verification Vocabulary: 'couta' Latin American Spanish dialect word for . . . oh, really, you don't want to know.

CSM said...

Here's a wacky idea: repeal the estate tax so the descendents of the company founder can act as real owners -- offsetting the power of the CEO ;-Þ

Anonymous said...

David, you're off base with the issue about interlocking directorates. That's a problem with Japanese keiretsus or South Korean chaebols, but isn't typically the problem afflicting American companies. Example: Disney's board of directors include's Michael Eisner's dentist. That's the problem. The boards are filled with people that the CEOs are buddy-buddy with, and whom they can control.

This isn't a cartel, it's simple corruption. A seat on a board of directors pays $40,000 to $70,000 a year for a couple of hours of work per month. Members of the board who kowtow to the CEO's wishes get lucrative goodies -- stock distributions, limos, lots of lucrative perks.

In Germany, 20% of the members of every company are required by law to be representatives of labor unions working in the company. Here in America, when workers organize in an American corporation:

* 30% of employers fire pro-union workers.
* 49% of employers threaten to close a worksite when workers try to form a union, but only 2% actually do.
* 51% of employers coerce workers into opposing unions with bribery or favoritism.
* 82% of employers hire high-priced unionbusting consultants to fight union organizing drives.
* 91% of employers force employees to attend one-on-one anti-union meetings with their supervisors.

http://www.americanrightsatwork.org/docUploads/UROonepagefactsheet.pdf

The right to organize unions has effectively been eliminated in America. Anti-trust laws have for all intents and purposes been repealed in America.

More here:
http://firedoglake.com/2006/05/30/union-organizing-in-the-21st-century-card-check-and-roach-motels/

TwinBeam said...

1929 - 1933 : The Great Depression

2008 - 20?? : The Lousy Depression

Just thought we should start thinking about a name for this dog, in case it sticks around...

Ilithi Dragon said...

@TwinBeam: I vote for "Bob."

Woozle said...

How about "The Manic Depression", alluding to the neocon insanities which got us here.

William_Shatner said...

Woozle said...
There's got to be a way to do a TheyRule using more current data, or even tracking changes over time... where does the data come from?
I'm guessing from legal documents for all these holding companies that get formed in Delaware.

It really is a sick state of affairs, that a company can wield huge power, be faceless, and we don't even know what they do, until of course, the public is told they are too complex and big to fail.

The big issue is "interlocking directorates." The names of the companies and their current stock price, aren't nearly as important as who is friends with whom and is sitting on their board voting them a bigger slice of pie.

We have this illusion of oversight and competition, but really, the regulations that get destroyed remove barriers to corruption, while much of the regulations made, are sponsored by large corporations to create barriers to entry. When it's one club, and a bank has an interest in their investment doing well -- the winners can be providing great compensation to the club. The losers can be places where there are unions. Rename it and open it in Mexico, vote up a bigger slice for the Executive.

>> The whole feedback mechanism is broken.

>> Lower corporate and wealth taxes, provided more money to create think tanks, political action committees, influence judges, and invest in media.

The "viewpoints" that allowed for excess amongst the wealthy grew more supportive. The judges more favorable.

Eventually, corporations were able to have "rights" and to lobby. Wealthy families wanting to keep more money, saw more advantage in manipulating the system and few risks.

Now, a company must be proven guilty of a crime AND that they are taking too much money (impossible to prove) while a citizen must be proven innocent AND worthy of a raise. A great example is the Exxon Valdez oil spill. The cover story was that it was about one drunk captain -- who was inexpensive and easy to scapegoat. The real problem was, that Exxon agreed to install radar systems and collision avoidance within the Alaskan preserve area. They were given a naturally protected and deep port location -- worth millions, for next to nothing, in exchange they would have the latest safeguards and hire local indians. Of course, they turned off the safety equipment and fired the locals after a few years and went back on every agreement of safety and standards.

After fighting and delaying and watching indigenous people go broke and move out of the area, Exxon saved much more money than they would have spent complying with their safety agreements.

And there you have tore law, environmental damage, labor, legal compliance standards, and class warfare.

Is it any wonder that we debate minimum wage. Pollution standards. The ability to sue for damages a cooperation. And even Global warming? By paying for shills, lobbyists, and bloggers, a company can do whatever it wants, and its more cost effective than following the law, agreements or standards.

In fact, the FDA has sued a company for trying to raise its own standards on Beef.

Fox News, works with an Oil Company, Phil Graham, a disgraced politician and con man who has not been proven guilty enough to be removed from power, and professional lobbyists, to create the march of the idiots known as the "tea bagger protest."

It is a wonder this nation is still alive and kicking.

William_Shatner said...

TwinBeam said...
1929 - 1933 : The Great Depression

2008 - 20?? : The Lousy Depression

Just thought we should start thinking about a name for this dog, in case it sticks around..
That's pretty good.
However, the original name of the "Great Depression" was "The Republican Great Depression."

I was thinking we could tag this with the "NeoCons" or "Globalists" who pushed it into reality.

But fundamentally, we have a bunch of un-treated cases of Narcissistic Personality Disorders that create all these people who listen to Rush Limbaugh but don't think.

Do maybe "NPD Depression" but, I don't know, that might require a mandatory college course just so people would understand it.

IN addition, "Depression" doesn't capture the "Made it Happen on Purpose" nature of this current problem. All the safeguards FDR put in place were meticulously dismantled, and the same speculation (con) that trapped a lot of the wealthy, and the run-up of banks that were too big to fail. They didn't use the last depression as a warning but a blueprint.

I'd call it "The Great Betrayal" -- and Great is in in "huge" not great as in "Wall."

Sociotard said...

How about that! Brin was half right; there was a pardon tsunami for people who did bad things under Bush, but it came from Obama instead.

http://www.agi.it/world/news/200904171654-pol-ren0035-usa_obama_reveals_torture_but_acquits_cia

Anonymous said...

ATTORNEY GENERAL REFUSES TO PROSECUTE GOVERNMENT TORTURERS

“It would be unfair to prosecute dedicated men and women working to
protect America for conduct that was sanctioned in advance by the
Justice Department,” Attorney General Eric Holder said in a statement.

http://www.alternet.org/module/printversion/137056

Good speech, but I liked it better in the original German.

David S. said...

Pardon Tsunami or the beginnings of a truth and reconciliation process? I can't tell yet.

In any case, I like the idea of limiting any "pardon" to only the specifics that they confess to. (This is one of Brin's ideas).

Anonymous said...

Andrew Sullivan (a conservative) has more on the Obama administration's shameful and unconstitutional refusal to prosecute government torturers:

http://andrewsullivan.theatlantic.com/the_daily_dish/2009/04/the-bigger-picture.html

Looked at from a distance, the Bush administration wanted to do two things at once: to declare to the world that freedom is on the march, and human rights are coming to the world with American help, while simultaneously declaring to captives that the US has no interest in the law, human rights, accountability, transparency or humanity. They wanted to give hope to all the oppressed of the planet, while surgically banishing all hope from the prisoners they captured and tortured. And the only way they could pull this off is by the total secrecy they constructed and defended. So we had a public government respectful of the rule of law, and a secret government whose main goal was persuading terror suspects that there was no rule of law at all. It is hard to convey just how dangerous this was and is.Moreover, this was done by the professional classes in this society. It was not done by Lynndie England or some night-shift sadists at Abu Ghraib. According to these documents, almost nothing that was done at Abu Ghraib was outside the limits agreed to by Bush - and much of what was done at Abu Ghraib was mild in comparison. ...If you want to know how democracies die, read these memos.It is "hard to convey just how dangerous this [removal of the rule of law] is" because once law is abolished in secret, it tends to disappear in public. Case in point:

http://www.ridelust.com/pastor-horrifically-beaten-and-tasered-by-border-patrol-agents-at-an-internal-us-checkpoint-for-refusing-a-search/

It makes perfect sense that David Brin's latest post is about corporate boards, rather than torture in secret CIA prisons, or torture and abuse of innocent motorists by the Border Patrol.

As a bestselling author who pulls down $20,000 consulting fees with giant corporations like IBM, David Brin undoubtedly makes at least $200,000 a year. That puts him in the top 1.5% of the income distribution of America. David Brin knows where his priorities are. Torture the peons, but don't trash his investments!

Tacitus2 makes $230,000 a year as an ER physician, so what we've got here are couple of the superwealthy elite lounging around sipper merlot and debating the fine points of corporate governance while ordinary citizens are getting beaten and tortured byour government.

David and tacitus2...you're going to be in the tumbrels if you don't cut this crap out.

Stefan Jones said...

Anonymous, you're being a real asshole.

People are allowed to be concerned about something, and write about it, without addressing each and every other thing that is wrong with society.

There are people who are really concerned about the plight of homeless dogs and cats. That's a real problem. But does it mean that these activists have a right to demand that every post on every blog rant about spaying and neutering?

There are plenty of blogs which address civil rights issues. Why not hop over there so you can bask undistracted in a glow of self righteousness?

Me, I donate a few hundred a year to outfits like Amnesty International, the EFF, the Southern Poverty Law Center and the A.C.L.U.

idiotgrrl said...

TwinBeam asked for a good name for the current economic crisis. It's already been given one in popular speech here on Main Street, leaking into the media even now. It's being called "The Great Recession." Leaving the next one to probably be called The Big Blip.

tacitus2 said...

Among other fabrications, Mr. Annonymous, the insinuation that I sip Merlot is utter nonsense. I work my own schedule, make an amount of money that is less than you quote but certainly none of your business. And I donate enough of my time to the local free clinic and the public school system that I doubt I will be in preferred seating on the tumbrels.

sipping a very proletarian beer...

Tacitus2

Ilithi Dragon said...

$200,000 a year is a super elite? Uh, no. That's about eight and a half times what I presently make, four times what my dad makes (with sometimes insane amounts of overtime), and I would LOVE to make that much money, but no, that is not a super elite by any margin. Upper middle class, maybe, but far from the 'super elite' clade unless you're one of their errand boys or something.

I'm not entirely happy with Obama's decision to not prosecute interrogators for 'harsh' methods (aka torture), when they were following orders, but I can understand it, and support it to a degree, mostly from a practical standpoint. My justice-demanding idealist side would demand that they all be put on trial for obeying illegal orders, but that is not practical at this stage in the game. There are too many other things going on right now, too many big things, to waste so much time going after relatively little fish.

And, to be honest, the ones to really blame are the people who gave the orders, who said it was legal. The people following the orders can be faulted for not disobeying illegal orders, but that can only go so far - they were still given the orders and guidelines and authorization, and a LOT of pressure to get results and use them to get results. I want this to be properly addressed later in the future, but at this stage, we have so many things to juggle, the Obama administration has so many things to juggle, to keep the country afloat, and sometimes we have to set things aside to worry about more pressing issues.

You also have to remember that the people who gave those orders, and who would be directly culpable if those orders were declared illegal, still have a lot of influence and power. Obama's effectively walking a tightrope, in the reality of D.C., which has insanely distorted laws of physics. The people who made those illegal orders and authorizations also still have a lot of influence, or buddies with a lot of influence, in the courts. For now, I am content to bide my time on this, while work is done on more immediately critical problems, especially since any attempt at a trial on this right now will go nowhere, and just be a massive, grand-standing show trial that would consume all attention, resource and efforts.

David Brin said...

1 - Anyone smart enough to become an e-room bum... working fantastically hard and saving lives for 30 straight hours, then kicking back the rest of the week and surfing... has my vote for 2nd best example of how the Enlightenment offers positive sum games. These guys do more good, save more lives and earn down more accumulated karma, in a month, than you and I can in ten years. And yet, they have also designed their lives to be net winners.

Oh, #1 on that list is sci fi author...;-)

2- My complaint re Obama is that he hasn't made the Truth & Reconciliation thing explicit enough. Vengeance is for saps (and anonymous is the genuine article). My life obsession in transparency and truth, which will stop that shit far better than any number of bodies hanging from lamp posts.

3- Anon only looked up "tumbrels" after I mentioned the word, threatening the oligarchs if they keep us heading toward Louis XVI levels of class war. Still, there is something worth noting, amid anon's bona fide "assholeyness."

If the good wristos don;t start helping us to take the bad ones down a peg, then we may soon see populism heading toward French territory (circa 1789.) If so, the radicalized peasants MAY indeed move down the blame chart to take in the upper middle class... as Robspierre got them to do.

What anon neglect to notice is who came out on top after that excess. The winners were...

a new monarchy and his pals in a new upper middle class. Oh, and good old boy French farmers. The losers? Every single radical asshole. Like anon.

Try reading-up. Fool.

Jester said...

Zorgon, get a grip.

That aside -

No Idea what Tacticus makes, but given the immense cost of student loans, the rarity of the set of talents necessary to be a competent ER physician, the stress and emotional toll of the job, the low-pay "apprenticeship" involved, and the years of lost income that result from lengthy schooling. very few professionals deserve their six figure salaries more IMO.

Whether he did volunteer work or NOT.

Granted, he's wrong about a lot of stuff, but he's certainly not making his living by conning people out of their money, and he certainly isn't in the "Buy and Sell Congressmen" category.

Neither is Dr. Brin.

Six figure salaries don't render a person "part of the Elite"...although, anything beyond a 150k for a family of four is NOT "upper middle class" but is, honestly Rich.

Top 5% ain't middle class, but it sure ain't "They Rule" either.

epeon said...

I read your post and was a little bit shocked by it. Have there been achievements by the right? Yes, I think there has been. Reagan reduced the marginal tax rates which was certainly good for the economy. The whole capitalist approach is now at least considered and I can tell you that was not the case a generation ago.

As far as right wingers being ill-educated, that is certainly true for some. But, what I don’t think you fully understand is how the prism of the media distorts the message. For example, I was at a tea bag rally. I counted six offensive signs at the rally. The vast majority were about reducing government size and scope. Do you want to guess which six signs found their way on TV? The media vastly distorts the message of the right. They want the right to seem incoherent, ill-educated, and xenophobic. So, the media publicizes those that fall into that spectrum. The clear-headed voices articulating the attractiveness of balanced budgets, national readiness, and competitive free enterprise are out there. But, they don’t get media attention. What gets media attention is the bomb-throwers. Equally as bad, the message of those from the right is distorted by being taken out of context or just flat out lied about.

A classic example of that is Barry Goldwater. If you read what he said, he was very prescient both about contemporary events (such as Vietnam) and the future of this country. But, if you are old enough, you will remember that the media portrayed him as a “bomb them to the stone ages” fanatic. Remember, LBJ was the peace candidate. Of course, LBJ had already planned a massive escalation in Vietnam, but he prudently did that after the election (which, of course, he denied during the campaign).

What most of the grass-roots is fighting for is simple: less government spending, less government influence in our lives, more competitive capitalism (get rid of crony capitalism), and less corruption (which goes hand in hand with government influence). Since the media benefits precisely from crony capitalism, it is no wonder that the press is diligently trying to distort that message. It is not a surprise that MSNBC (with Kieth Oberman and Madow) is owned by GE. GE directly benefits by government TARP money and government contracts. Immelt sits on Obama’s board of economic advisors. I have personally heard GE VPs say that Oberman’s purpose is not to generate ratings but to generate support for Obama.

Get your hand out of the sand, stop watching the old media,and pay attention. It might inspire yoru left and improve your writing.

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