We are shouting out that “Corporations aren’t people!” but, as I pointed out in my “People are the organization” post, corporations are made up of people. If any actions we take to influence, channel or control organizations, including corporations, are to have real effect, I think it is implicit that those actions have to be directed at the people within the organization and not the organization itself.
So, for example, recent history has shown how corrupt and selfish the management and directors of Wall Street banks are. It has also shown that fines and monetary penalties levied on the organizations have no meaningful effect. There was a time when a bank CEO who crashed the economy and whose company lost $9 billion would have been fired and black listed from the industry entirely. Not only that, the members of the board of directors would have been replaced by the shareholders and probably sued. No more…now that CEO gets a multi-million dollar bonus and a better golden parachute and the board members get hired to sit on other companies’ boards as well.
Bloomberg reports that The three directors who oversee risk at JPMorgan Chase & Co. (JPM) include a museum head who sat on American International Group Inc.’s governance committee in 2008, the grandson of a billionaire and the chief executive officer of a company that makes flight controls and work boots. Is it no wonder JPM lost $9 billion in speculative trading? And this is commonplace. At failed Lehman Brothers, of the 10 non-management directors, only three had financial industry backgrounds.
So, what has happened to Jamie Dimon, the CEO and these directors? Nothing to date. Lehman CEO Dick Fuld walked off with some $260 million, including $30 million in cash bonuses, from 2004 to 2007, a time when it took big risky bets, according to congressional investigators. Do we really expect any real change in the way these organizations operate as long as real people do not suffer any serious consequences of their greed and ineptness?
It should be up to the shareholders to deal with incestuous, inept boards. Even corporate raider Carl C. Icahn agrees that shareholders must rise up and take power and replace inept corporate directors.
But is that the extent of what should be done…rely on shareholders when, as market analyst Peter Cohan writes at AOL’s Daily Finance: 70% of trading volume on the major exchanges is conducted by high-frequency traders who hold a stock for an average of 11 seconds? Or, maybe that is unfair. Michael Hudson, a highly-regarded economist, said on January 3rd of 2011: “Take any stock in the United States. The average time in which you hold a stock is–it’s gone up from 20 seconds to 22 seconds in the last year.” Trades are computerized and much of conducted by funds rather than individuals. Can we expect these “shareholders” to actively pursue good governance of the companies whose shares they hold so briefly.
No, I think the legal system needs to step in and take action. Current corporate law establishes duties and penalties for directors but those penalties are typically civil rather than criminal (except in the case of product liability) and make directors subject to removal and civic suit for damages. Criminal prosecution will generally involve fraud charges by the Securities and Exchange Commission (SEC), such as action against Dennis Kozlowski, one-time chief executive, whose extravagant spending and pay package at Tyco International became notorious examples of corporate excess, resulted in him being sentenced to eight1/3 to twenty-five years imprisonment and ordered to pay almost $US170 million ($222 million) in fines and restitution for stealing from his former company.
Sadly, action by the SEC requires political will on the part of the administration, which Obama has failed to show in the case of the banking industry. Yet, I postulate that a self-correcting system requires that there be real and severe consequences, i.e. prosecution, for management and directors like that experienced by Dennis Kozlowski. If the individuals do not experience the consequences of their actions, there will be no correcting mechanism.