Who Watches the Watchmen?

New at Reason: A new call for corporate accountability.

Comments

[Plutarck]

More and more I find myself agreing with our beloved Mr Carson, and I have more or less one thing to offer in addition to what he stated:

You pays your money and you takes your pick. The corporations which are supposedly so evil exist - with a few notable eceptions - purely out of the choices of countless individuals. Investors bought stock and became stockholders, stockholders approved/elected/formed boards of directors, boards of directors chose what executives to hire and fire, the executives chose what managers to employ, the managers chose what employees to hire, and executives, managers, and employees all chose to be employed. Furthermore, creditors chose to take the risks of lending their money to these people - no one forced them to say, "Sure, I'm just going to believe whatever you've told me - here, take my money."

It is, as such, precisely as I say - you pays your money and you takes your pick. Don't like the risk? Buy a T-Bill, convert your cash to CDs, or stick the cash under your mattress; become a private money lender, find a broker or other money lender to join your funds with, and so on and so forth. The choice is yours, and you should be solely responsible for any and all outcomes - it's your money, so if it gets loss out of anything other than coercion, it cannot meaningfully said to be anyone's fault but your own.

There are quite rightfully laws against fraud and murder, and there is no good reason not to enforce them personally. Indeed, pretending that corporations are not made up of free individuals that choose to behave in certain ways ensures that tremendous damage and dirty-dealing will be done, beyond that that would otherwise occur.

OR, we can choose that the benefits of such organizations are worth the price, and take the only valid resulting view - that this sort of thing is simply a price of doing business.

Indeed, you pays YOUR money, and YOU takes YOUR pick. The money is yours to loose, or to keep - to make to grow, or to make to shrink. Unless it is taken from you by force, it's fate is your sole responsability.

[s.m. koppelman]

Ehh.

Though government agencies should be easier to sue and easier to hold accountable, I think the same medicine would be helpful for both the public and private sectors: scaling back the concept of the corporation (or government agency) as ficticious person.

Punishing a corporation for malfeasance through the market--as you can argue happened with Enron, Tyco et al--punishes whom exactly? If the "crime" is that a company's officers and senior management team have been cooking the books or gaming markets, and then paying themselves massive bonuses based on this, who's really punished by the company's collapse or a plunge in share price? Minority shareholders? Rank-and-file employees?

Sure, Messrs. Kozlowski and Lay lost a lot on paper in their companies' collapses. Both held lots of stock. But if you've got a board--paid in cash--approving compensation packages and "forgiven personal loans" big enough and liquid enough that your take-home pay is in the tens or hundreds of millions--what's really the big deal if the stock collapses?

Sam Waksal was convicted for insider trading--one of the few activities that a corporate officer is held personally responsible for, and with an attainable burden of proof.

Union Carbide didn't kill people in Bhopal, India. People working for Union Carbide did. People who looked at their chemical plant spreadsheets, consulted with their lawyers and decided that Bhopal would be a good place to put a plant, with little or no meaningful safety oversight or regulation.

Had that plant been built in Danbury, on Carbide's corporate campus a few hundred yards upwind from senior management's offices, I suspect it would have been built and maintained to higher standards. Maybe too high to allow it to "compete" in India's market.

Punishment by the market through evaporating sales and a nosedive in stock price often doesn't have the intended effect. The legal protection offered by the notion of a ficticious person, and insulation from stock-price fluctuations via cash-rich pay packages, have led us to a system that's been gamed enthusiastically. When corporate officers are paid so well that they don't have to care whether the company survives another year, and they're personally off the hook for fraud against shareholders and things that are bluntly criminal--like gaming energy markets through collusion--when perpetrated by individuals, what good does a gutted market mechanism do?

[s.m. koppelman]

So let's go with the notion that major stockholders are the real crooks for voting in directors who vote in venal managers. All right.

Starting from there, it follows that when managers have been paid by directors appointed by major shareholders to cook a company's books in order to drive up the stock price in order to make more money for the major shareholders, it seems only fair and right that the creditors left emptyhanded in the Chapter 11 filing should be able to go to the stockholders for payment.

Either way, you're less likely to see short-term-greed-driven management, whether it's by making a would-be C-level officer unwilling to sign off on questionable practices, or by making directors and stockholders think very hard before they give managers bad mandates.

[Rick Barton]

s.m. koppelman wrote:
"But if you've got a board--paid in cash--approving compensation packages and "forgiven personal loans" big enough and liquid enough that your take-home pay is in the tens or hundreds of millions--what's really the big deal if the stock collapses?"

But, that's not how the real corporate world works for the vast majority of fortune 500 and even fortune 100 companies. Daily, CNBC and the financial press runs stories of corporate executives selling stock and then laying out, to allay investor fears, the arithmetic of how their company stock and stock options form a significant part of their compensation package, thus justifying the sale. Boards are of course wise to make company stock a significant part of the executive's remuneration.

The market reaction to corporate crime does not just serve to punish the corporations in question with "death sentences" as Tim Cavanaugh's piece points out but also apparently acts as a very effective deterrent since the rate of corporate theft and fraud is infinitesimal. Their does not exist a geographical community any where with a theft crime rate any thing near as low as the "corporate community". The far more prevalent corporate "crimes" are the unconstitutional government subsidies that are obtained by the politically well connected . (see:"James Madison and the future of limited government" Ed: John Samples, for Madison's interesting concerns on this matter.)

Back to Tim Cavanaugh's observation that; while the corporate world by in large pays the price for malfeasance, government on the other hand, "gets away with murder". The point should be well taken:

Lets imagine Microsoft, wanting to undertake a VERY,VERY, costly and risky venture - an acquisition or a foray into a whole new market niche or something, enlists the assistance of another company, a junior partner in the proposed venture, to help persuade shareholders and investors of the wisdom of this action. And, the junior partner does just this and in fact makes a persuasive case that without undertaking this new venture, the very existence of Microsoft as a viable company will be called into question. But, the junior partner's case is found out to be simply lies - lies based upon outdated analysis and non-germane information, using actual forgeries to make it look both current and relevant. Imagine the bloodletting and heads that would roll! But, in this scenario, replace Microsoft with the U.S government and the "junior partner" with the British government, and this is exactly the fraud that happened in the production of the case for the Iraq war. Heads rolling? Impeachment? Hell no. In fact, Bush looks like a pretty good bet for reelection! (of course, this could have something to do with the fact that not one of his likely Democratic opponents understands anything about free enterprise and only one, (Kucinich), seems sincere about rolling back the current lethal course of foreign intervention).

[Tommy_Grand]

The government's guilt does not exonerate these executives. CEOs and CFOs are often guilty of fraud. They rarely suffer. In fact, they often benefit from their crimes. That's unjust. Those of us who believe in free markets should abhor fraud - which is a form of theft. A true believer in free market capitalism should hold that crimes against property (such as theft by fraud) are nearly as serious as assaults against a person. The fact that some victims of the frauds are wealthy stockholders is irrelevant. Even if it were a consideration, many of the victims are not wealthy.

I would support a law requiring any corporate executive (a term I'd define broadly) convicted of knowing financial fraud to forfeit all his or her assets and be sentenced to work at McDonalds (or a similar estab.) in an entry-level job for 2-5 years.

[Kevin Carson]

Tommy Grand,

I don't dispute that they should be punished; just that all the transaction costs of detecting and punishing their crimes should be considered part of the cost of investment, rather than externalized on the taxpayer. ALL law enforcement costs, like all other "public" services, should be operated on a cost basis through user-fees, rather than from general revenue. The genius of market pricing is that it provides a feedback mechanism to the consumer about the real cost of providing what he consumes, so he can make a rational decision about how much consumption is worthwhile. When the costs are shifted to someone else, he has no such incentive to rationality.

[nm156]

Comics ref. COOL. Still the best headlines, guys.

[Kevin Carson]

Plutarck,

I'll try to pull myself back together after that moving tribute (wipes eyes). Seriously, "you pays your money and you takes your pick" is a pretty good summary of the principle I took a gazillion column inches to state.

It also applies, I think, to copyright issues. Leaving aside the moral issues of whether IP is "real" property, the fact is that as technology changes, it makes some forms of property rights harder to enforce; and it is incumbent on those who choose certain business models or invest in certain forms of property to bear the risks and costs of their own decisions. So if free downloading makes the old recording business model untenable when record companies are spending their own money on enforcement, they'd better switch to a business model that pays, even for people spending their own money.

The divorce between expense and voluntary payment, in any realm of economic life, leads to irrationality--when the State provides something (transportation, security, R&D subsidies, technical training, energy) for less than the real cost, acute shortages and bottlenecks develop, and the economy shifts to forms of production that use those benefits a lot more intensively than they would if people had to pay for them themselves.