License to Steal

Remember Eddie Chiles? He was mad as hell and wasn’t going o take it any more. It’s time the rest of us got mad. Corporate managers have been taking us to the cleaners and getting away with it for years. I don’t mean Enron executives. They got caught in their fraud and went to jail. I mean the people who do it legally and the boards of directors who allow it or even encourage it. One CEO after another has trashed his company and walked away with a king’s ransom. Stockholders lose fortunes, employees lose jobs and dreams, departing managers get rich, boards pay no price at all, and in many cases tax payers foot much of the bill. We’ve established a pattern here and in this day of the 401K it affects enough of us that it’s time to rethink some corporate governance practices. I’m not normally in favor of more regulation but this has been broken for far too long.

The list is long and brings back a lot of painful memories right here in North Texas. Harding Lawrence bankrupted Braniff in 1982 and retired to the Caribbean with his millions while the airline shut down, buried under a mountain of debt. A couple of years later Edwin McBirney partied Sunbelt Savings into a failure that cost taxpayers about $2 billion. The whole Texas S&L industry eventually collapsed leaving the freeways lined with half finished townhouse complexes and a few individuals wealthy, having gotten their money swapping the properties back and forth among themselves. In 1998 Les Alberthal left EDS with a severance package of $35 million, though the stock price was well off its highs of two years earlier and it was clear the company’s business model was in trouble. A series of management teams followed. None of them really managed to turn the company around though they all did quite well personally. Now the company has been sold at a fire sale price and is going through one more round in a lengthy series of layoffs. There have been many such stories. The common thread is that everybody loses except senior management and the boards that are supposed to be overseeing them. Once an executive gets control of a major corporation the rapine begins and too often continues until there is little left.

I don’t object to seeing these people do well while their companies prosper, though I do think their compensation is often excessive. My issue is that they do so well whether the company does or not. Nobody represents shareholders or employees, and now, one more time, not taxpayers. We are seeing stock market instability unrivaled since the Great Depression. I am hearing that D word more than at any time I can remember. We are bailing out banks, brokers, and insurance companies left and right at staggering expense. At the root of it all are managers who made bad bets using other peoples’ money and faceless boards of directors who are not being called to account.

Reform should begin where the problems do, with corporate boards. In theory they are elected by shareholders. In practice they are typically appointed by management, the wrong way around. My suggestion is institutional investors (mutual funds, retirement funds, etc.) be required by law to form director nominating committees and vote in proportion to their holdings. Individual investors whose stock is held in street name can be represented by their brokers if they do not exercise proxies or vote themselves. All of this should be done independently of management. Corporate officers should be prohibited from naming or serving on their own boards. Directors should report at least annually to the committees that nominated them. Anybody have a better idea?