Corner Office-Governance or Government?
“Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight. Our entire economy has been undermined by that failure. So the question is, ‘What do we do now?’”
—President Barack Obama, June 17, 2009, announcing a proposed reform of the U.S. financial regulatory system
If I could step into the president’s shoes for one day to address the nation’s corporate leaders, I would ask the same question. But my answer would be different.
The president and Congress are riding a populist backlash against the breakdown of the economy, so naturally their solution is to create systems that give more control to the federal government. History has proven that the inevitable byproduct of crisis is legislative and regulatory “solutions” intended to ensure that the crisis will never be repeated.
However, our government is learning the wrong lessons from the current crisis and, as a result, pushing the wrong medicine. Many in Congress believe that the central cause of the economic crisis was a widespread failure of corporate governance. This is just plain wrong. While there is plenty of blame to go around—greedy shareholders, inept regulators, slick Wall Street robbers with their derivatives, and others associated with the mortgage industry—no evidence of widespread corporate governance failure is apparent.
There is a huge disconnect between the facts leading to our current crisis and the legislation proposed to prevent it from happening again.
So, what’s my solution? Well, it’s in line with what you’d expect from someone who’s had a long career as an NYSE-listed-company executive, corporate director, small-business owner, entrepreneur, and adviser: self-regulation by business leaders who are willing to establish and protect good corporate values, fair pay, transparency, and innovation.
If we don’t demonstrate this leadership now, the government will take the reins and eventually stifle American innovation. There is no argument that too much emphasis was placed recently on achieving short-term gains, with little or no understanding of risk management. The most deep-seated problem facing our country is not a lack of capable corporate management; rather, it’s management capable of neglecting to perform with integrity.
American workers who have lost their jobs, retirees who have seen their life savings vanish, and small businesses that have had to close their doors all expect the government to enact reforms that will protect them from future economic catastrophes. But as we saw in 2002 with the Sarbanes-Oxley Act—hastily created and passed by Congress in reaction to the failure and unethical activity of Enron and other firms—a rushed, political reaction by Congress is only a Band-Aid if the systemic disease is not diagnosed. President Obama, Senator Chris Dodd, chairman of the Senate Banking Committee, and Representative Barney Frank, chairman of the House Financial Services Committee, cannot legislate against the diseases of greed and laziness.
Existing governance standards failed because the people in charge of them lacked knowledge, were not engaged in their fiduciary duties, and allowed the lure of easy money to overcome common sense. It wasn’t the system that failed; it was the people running it who failed.
A Deeper Look
President Obama, in his June 17 address, said that “one of the most significant contributors to our economic downturn was an unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess.” Few have taken a deeper look at why those major financial institutions really unraveled.
According to the Securities and Exchange Commission, Bear Stearns’ concentration of mortgage securities was increasing for several years and was beyond the company’s internally set limits, yet its board of directors did nothing to lessen its risk. In fact, Bear Stearns created a full risk committee of its board only a year before the company failed, much too late to stop its death spiral.
Other now-failed institutions had risk committees, but those directors were not engaged enough to be effective. The risk committee of Lehman Brothers’ board met only twice a year in 2006 and 2007. At UBS, by some accounts, risk managers learned about potential subprime losses in the first quarter of 2007, but executives didn’t bring those issues to their board until months later.
Most of the failed firms had a “silo” approach to risk management and communication with their boards, so nobody had a complete understanding of the level of risk to which subprime products had exposed their firms. It didn’t help that the companies were making loads of money—who’d want to change that?—which bred complacency and fed greed.
So, back to the question, “What do we do now?” My answer is to reform the attitudes of people running the corporate governance system. Business executives and corporate directors must lead the charge and enact reforms at their companies to address the following:
• Corporate values: Taking advantage of easy money while accumulating debt and living beyond our means may have been the American way in recent years, but it does not build a sustainable economy. We must be strong enough as leaders to model moral behavior.
• Fair pay: Rewarding risk and innovation is the source of American business success, but executive compensation cannot reward short-term profits at the expense of the long-term viability of the firm.
• Transparency: Business leaders need to be more clear, simple, precise, and honest in their communications. Managers need to share valuable information (not just data) with corporate directors and each other, and directors must communicate more clearly with shareholders. This also means that managers, executives, and directors must get engaged in their businesses and understand what is going on in order to communicate about it! When President Obama said that “few inside or outside these companies understood what was happening,” he was talking about the lack of transparency.
• Selflessness: Leaders must earn the right to be called leaders. Business leaders at the helm of the many failed institutions that were considered foundations of our economy should be ashamed of themselves for selfish behavior that caused harm to millions of innocent people.
• Innovation: The success of future generations of Americans depends on feeding our spirit of innovation. The world looks to the United States for the most groundbreaking, paradigm-shifting, pioneering, revolutionary innovations and ideas. We must ensure that the yoke of government regulation that’s intended to protect us doesn’t eventually strangle us.
I hope that our government leaders step back and engage in serious reflection about the real causes of the current crisis and consider whether proposed legislative reforms will create stronger corporations in the long term that are better able to develop jobs, pay taxes, and provide goods and services that are in demand. For the future of our great country, I hope and pray that care is taken to avoid a fundamental and potentially dangerous change in the balance of power in the corporation.
The failure of corporate leaders to properly regulate themselves threatens the feasibility of a free-market democracy. If we are ever to truly recover from this economic meltdown, we must become more vigorous, morally principled, and engaged—starting today—or the government will do it for us, and we will lose the spirit of innovation that fuels the American dream. The choice is ours!