ACCOUNTABILITY

Posted at 8:20 p.m. ET:

There were some Congressional hearings today, focusing on fixing blame for the economic mess.  It's important that we know the full story. 

The Wall Street Journal, certainly a free-enterprise paper, today ran a fine piece by Jonathan Macey of Yale, insisting that corporate executives and boards of directors take their share of the blame.  That is correct.  Free enterprise is the best economic system ever developed, but it requires wise stewardship and responsibility.  When trust is breached, we who favor the market system should be the first, not the last, to demand that those responsible be dealt with appropriately.  Macey:

The failure of the General Motors board of directors to fire CEO Richard Wagoner provides a rare glimpse into the inner-workings of big-time corporate boards of directors. The sight is not pretty.

When Mr. Wagoner took the helm eight years ago the stock was trading at around $60 per share. The stock had fallen to around $11 per share before the current financial crisis. It's now below $5 per share.

In 2007, Mr. Wagoner's compensation rose 64% to almost $16 million in a year when the company lost billions. The board has been a staunch backer of Mr. Wagoner despite consistent erosion of market share and losses of $10.4 billion in 2005 and $2 billion in 2006. In 2007 GM posted a loss of $68.45 a share, or $38.7 billion -- the biggest ever for any auto maker anywhere.

And we see this same pattern repeated everywhere.  In Hollywood they call it "failing upward."  No matter how many flops a Hollywood executive has, he gets more money at his next job because they think he's learned from his experience.

The average pay for chief executives of large public companies in the United States is now well over $10 million a year. Top corporate executives in the United States get about three times more than their counterparts in Japan and more than twice as much as their counterparts in Western Europe.

And the corporations don't often get their money's worth.  Weak, acquiescent boards of directors are part of the problem:

Like parents unable to view their children objectively, boards reject statistical reality and almost always view their firms as above average. Because directors participate in corporate decision-making, they inevitably take ownership of the strategies that the corporation pursues. In doing so, directors become incapable of evaluating management and strategies in a detached manner.

And...

Once an opinion, such as the opinion that a CEO is doing a good job, becomes ingrained in the minds of a board of directors, the possibility of altering those beliefs decreases substantially. All too often, it is only when an outsider takes an objective look does anybody realize the obvious: That the directors of a company are generally the last people to recognize management failure.

Finally...

Little if anything has changed at GM since dissident director H. Ross Perot dubbed his board colleagues "pet rocks" for their blind support of then CEO Roger Smith. The broader problem is that there are far too many pet rocks on the boards of other U.S. companies.

Criticism like this has been voiced many times over the last thirty years, especially when the auto industry was discussed.  But each time the corporate machine got by, protected by well-oiled PR operations.  Maybe this time the corporate sector will learn.  Or maybe not.

December 9, 2008.