Thursday, September 17, 2009

Being Eliot Spitzer IV

In a recent article, "Better Regulate Than Never," for The New Republic Eliot Spitzer makes more than a few profound points about what we should do in moving forward in the economic crisis. Instead of employing bailouts and the like we should require shareholders to do their jobs, essentially in being regulators.

As we emerge from the crisis, there will be a temptation to over-learn lessons. The old system socialized risk and privatized gain. In our rush to reverse the damages wrought by this imbalance, there are many proposals (some of them already implemented) that bureaucratize decision-making and sharply limit private gain. There's the application of Sarbanes-Oxley to venture-capital firms, which has been neither effective nor useful, and has perhaps inhibited capital flows. And we have already added a federal "pay czar" to determine compensation for bailed-out bankers.

But, once again, we’re missing the opportunity. Instead of adding bureaucracy, we should be using the government to help invigorate shareholders to police companies. They should be empowered to control executive compensation, eliminating all the conflicts that now encumber those decisions.

Shareholders, like all stakeholders, will make a better determination about the use of their capital than bureaucrats who don’t ever suffer the downside of a bad investment. We need to facilitate opportunities for shareholders to actually participate in key decisions, and to deny those whose interests are not aligned from hijacking them. Strangely, we’ve heard a lot about executives and bureaucrats in this moment of reform. But shareholders, a force integral to the integrity and vitality of markets, have largely been left out of the discussion. We need them now more than ever.
I strongly agree with the points above. I also wonder what the role of the boards of directors will now play? Should they begin to do their jobs as regulators now? Had they done their job we could have averted a major financial crisis. Instead, they seemed to have sat back and collected fat fees and expected taxpayers to bail their companies when they should have been regulating and acting as a governing body.

What's really sad is that many board of directors of bailout banks and auto companies themselves have run major corporations and should have discerned certain pitfalls. Isn't this the reason that they sit on their asses for nearly the whole year and go to meetings once or twice a year, collecting fat fees for their "knowledge?"

2 comments:

zorro said...

"But, once again, we’re missing the opportunity. Instead of adding bureaucracy, we should be using the government to help invigorate shareholders to police companies. They should be empowered to control executive compensation, eliminating all the conflicts that now encumber those decisions."

That sounds OK, but over time, couldn't we wind up with 'lobbiests' who work the shareholders? Much like what goes on in Congress now?

Judith Ellis said...

Good question, Zorro. But if lobbyists were excluded from the process we would not have this concern, would we? I was amazed reading about all of the various kinds of lobbyists in Washington. There was an article in the NYT this week about a new young Jewish lobby on the block that appears to be more sympathetic to the plight of the Palestinians. The big lobbyists fought not to have them at the table during recent talks at the White House. I was pleased that the administration allowed their more modest voice. But they're still lobbyists.

Lobbyists are special interest groups. Period. They have organized agendas and causes with big bucks backing them. To some extent they represent a portion of the population. But the difference is the access and money used to influence the process that can't be compared to average Americans. Rahm Emmanuel's position is important because of access to the President.

No lobbyists I say, even those who lobby for issues close to my heart such as poverty, education, and children. Get the special interest out of Washington and do away with campaign financing. Make both illegal. Isn't it interesting that most congresspersons become lobbyists for large corporations. After all, the connections with other congresspersons are already there. This is a problem as I see it.