February 24, 2009 (blogging from Tokyo) - Why Change happens in Politics but not in Business
Barack Obama swept into the nation’s capitol and with a few scribbles of his name, started the process of dismantling eight-years of Bush policies. He faces a Congress that will largely embrace his changes, mostly because the Democrats have a comfortable majority in the House, and only a 2-seat deficit to get to the filibuster proof super majority in the Senate. The economic stimulus package was passed after a hard fought battle. Washington will get its change.
The news from the business world continues to disappoint, but perhaps most surprising is not that the economy is tanking, but the fact that even in these tough times (or perhaps because the times are tough), we discover Madoff’s brazen $50 billion ponzi-scheme, the $1 million renovation of Merrill Lynch’s CEO Office, or the $18 billion of bonuses paid to managers of those very financial institutions that are begging for bail-out funds. Obama instituted a $500,000 max on executives from companies that receive bail-out funds, but it just seems business executives simply “don’t get it.”
Actually, they do get it. The simple truth is that self-interest is the surest way to get ahead in our society. Business Leaders simply follow in the footsteps of their bosses. And those bosses are the ones that have shown the rest how to rig the system in their own favor. Look at the board rooms of any major Fortune company. Board members, even outside directors, are all executives of companies that would not want their boards to clamp down on their own compensation packages.
External auditors have little incentive to detect fraud or to call out their clients. If the call-out of the SEC by Harry Markopolos, where he claimed that the SEC staffers wouldn’t be able to find first base at Fenway Park if they were seated in the Boston dugout were true, how should we characterize an industry of highly paid partners (whose average compensation is well over $500,000 ) who have failed to prevent any of the collapses we’ve witnessed in the financial institutions? Audit fees are notoriously high for major financial institutions—usually in the tens of millions dollars. At some point, after the politicians have given enough pounding to the CEO’s, rating agencies, the SEC, the PCAOB, they may turn their attention to this industry which needs a good kick in the behind.
And while they’re at that, it may serve them well to start instituting changes in the way Boards operate—so that they no longer condone the incompetence, excessive compensation and lack of accountability at both the CEO and Board levels. The SEC, the PCAOB, and the SRO’s (self-regulated organizations—i.e., NY Stock Exchange and NASDAQ) had instituted various restrictions on independence for Board members. But perhaps they have missed the boat. Their idea of independence was not too dissimilar from the notion of independence used by the financial engineers who designed the models governing risk for the massive mortgage securitizations. A pool of assets in California was supposed to be independent of a pool of assets in North Carolina. But when the economy tanks, both pools sink. There’s nothing independent about that.
Finding outside board members doesn’t make them independent. If they come from the same pool of overpaid executives who don’t have the guts to hold themselves and their peers accountable for incompetence, they’re not any better than an insider on the board. If they cannot ask the tough questions demanded by shareholders, then the independent director is simply a highly paid cheerleader, serving together with other friends who do not wish to see themselves judged harshly.
As a businessperson, it’s hard to say this, but sometimes, politicians are held to a higher standard than a CEO.
Joseph Lee is an independent consultant and executive coach. He is also an Adjunct Professor at the Peter F. Drucker and Masatoshi Ito Graduate School of Management where he teaches a second-year MBA course in Management Consulting. In addition, Mr. Lee is also an author, writing International Business Thrillers, including his debut novel The Sky Burns Red (赤く燃える空) which was published in Japan. A sequel is scheduled to be released Spring, 2009.