Where were the boards of the banks and trading companies?
By Hank Boerner
What are we to make of the comprehensive report by the Financial Crisis Inquiry Commission? This detailed post-mortem of one of the worst financial markets debacle in the modern era contains characteristics that jump off the page (or screen). Reckless risk-taking by corporate management at many levels and a hands-off board that often did not have a clue as to what was going on led to disaster and outright failure at too many firms. The intense focus was short-term reward – “immediate,” if that qualifies – without regard to the consequences for shareholders and stakeholders. Who provided the capital for our capitalistic democracy?
The result: trillions of trusting investor dollars lost and onset of the Great Recession with many millions of jobs lost to layoffs, downsizing, rightsizing, outsourcing and the unending quest for greater worker productivity (more output, less cost). We might characterize the outcome of the 2007-2009 financial crisis as one of the greatest wealth transfers in the modern history of the US. Yes, money was lost by investors – and gained by “the house,” which on Wall Street almost always wins. (One of our favorite financial and business authors signs his books, “Stay Away from Wall Street!”)
But this is not a practical answer or piece of advice. We all participate in some way in the US and global capital markets. We regularly see projections 100 million and more Americans are “in the market,” through their 401-ks, profit-sharing plans, personal investments and through reliance on state and municipal pension funds. So the solutions to some of the most vexing issues the nation faces are not going to be solved by doing the Wall Street Walk (avoiding the markets). Too late for that.
As the boards and senior management of commercial banks and trading companies (often now combined) climbed on the big yellow bus and headed (willingly) for the looming financial cliffs, the question that kept popping in people’s mind was: Where was the board?! Fair question (read the FCIC report for chapter and verse). So the “reform” effort– for corporate America and Wall Street interests – should focus on the need to recognize the importance of board and managerial stewardship – and yes, “corporate responsibility” in its finest form – for using OPM – Other People’s Money.
This is not a new topic for societal debate. In the early 20th century one of America’s most respected jurists – Louis Brandeis – authored a series of penetrating commentaries that carefully assessed the impacts of enormous changes taking place in corporate America, and on Wall Street. These were gathered in a 1920s book – Other Peoples Money – that greatly influenced the regulatory framework of the 1930s (the 1933 and 1934 acts). Brandeis later became a Supreme Court Justice.
In the corporate sector, founders – smart and autocratic leaders such as Henry Ford and Thomas Edison – were giving way to boards elected by the growing base of public shareholders; on Wall Street, in time, the partners (who had all of their money at risk) took their firms public. Result: the capital markets are today all about Other People’s Money. So, it seems simple – and maybe I am being simple-minded here – the highest order of business for boards and corporate executives is to think about OPM and discharge their responsibilities accordingly (to all stakeholders). That is the ultimate demonstration of corporate responsibility, I think. What are your thoughts on this?
About Hank Boerner
Hank Boerner is Chairman of the Governance & Accountability Institute in New York City and is co-author with Mark W. Sickles of the book, Strategic Governance: Enabling Financial, Environmental and Social Sustainability (published 2011 by the Institute). In the volume the authors explore links between culture, risk management, strategies and corporate responsibility.
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