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Is Bad Corporate Governance to Blame for the Economic Mess?

  • Does corporate governance get the thumbs down?The Find: Professors from the Wharton School debate whether "America's executives and boards of directors are beset with an epidemic of incompetence, self-dealing or both" and, if so, what to do about it, in this article looking at the role played by corporate governance in the current financial mayhem.
  • The Source: Knoweldge@Wharton.
The Takeaway: Those arguing the case that corporate governance failures have contributed massively to the current mess have some very high profile evidence to point to: the near collapse of the Big Three auto makers while foreign competitors thrived in the same market and the out of control risk taking that brought down so many prominent financial institutions. But there's never just one side to any story.

While there seems to consensus that a focus on short-term results rather than companies' long-term health underlies both Detroit and Wall Street's problems, some professors argue that that governance was not the principle problem. Wayne R. Guay, a Wharton accounting professor, for example, says that executives played by the rules:

It is just hard to tell a story about why these firms would choose executives who weren't trying to maximize shareholder value... Most of these executives held a vast majority of their own wealth in their companies' stock or stock options, so they had the greatest possible incentives to maximize profits. It's hard to say that all the banks hired bad executives.
In his view, everyone made the same mistakes and everyone can't be incompetent and venal. But others look at the same facts and come to a different conclusion. The game itself, rather than the players, is flawed. "Stock and stock options give top executives an incentive to manipulate results or take excessive risks to boost stock prices over the short term," argues this camp.

Nell Minow, editor and co-founder of The Corporate Library, also believes CEOs are too cosy with the boards who oversee them, noting that frequently elections for board seats have only one board-nominated candidate. Pulling no punches, critics such as Minow "liken this to elections in the Soviet Union." Reformers like Lucien A. Bebchuck, a law professor at Harvard who specializes in governance, propose reforms that would require candidates to be listed if they produce petitions representing a significant portion of shareholders, say three to five percent. He also advocates "requiring all directors to face election every year."

Eric. W. Orts, professor of legal studies and business ethics at Wharton, however, champions other regulatory changes, while others emphasize the need for a cultural shift within business, and the discussion goes on. If you're interested, a plethora of points of view and suggestions can be found in the complete article.

The Question: What single change or regulation would do the most to prevent future problems like those we're experiencing now?

(Image of trader giving the thumbs down from artemuestra, CC 2.0)

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