Yesterday, I offered my two cents on a particular Director, Rahm Emanuel, who served on the Board at Freddie Mac for a year in between a stint at the White House and running for Congress. I appreciate the discussion; I'm still relatively new, so it's nice when there is feedback, when something strikes a chord.
Today, I am following up with a broader brushstroke, a general declaration for corporate governance in the financial industry.
I'll start with a little follow up from yesterday, because I want to explicitly state that while yesterday was talking specifically about one individual Board Member who is representative of a systemic problem, today is about addressing that problem on a systemic level. As I said
Assuming Emanuel wasn't a key instigator of the questionable practices, was he incompetent or negligent?
And more importantly for our political purposes, is that question worth investigating?
I disagreed yesterday with the particular letter that Hamsher wrote with Norquist, and I still disagree today. I'm not claiming that I have a criminal indictment against Rahm Emanuel. Rather, I'm asking if his conduct as a Director is relevant at all? Do we care whether the Chief of Staff to the President of the United States is incompetent, or negligent, or irresponsible, or indifferent, or honestly got fooled by the shenanigans by Freddie's executives, even when those questionable practices included criminal lawbreaking and billions of dollars? After all, not all of those explanations can be true. Do we sweep those kinds of questions under the rug, or do we deal with them? That, I think, is a political question, not a legal question. Responsibility and leadership are much broader concepts than their rather limited legal connotations.
Indeed, most corporate crime these days doesn't even involve an admission of wrongdoing. Massive crimes, involving even billions of dollars, can magically result in a fine where no one admits fault to anything. It's brilliant for its complete lack of transparency and accountability. Brilliant, at least, for those responsible who largely get off the hook. These things are simply written off as a cost of doing business.
And of course, there are even bigger crimes we're not investigating at all. Not to sound like a broken record, but when we don't even instigate legal proceedings for fundamental constitutional violations, let's get real, we're not going after white collar corporate criminals. We make public enemies of specific people from time to time, like Martha Stewart or Bernie Madoff in the financial realm, or England and Karpinski with regard to detainee treatment, and then tell everyone to Move On, Show's Over, Nothing to See Here, it was just A Few Bad Apples.
Heaven forbid we call out a specific individual; that's unfair, they couldn't have done anything, the problem is the system. Emanuel was just a Board member for one year, what could he have done? Gosh darn it, the criminals, the executives at Freddie, were hiding information from him and trying to trick him and confuse him. You can't possibly expect Board Members in such a situation to do anything!
Well, I can. That's what makes my position radical change. I believe corporate governance has to change, and in a big way. It starts with not accepting the status quo, which says that nothing can be done. The future is what we make of it; it is not set in stone, it is not inalterable. And Emanuel is a great personification of this. There are corporate executives to this day that are trying to trick the Administration, that are trying to hide information from the Administration, that are hoping the Administration will look the other way and not ask questions. That's what makes Emanuel's Board tenure at Freddie Mac so scarily relevant, from my perspective. His indifference to corporate wrongdoing then doesn't seem to be an anomaly. It seems to mesh very well with career opportunism that has made him a fortune of wealth and political power.
But, let's move past Emanuel from here on out. Indifference to corporate wrongdoing, disinterest in effective corporate governance, is a systemic issue, particularly in the financial world. In fact, I'm going to make a statement that is perhaps even more controversial than anything said so far.
Many Board Members of large corporations, the people responsible for the governance of an organization, have no idea what their organizations are doing.
It's a crisis. And like our wage crisis, our environmental crisis, our healthcare crisis, our prison crisis, corporate (mis)governance is not a crisis of sudden urgency. It's a slow-motion crisis, something that has developed over years and years. It's not the fault of any one person or event, but rather, the aggregate sum of many actors and many events. At a certain level, assigning responsibility is difficult. Is it fair to single out one person when 'everybody's doing it'? Well, do we arrest drug users collectively, or do we arrest individual people for individual acts? Is it fair to demand a higher standard of conduct? Well, is it fair that attractive people make more money? Life ain't fair. And when it comes to individuals who are paid to serve on corporate boards, well, they're generally the folks who have the least room to complain about the unfairness of life.
The aggregate consequence of absolving everyone of responsibility is that no one is accountable for anything, either preventing bad behavior from occurring or correcting bad behavior once it happens.
There is one specific compromise step which I will advocate today which will help us delineate between Directors who are personally responsible for corporate failures and those who just were too indifferent or uninterested to know any better. You see, at many nonprofit organizations, Board Members (Directors/Trustees/Council Members/etc) are volunteers. Churches, social service agencies, schools, and so forth frequently attract people by appealing to a sense of community involvement, of service. There is much debate in the nonprofit world about the role of compensation generally, and compensation of Boards in particular. But some nonprofit organizations and for profit organizations pay Board Members. This usually comes in the form of stock and cash compensation.
Here's my proposal. Let's declare 2010 a year of corporate governance amnesty. It will be a year when Directors can come clean, acknowledge their responsibility for not understanding the business in exchange for protection from ramifications from legal connotations of things like negligence related to the admission. There are two criteria for this.
- There must be a specific, written document outlining the areas of weak or incomplete understanding, and
- There must be a personal check written to the US Treasury equal to the total amount of compensation the individual was paid by the organization for serving in the capacity of a Board Member.
This is important because fixing our systemic failure of corporate governance is more important than holding grudges against individual actors in the system. What this does is it puts people on record as affirming whether they 'earned' their compensation or not. There may be social ramifications for someone to come forward, but there will not be legal ramifications.
Then, that allows us to focus our energy on those who do not return the money. You see, those people, the ones who pocketed some money and went on their way, are precisely the folks who've been rummaging through the US Treasury piggy bank these past couple years. Before one dime of taxpayer money is spent, corporate leaders should show actual leadership and take responsibility for their own mismanagement. One way they can do that is contributing financially to the bailouts.
In short, those responsible for governing corporations can't have it both ways. They either have a responsibility due to their compensation, or they should absolve themselves of responsibility by donating their compensation to the US Treasury that has donated so much money to the very companies they mismanaged into the ground. If non-executive Board Members aren't responsible for anything, then their compensation is tantamount to theft. But like everything else, theft is in the eye of the beholder.
My year of amnesty is one step, not a comprehensive solution. As long as Board Members can receive financial compensation for not doing anything, none of the more drastic steps for revamping corporate governance are remotely achievable. It's a profitable system for the actors involved, and nobody wants to rock the boat.
Crossposted at The Seminal at FDL.