Time for Swords of Damocles
When we read about the wrongdoing at Bank of America, General Motors, and other large companies, we realize that the current legal structure does not work
to prevent it. And the monetary settlements, as large as they are, will not produce the desired conduct. What is needed are dangling swords.
The traditional lesson ascribed to the story of
Damocles is that he who would sit on the throne is constantly under threat of his life. But perhaps there is a different
lesson to be learned. Namely, that if one in power must sit under a sword, that person will take all necessary precautions to assure that the sword has a near zero
chance of falling.
So why not insert multiple swords of Damocles into the arena of U.S. public companies instead of the current system of sanctions that are truly laughable. Indeed,
under the current system, wrongdoing is a game that companies have learned to play very well. First, they may never get caught. Second, they have learned how
to obscure, cover, or even totally obliterate any trail that might implicate the head honchos. Third, they know that they have the upper hand in almost any legal
proceeding. They can usually utilize the company’s cash register (and also the funds of their insurance providers) to drag out the legal proceeding so that by the
time of any resolution most of the public has forgotten what the issue was. And the prosecutors generally just want to show some benefit for the time and money
they have expended on the case. At the end of the day, what you usually see is a settlement for money, no admission of wrongdoing, and, except in a very egre-
gious case, no one convicted of a crime or entering a criminal plea.
The only losers are the innocent shareholders of the offending company who bought shares at prices that were inflated by the company’s wrongdoing or non-disclosure.
And executives at other companies simply learn how to play the game and increase the amount of money they walk away with.
So what can be done? The game has to be changed so that executives at companies have their skin in the game. In other words, put swords over the heads of all those
who are top executives and all who head up the various departments of the companies. Then they will double and triple check to be sure that strong chords prevent the
swords from falling. It is far better to have those who best know their particular companies put those chords in place, rather than have a government body or agency do
it with their one size fits all approach.
How do we have them put skin in the game? One approach would be to require all executives, control persons, and department heads of public companies to place all
bonuses (including signing bonuses) and proceeds from any exercises of options for stock of their company and sales of stock of their company under an agreement
whereby those amounts, together with any actual or imputed earnings thereon (whichever is greater) would be paid automatically to their company to the full extent of
the drop in total market value of their company’s stock resulting from any restatement of earnings or settlement payment. The drop would be determined by a panel of
independent arbitrators and would be non-appealable. There would be no civil or criminal proceeding to establish fault or wrongdoing.
And the spouses of all these covered people would be required to sign off on this agreement. Any person who would not sign the agreement or whose spouse would
not sign off would not be eligible for the position.
It would be necessary to keep the swords in place for some time after an individual left the company (e.g., five years). After that, if an error or wrongdoing was detected
that occurred prior to the beginning of that five year tail, those holding the various positions at the company at the time of detection would be liable. This would encourage
all successors to do a thorough audit or to have one done before they come aboard at the company and to require anyone doing the audit to put some skin in the game too.
Obviously, mechanisms would have to be put in place to prevent assets from moving out of reach; but this could be done.
Many will argue that a requirement such as that proposed here would discourage people from seeking these positions at public companies. But people who would not take
the positions on these terms probably lack the skills or desire to assure that companies follow the applicable laws and regulations. And if we get rid of those people, we will
be much better off in the long run.