Why Change Happens in Politics–NOT in Business

Joseph Lee
Joseph Lee

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 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. Board members, even outside directors, are executives of companies who do not want their boards to clamp down on their own compensation packages—it is simply not in their self interest.

Even external (supposedly independent) 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 is 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 CEOs, rating agencies, the SEC, and the Public Company Accounting Oversight Board (PCAOB), they may turn their attention to te auditing industry, which deserves a good kick in the behind.

And while they’re at it, 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 SROs (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 tanked, both pools sunk. 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 adjunct professor at the Graziadio School of Business and Management, where he teaches a course on management consulting. Read his blog at joe-lee.com/blog.html

Related in the GBR

Who’s Driving American Firms? by Steven Ferraro, PhD, and Linnea B. McCord, JD, MBA

High CEO Pay Could Draw Renewed Attention in Election Year by Larry Bumgardner, JD

The Company Director’s Role in Company Growth by John Rehfeld, MBA

Author of the article
Joseph Lee, Adjunct Professor
Joseph Lee, Adjunct Professor
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