A few days ago I published a book review of “The Roaring Nineties” by the Nobel prize Joseph E. Stiglitz. I wanted to share here some passages related to how shareholders, investors are mistreated by those who are supposed to work for them and how alignment of incentives play a role in this.
[On boards of directors] “Here again there was another conflict of interest. Boards are supposed to protect the interests of all shareholders. But some boards, whose members often receive large fees for membership and attendance, were frequently more concerned with pleasing the CEO than fulfilling their supposed fiduciary responsibilities.”
[On one-offs] “[executives] found ways to boost their earnings – through sam transactions which allowed them to book revenues even if they didn’t really have them, or by moving expenses off the books, or by using one-time write-offs (time and time again), to try to give the appearance of robust normal profits. Their objective was to create the appearance of alluring success […] and cash out before the world discovered the truth.”
[On incentives] “The bankruptcy report spoke of “numerous failures inadequacies and breakdowns in the multilayered system designed to protect the integrity of financial reporting system at WorldCom, including the board of directors, the audit committee, the company’s system of internal controls and the independent auditors”. The problem, I would argue, was deeper, and touched not only WorldCom: the problem was with incentives – for the management, and for those who were supposedly watching over management.”
[On the subject of fines] “They accepted fines of unprecedented levels […] but, in most cases, only after being assured that their CEOs would not do [jail] time. […] in many cases it was not the CEOs but the companies that paid them; indeed, the fines imposed on corporations for such bad behavior represent a curious case where the victim is punished twice over. For ultimately, the shareholders – who have already been cheated by corporate management- bear the costs of such fines.“
[On executives’ greed and regulation] “The deregulation mentality made the suggestion of increased government regulation […] an anathema. What worried many were shareholder suits, which they viewed as simply reflecting the rapacious greed of lawyers, not part of a system of checks and balances against the rapacious greed of corporate executives.”