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Corporate Governance Reform - Ideas

by Zwackus Sun Nov 13th, 2011 at 09:47:02 PM EST

ET is excellent at deconstructing events in politics and economics, and at picking apart the dominant narratives that are destroying Western society.  Further, there has been a fair bit of discussion regarding alternative solutions (TINA) to the European financial crisis.

However, I've not seen so much in the way of real discussion of larger reforms that would help fix the mess we're in.  I'm not talking about utopian social reforms so much as legislative-type proposals that could use existing institutions and frameworks to solve various social problems.  Obviously, anything effective would be anathema to the powers that be, but it doesn't hurt to think about and discuss these sorts of things.

So here's an idea for people to mull over - Corporate Governance Reform.


As I see it, there are several rather large problems with the way modern corporations work.  Among the larger ones is the fact that there is no real way to hold large corporations accountable for the kinds of world-destroying disasters they are able to cause.  Deepwater Horizon, Fukushima, the Bhopal disaster, the Niger Delta, the current financial crisis - in none of these situations have the corporate entity, or the people within it, been held properly accountable.

Now, a large part of this is simply lax enforcement of already existing rules and regulations.  But, in my rather uninformed opinion, I suspect a fair bit of it also has to do with the structure of the laws regarding the corporations.  Management is largely insulated from legal consequences of their actions, encouraging gross irresponsibility.

What sort of legal framework could improve this situation? My rather simplistic and draconian idea is as follows.

Top management and middle management should be held responsible for the actions of their corporations, in much the same manner as the captain of a ship is responsible for the actions of his/her crew.  Serious screwups are ultimately the fault of the captain, who will probably never be given command again, and may well face serious sanctions.

Large corporations, given their power in society, must have sober and responsible governance.  Their mismanagement can simply cause too much damage to society.  Therefore, there is a strong public interest in enforcing sober and responsible corporate management.  To that end, I would propose that in the case of a serious disaster, there be a legal framework in place so that "nobody could have imagined" or "I wasn't aware of that" are simply not acceptable excuses.

1 - Management was either aware of the problems, and is thus criminally liable for the disaster.  The CEO, and appropriate division managers, go to jail and face massive fines proportionate to their compensation package, and the board is discharged for inadequate supervision.

2 - Management was so incompetent that it was truly unaware of the situation.  The CEO and appropriate division managers face a lifetime ban from corporate or government service, and face massive fines proportionate to their compensation package.  The board is discharged for inadequate supervision.

The various officers can plead incompetence to avoid criminal liability, but have to prove it.  They were supposedly responsible, so the burden of proof is on them.  There is not alternative - you were either criminally irresponsible, or criminally incompetent.

Would this be enough?  All on its own, probably not.  There are still issues of lax or corrupt enforcement, which would require an entirely different set of governmental and campaign reforms to clean up.  But something along these lines seems entirely fit and appropriate in cases of massive environmental disasters.  We've discussed before how it is literally impossible to truly punish anyone in proportion to the damage caused by something like the Deepwater Horizon spill or Fukushima, but fines and jail time are a start.

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The problem lies both in the Limited Liability of directors and the non-liability of shareholders (limited to their investment).

If shareholders owning a significant proportion of a company (say over 10%) were required to co-sign (i.e. give personal guarantees of company debts) the entire corporate responsibility dynamic would change.

No matter that 'personal' would, in many cases, be a corporation - the same rules would apply within the investing corporate body, and so on ad infinitum.

You can't be me, I'm taken

by Sven Triloqvist on Mon Nov 14th, 2011 at 04:31:25 AM EST
And you've just completely broken the idea of a corporation.

Which is fine if that's what you want to do, but now  you're relying on government to run every detail of your industrial society. This is not obviously a good plan, any more than the current extremes are a good plan.

by Colman (colman at eurotrib.com) on Mon Nov 14th, 2011 at 04:47:18 AM EST
[ Parent ]
Co-signing is common for small companies (where directorship and ownership frequently coincide).

But how you make the leap to " government to run every detail of your industrial society" is beyond me.

You can't be me, I'm taken

by Sven Triloqvist on Mon Nov 14th, 2011 at 05:07:18 AM EST
[ Parent ]
Co-signing is common for small companies (where directorship and ownership frequently coincide).

Yeah, tell me about it.


But how you make the leap to " government to run every detail of your industrial society" is beyond me.


Because you've pretty much killed big companies.  It looks like you have everyone involved on the hook for everything if the company fucks up.

I don't know about other countries, but in Irish law, in theory, limited liability only applies if you're trading in good faith. Fraudulent trading, for instance, strips the liability and the directors are liable for the debts of the company.

The problem is not, in many cases, company law, the problem is company law enforcement. The US seems to need a revision to its legal system to properly codify legal personhood and limit it.

by Colman (colman at eurotrib.com) on Mon Nov 14th, 2011 at 05:13:56 AM EST
[ Parent ]
I don't know about other countries, but in Irish law, in theory, limited liability only applies if you're trading in good faith. Fraudulent trading, for instance, strips the liability and the directors are liable for the debts of the company.
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.


To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis
by Migeru (migeru at eurotrib dot com) on Mon Nov 14th, 2011 at 05:19:16 AM EST
[ Parent ]
You are only 'on the hook' if you own more than, say, 10%.

You can't be me, I'm taken
by Sven Triloqvist on Mon Nov 14th, 2011 at 05:27:29 AM EST
[ Parent ]
So nobody owns more than 10%? Jobs was Disney's biggest stockholder. At 7%. Gates owns about that of Microsoft.

How would that even help with the large corporate with spread out ownership?  

If your family of 9 owe 9% each are you ok?

Limited liability is not the problem here. Forgetting that it's a privilege we grant in order to make it possible for large corporations to function is the problem. When that privilege is abused, there should be consequences: you lose the protection of the limited liability and the investors lose their stake.

by Colman (colman at eurotrib.com) on Mon Nov 14th, 2011 at 05:38:24 AM EST
[ Parent ]
Because you've pretty much killed big companies.

You say that like it would be a bad thing.

Fraudulent trading, for instance, strips the liability and the directors are liable for the debts of the company.

In which jurisdiction? And when was the last time this law was applied to any PLC (or the Irish equivalent)?

Limited liability is a small part of the issue. The other elements are:

  1. A revolving door between corporate management and government. Too often you get the same people doing both. Where you don't, you get close personal and financial connections between the people involved.

  2. Transnational tax evasion.

  3. The primary responsibility of corporations to create shareholder value, irrespective of social and ecological costs. (The fact the social and ecological costs are excluded from accounting practice makes this an unfair fight.)

  4. Massive near-Pharaonic power differentials between CEOs and board members and most workers.

  5. Internal power structures that reward sociopathy and punish social responsibility and ethical behaviour.

Fixing limited liability on its own won't fix these other issues.

What's needed is a total overhaul of the idea of a corporation as a collective enterprise. There are better and more democratic collective participatory models, but they're not being used.

There's nothing wrong in principle with the idea of collective effort. But current practice and law are literally feudal and medieval throwbacks, with features that date back to the time when monopolies in useful goods and services were granted as an aristocratic boon by a monarch.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 14th, 2011 at 05:50:00 AM EST
[ Parent ]
A revolving door between corporate management and government. Too often you get the same people doing both. Where you don't, you get close personal and financial connections between the people involved.

Transnational tax evasion.

The primary responsibility of corporations to create shareholder value, irrespective of social and ecological costs. (The fact the social and ecological costs are excluded from accounting practice makes this an unfair fight.)

Massive near-Pharaonic power differentials between CEOs and board members and most workers.

Internal power structures that reward sociopathy and punish social responsibility and ethical behaviour.

Yes. Those would be a lot of the real problems.

Add to that the problems that investors have with corporate governance - too many companies are not run in the best interests of the investors for instance.

by Colman (colman at eurotrib.com) on Mon Nov 14th, 2011 at 05:54:21 AM EST
[ Parent ]
The issue of the alignment between shareholder interests and company interests is a tough one.

On the one hand, management paying itself insane bonuses is obviously not in the greater benefits of the shareholders.

On the other hand, an excessive focus on shareholder value has a tendency to force the worst kind of short-sighted, extractive decisions on the company, because selling everything off now will always be more profitable, now, then slowly building it over the next ten years.

by Zwackus on Mon Nov 14th, 2011 at 07:58:45 AM EST
[ Parent ]
The problem is not, in many cases, company law, the problem is company law enforcement. The US seems to need a revision to its legal system to properly codify legal personhood and limit it.

The failure of enforcement is a pressing issue.  However, the keys to solving that lie in an entirely different direction.  As you pointed out, the US has serious problems regarding the legal nature of the corporation and the laws regarding its governance, and the responsibilities involved in that governance.

Fixing the laws will, obviously, never have an effect if those laws are not enforced.  It's worth thinking about what the laws should be, though, and if they should be made easier to enforce.

by Zwackus on Mon Nov 14th, 2011 at 08:04:04 AM EST
[ Parent ]
It is, but it's a secondary issue. As usual, the primary problem is political - corporations have vast political power, and so does the investor and CEO class.

Comparatively, everyone else has very little.

It's not all that difficult to imagine improved social enterprises, But they will never happen until power is distributed in a more balanced way.

The checks and balances model has potential, but it needs to include checks and balances against corporations, corporate lobbyists and investors.

Currently they have almost unlimited influence and negligible democratic accountability.

Internal democratic accountability is possibly the simplest and most effective way to change that. But you're still stuck with the problem that you can't enforce internal accountability from the outside when lawmakers will never vote against the interests of the corporations who own them.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 14th, 2011 at 08:24:13 AM EST
[ Parent ]
Yes, that's why I figure something along these lines is but one brick in a comprehensive wall of social and economic reform.

Getting active and effective legal enforcers on the beat is one task, and giving them laws with serious teeth to work with is another.  Lowering the bar for what counts as criminal misconduct makes it more likely that cases will be considered worth pursuing, and thus reduces the level of regulatory vigor necessary to pursue enforcement.  I think it's a good idea, but alone I acknowledge it to be insufficient.

And, in truth, I think that encouraging regulatory activism and lowering the bar for regulatory bite via new laws and criminal sanctions would be a much more approachable task than the creation of a democratic corporate form.  

by Zwackus on Mon Nov 14th, 2011 at 08:30:53 AM EST
[ Parent ]
Until we have economic democracy, especially in the workplace, what democracy we have is always limited and at risk. Unfortunately, given the vulnerability of public opinion to manipulation, even the fact of economic democracy would be vulnerable to popular overthrow in favor of some smiling sociopath.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 14th, 2011 at 09:29:01 AM EST
[ Parent ]
Require by law that all entities enjoying limited liability have boards composed equally of shareholder representatives and employee representatives (elected by secret ballot. One employee, one vote) with the same privileges and voting weights.

Limited liability is for real people only: A company must be held to account for the liabilities of companies in which it holds stock, proportional to its ownership share.

95 % tax on all income above ten times median, to discourage excessive remuneration of management.

Management to be "deemed to have known" of any and all activities in the company, unless it can prove to the satisfaction of a court of law that it was actively and criminally mislead by a subordinate. "He didn't tell us" does not suffice. "We asked point-blank and he lied about it" does not suffice. "We had the auditors go through the books, and he had cooked them so well that the auditors couldn't find anything" might suffice if the books are cooked well enough to credibly fool competent auditors.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 14th, 2011 at 05:58:58 AM EST
Strongly progressive income taxes, with perhaps extra penalties on certain kinds of excess compensation, should fix most problems surrounding management paying itself too much.

Your last point is much in the spirit of what I was proposing - putting the burden of proof on management, to show that it really and truly could not have known, as opposed to forcing the public attorneys to prove that management did, in fact, know.

by Zwackus on Mon Nov 14th, 2011 at 08:00:43 AM EST
[ Parent ]
Unfortunately, enacting these reforms requires that the power of the existing system be broken AND that a majority of the electorate understand and insist on the necessity of such reforms after that power is broken.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 14th, 2011 at 09:32:12 AM EST
[ Parent ]
Well, yes.  However, I think it's at least an interesting and useful intellectual exercise to hash out new ideas and, having proven their strength through debate, get them into circulation.

Political will comes and goes, and the tides of public opinion flow in and out.  If only one side is ready to take advantage of them, than that side will always come out the better.  Having a plan and a narrative already ready and waiting allows the left to take advantage of things like the financial crisis, or Deepwater Horizon, and turn these tragedies into political victories.

And it beats drawing up plans for my bomb shelter.

by Zwackus on Mon Nov 14th, 2011 at 08:12:38 PM EST
[ Parent ]
in an article on FT noting that stock markets no longer fulfil their theoretical role of allowing new and innovative companies to raise capital, i.e. they no longer serve capitalism but are parasitic to it. Visibly, a major driver of this is that the stock markets are themselves private companies, which is outright lunacy if they are implicitly expected to fulfill a particular utility function for general benefit :

A market less efficient - FT.com

The changing role of stock markets has been accompanied by a radical change in the business models - and priorities - of exchanges, which have evolved from mutually owned "clubs" into listed companies driven by their own shareholders' need for returns. There are fears that some have lost sight of their public utility function as platforms for raising capital and, ultimately, helping with job creation.

For many exchanges, the business of attracting flotations has lost its ap­peal, bringing in little more than initial listings fees. Instead, exchanges - especially large ones - are diversifying into derivatives and clearing, where margins are higher; and rolling out new technology to attract high-frequency traders. For example, NYSE Euronext, operator of the New York Stock Exchange, earned $334m of group revenue from company listings in the year to September, compared with $675m from derivatives.



It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Nov 14th, 2011 at 06:15:43 AM EST
I don't know enough about how stock exchanges are, in theory, supposed to work and be beneficial.  I don't know enough about how stock exchanges are screwed up at the moment, beyond a general sense.  So I can't really comment on this.

Having non-profit, government controlled exchanges sounds good, but that's just because I think "non-profit" and "government controlled" sound good in general.  I honestly don't know why they would be better in this case.

by Zwackus on Mon Nov 14th, 2011 at 07:56:00 AM EST
[ Parent ]
Exchanges provide an infrastructure service, and are a choke point for economic activity. These are two typical justifications for nationalisation.

But I think the urgency is greater for commodity exchanges than for stock exchanges. Everybody knows a stock exchange is a shark pool, so when consenting adults jump into the pool they are kinda asking for it. Whereas commodities exchanges are much more of a choke point for the real economy: A shipping company needs to be able to buy bunkering oil six months forward, because it needs to be able to plan its logistics six months ahead. So it has to participate in the commodities markets.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 14th, 2011 at 11:27:36 AM EST
[ Parent ]
seems to me, intuitively, to be a major part of the governance problem. (It's possible that this is pure prejudice on my part, I bought into the "small is beautiful" meme at an early age.)

Any attempt at limiting corporate size would probably be tax-based. A European company tax could be progressive : that would help to level the economic playing field.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Nov 14th, 2011 at 07:00:27 AM EST
Unfortunately, "efficiency" has been used to justify consolidation which has let to monopoly profits. This will, shortly, be shown, again, to lead to instability. We need to understand that "efficiency" and "stability" exist on a continuum and that the goal must be a balance. Hyman Minsky understood this and pointed out how long periods of apparent stability will lead most to conclude that stability is the natural order of things. When policy and law is changed so as to be based on this understanding the stage is set for collapse. And so it was from 1970 to today.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 14th, 2011 at 09:43:35 AM EST
[ Parent ]
There is now an obvious public interest in eliminating existing and preventing future TBTF institutions. A progressive tax on corporate profits and on capital gains could limit that, though steps would have to be taken to prevent a proliferation of de facto subsidiaries masquerading as independent companies. Limits to or a ban on individuals serving on multiple boards would help. Chris Cook has suggested how having the same executives both in Goldman and BP probably served to facilitate the development of forward leasing of oil in the ground to commodities markets with the result of bringing the typical price of oil up near the demand destruction boundary rather than letting it drift down to the capacity destruction boundary. While a balance between the boundaries is needed it is hard to see a PUBLIC interest in the situation that has obtained.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 14th, 2011 at 09:54:01 AM EST
[ Parent ]
Well, big is not necessarily bad. Most computer hardware (most that doesn't break when you look at it funny, anyway) is made by maybe a handful of companies. That works just fine. Most wind turbines in Europe are made by a handful of companies. That doesn't seem to be a great impediment to the functioning of the industry.

Big can be a requirement for the sort of capital concentration and market power required for technically sophisticated industrial processes. Big only becomes a problem when people start pretending that big companies are not political entities that need to be subject to political checks and balances.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 14th, 2011 at 11:34:28 AM EST
[ Parent ]
I think the key is to identify which economic and industrial sectors benefit from a degree of size, and which don't.  Some people might argue that aerospace, automotives, steel, and whatnot should be broken up, but I'm not so sure.  I think it's worth noting, though, that many big industrial companies aren't dong all that hot these days - they're not the ones draining the blood from the economy, and they're as much hurt by the pressure for insane returns as anyone.

Banks, on the other hand, seem to provide no obvious economic advantages from concentration - much the opposite.

Retail is another example.  Sure, Walmart is able to offer greater supply chain efficiencies, but this just means that more profit is sucked out of consumer pockets and concentrated into the hands of the Waltons.  An ecology of small and local retail outfits is a key part of a prosperous middle class, as small shopkeepers tend to be solid members of local communities, and employ people.  Furthermore, who really thinks that the complete and total domination of entire national markets by just a couple chains is a good thing?

Media is the final example.  I really see no good coming from nationalized media, given that there are so many people of talent and ability in all aspects of the creative fields who are desperate for employment, and so many regions and communities which are more or less ignored by the nationalized media.  Further, media concentration brings message discipline, with obvious and disastrous effects on political discourse.  Diversity is an unchallengeable good, more so in the modern era of low-cost production than ever.

by Zwackus on Mon Nov 14th, 2011 at 08:21:22 PM EST
[ Parent ]
Here are some proposals

  1. if any management employee of a public corporation is awarded compensation totaling more than $1M, that excess compensation can is subject to recovery over a 5 year period if the company suffers any reverses.
  2. any creditor of the company can recover losses from any participant in non-arms length decisions that have had a material effect on failure to pay over 15 years.  For example,if management decided to pay dividends and management was dominated by a PE firm that owned most shares and those dividends were funded by acquiring debt or taking working capital - those dividends could be recovered and criminal sanctions applied.
  3. Debts to pension funds and basic worker salaries are moved to top of bankruptcy priority.
by rootless2 on Mon Nov 14th, 2011 at 07:54:20 AM EST
If society hasn't figured out that elections should be about provable ideas, not repetition of slogans, and that we need a wall between money and elections, that society is fatally flawed, and will expire.

Corporate malfeasance is directly traceable to violation of these basic operating principles. I'll leave the problem for you to work out.

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Tue Nov 15th, 2011 at 07:23:44 PM EST
"...elections should be about provable ideas, not repetition of slogans..."

That's a pretty good joke!

by asdf on Tue Nov 15th, 2011 at 09:43:11 PM EST
[ Parent ]
Throwing some ideas out, off the top of my head:

  1.  Raising the starting level income tax to $22,350, the US poverty line.  Other countries will have other starting levels, depending on the basic Cost of Living in the individual company.  

  2.  Return to a progressive income tax structure.

  3.  Dividend payments should be non-taxable to equalize their tax consequences with debt.  

  4.  Institute a national sales tax on all financial transactions.  

  5.  Minimum 10% flat rate on non-financial corporation income.  Some percentage of this will be returned to the local communities where the corporation "does business."  (That last needs work!)

  6.  Minimum 15% flat rate on financial corporation income.  Some percentage of this will be returned to the local communities where the corporation "does business."  (Again, needs work!)

  7.  Institute a Single Tax (per Henry George) to be used solely by local governmental bodies.

  8.  Institute Ecological Taxation.

  9.  Impose a tariff on imported goods and services based on the average wage paid in the exporting country and the average wage in the importing country.  (To remove "labor wage rate arbitrage.)

  10.  Companies that issue anything but "plain vanilla" investment securities must place 110% of the risk-value of the security in a quasi-government body.

10.A.  The members of the Board of Directors of the Company will be held personally liable for second or third party losses arising from the issue of "non-plain vanilla" securities.

10.B.  The holders of "non-plain vanilla" securities have no claim on the underlying asset(s) of these securities.

  1.  Any entity must pay a yearly fee to engage in Future and Spot commodity trading.  

  2.  An entity engaging in Financial transactions greater than $100,000 per annum must pay a yearly fee.

  3.  If a publicly traded company is taken private that company has a five year ban on issuing new financial instruments and new bank debt assumption will be limited to 15% of the stock market valuation of the company six months prior to the date of privatization.

  4.  Social Security, pension, and private retirement account payments totaling, from all sources, under $50,000 per annum are non-taxable.  Above that they are taxable at the standard rate for their income level.

  5.  A national Sales Tax of 5% will be charged for purchases made across State lines.  (This is directed specifically at the US.)


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Nov 19th, 2011 at 02:01:46 PM EST
Thought of another one ...

16.  All claims on equity, including options, futures, etc., must be held for one year before they can be re-sold.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Nov 19th, 2011 at 02:10:59 PM EST
[ Parent ]


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