Archive

Archive for December, 2011

Limited Liability, Redux: As Bob Monks says, "corporate governance has failed and it’s time to move on." So what’s next? Unleash the Hounds!

December 10th, 2011 No comments

This is a precis of my preceding post.

As I noted, veteran shareholder activist Robert A.G. Monks has concluded that – in brief (emphasis added):

the people who exercise power for the corporations need to be accountable to somebody.  Over the years, it has become clear that they really are not accountable to anybody, and our experiment in self-regulation and minimal oversight has failed.  In practice, this has meant that a small group of individual CEOs exercise power over financing elections and lobbying the passage and enforcement of laws. …

Society is a give-and-take proposition but for now, the powerful take much more than they contribute and that is not sustainable. 

For me, corporate governance has failed and it’s time to move on.
So what do we do? I’ve already discussed this in a number of posts relating to how the state grant of limited liability to corporate shareholders has released moral hazard on a massive scale, leading to pollution and labor problems, a cycle of pressure for government ‘protection’ and government capture. These problems have been compounded by the “Principal – Agent problem” on which Bob Monks is throwing in the towel, which problem has its roots in limited liability of shareholders and has been exacerbated by the very securities laws that purport to protect shareholders of listed companies.
.
I left the following response at Bob’s blog (emphasis added):

 

Posted by TokyoTom on Nov 3, 2011 at 12:32 PM

Bob, the answer is simple:— Let shareholders of publicly-listed firms alone to figure out how to protect their own interests [sink or swim], and

— Let better managed firms that don’t tap public markets (and thus who have smaller numbers of more sophisticated investors who don’t need the dubious ‘protections’ of Government) eat the lunches of the bigger, more bureaucratic and less profitable public firms.
In other words, the existing system can’t be saved, and it is not worth the effort.

What we need is a whole lot more of Schumpeter’s ‘Creative Destruction’, which we can expect from private firms — which have been growing as Sarbanes-Oxley has helped large firms build barriers by walling off access to capital markets.

One action item that I still see as necessary is to encourage the use of alternative corporate/organization forms where shareholders/owners retain a significant tail of risk. Since it is the moral hazard and risk-shifting made possible by state-granted limited liability status that has also fuelled the growth of the regulatory state, states can also experiment with dramatically lowering regulations for smaller local firms where shareholders have unlimited liability or must pony up additional capital to pay damages for any torts.Sincerely,Tom

Categories: Uncategorized Tags:

Leading Republican corporate governance expert throws in towel on shareholder oversight of listed companies, decries unaccountable CEOs, excessive corporate power and Government Capture

December 10th, 2011 No comments

Robert A.G. Monks is another well-known Republican now railing at runaway crony capitalism and its related corruption of government.  I have referred to Monks twice previously:

More by Bob Monks on the shareholder marginalization at the core of the crisis of public corporation capitalism

WSJ: Governance guru Robert A.G. Monks blames investors for crisis (but both he and WSJ miss that irresponsible, ineffective shareholders is a consequence of limited liability and “public co” regulation)

Before embarking on a 40-year crusade as a corporate governance consultant, Monks had an extensive history in business and government. He was once the Republican candidate for Senate from Maine and corporate governance adviser in the film “The Corporation“. According to Wikipedia, “Monks has written widely about corporate governance and has published more than a hundred papers in publications around the world.He was the recipient of the Award for Outstanding Financial Executive from the Financial Management Association in 2007. Monks is the subject of a biography chronicling the corporate governance movement, A Traitor to His Class by Hilary Rosenberg.

Bob Monks’ 30-Year Crusade“, 2003), “In the early 1980s, Monks established Institutional Shareholder Services, a leading corporate governance consulting firm, and, in the early 1990s, he opened Lens Asset Management, a fund that used shareholder activism to shake up underperforming companies. But today — in the aftermath of Enron, the corporate profligacy of Tyco International management and the like — Robert A. G. Monks appears to be a man for the moment. Monks, author of the book The New Global Investors, argues that shareholders, especially large institutional investors, have become passive, essentially abandoning their responsibility of overseeing the behavior of executives who are charged to serve them, and, Monks argues, the common good.”

Monks’ books include:

  • Power & Accountability. HarperCollins, 1991. (with Nell Minow)
  • Watching the Watchers. Capstone, 1996. (with Nell Minow)
  • The Emperor’s Nightingale. Saint Simons Island, Georgia: Brook Street, 1999.
  • The New Global Investors. Capstone, 2001.
  • Capitalism Without Owners Will Fail: A Policymaker’s Guide to Reform. London: CSFI, 2002. (with Allen Sykes)
  • Reel and Rout. Saint Simons Island, Georgia: Brook Street, 2004.
  • Corpocracy. New York; Wiley, 2007.
  • Corporate Valuation for Portfolio Investment. London: Wiley, 2010. (with Alexandra Lajoux)
  • Corporate Governance (5th Revised Edition). London: Wiley, 2011. (with Nell Minow)

His blog is here. Below I cross-post in full , with his approval, Bob Monk’s October 31, 2011 post, together with the comment I left in response at his blog (emphasis added)

Corporate Power & Government Capture

Failure of CG has led to capture
For the past thirty years I have focused my energies on corporate governance and the legitimacy of corporate power.  And by legitimate, I mean that the people who exercise power for the corporations need to be accountable to somebody.  Over the years, it has become clear that they really are not accountable to anybody, and our experiment in self-regulation and minimal oversight has failed.  In practice, this has meant that a small group of individual CEOs exercise power over financing elections and lobbying the passage and enforcement of laws.
 
Where are we now?
The failure of owners to be involved in overseeing the corporations they own and the failure of government to enforce rules already on the books has led to what is known as capture.  Capture means, to me, the power to allocate the resources of government, in this case the U.S. federal government.  We’ve seen this in the bailout, in tax leniency and in subsidies.  We’ve seen it in deregulation and the failure to enforce regulations that already exist.   
 
Capture is a very predictable and logical outcome of our failures.  All the corporate governance efforts I’ve been involved with have stressed the internal accountability of those with power in a corporation.  And one of the essential elements of accountability that are critical for long term credibility of sustainable corporations is that they be subject to a governing law, and that they comply with law in a full way and not in a grudging way. 
So this is about corporate power – excessive corporate power.  The balance of power is not only tipped but so out of skew that we’ve come to accept it as normal.  We excuse it by saying that corporations need to be competitive or that they create jobs.  We excuse it by saying that CEOs take risks and therefore need outsized salaries to compensate for that.  But while some of that may true, corporations also take a lot from our society:  educated workforce, roads, subsidies, roads, military protection, diplomatic work done by our government and more.  Furthermore, they don’t take responsibility for the by-products or off-products of their work:  pollution, health issues, wear and tear on the infrastructure paid for by citizens.  Society is a give-and-take proposition but for now, the powerful take much more than they contribute and that is not sustainable. 
.
For me, corporate governance has failed and it’s time to move on.  These larger issues are where I see the discussion going so I’ll be writing more on this topic in the weeks to come.  Please comment or send me your thoughts.  There’s so much to talk about and I look forward to hearing what you think.

I left the following comment in response at Bob’s blog (emphasis added):

 

Posted by TokyoTom on Nov 3, 2011 at 12:32 PM
Bob, the answer is simple:

— Let shareholders of publicly-listed firms alone to figure out how to protect their own interests, and

— Let better managed firms that don’t tap public markets (and thus who have smaller numbers of more sophisticated investors who don’t need the dubious ‘protections’ of Government) to eat the lunches of the bigger, more bureaucratic and less profitable public firms.

In other words, the existing system can’t be saved, and it is not worth the effort.

What we need is a whole lot more of Schumpeter’s ‘Creative Destruction’, which we can expect from private firms — which have been growing as Sarbanes-Oxley has helped large firms build barriers by walling off access to capital markets.

One action item that I still see as necessary is to encourage the use of alternative corporate/organization forms where shareholders/owners retain a significant tail of risk. Since it is the moral hazard and risk-shifting made possible by state-granted limited liability status that has also fuelled the growth of the regulatory state, states can also experiment with dramatically lowering regulations for smaller local firms where shareholders have unlimited liability or must pony up additional capital to pay damages for any torts.

Sincerely,

Tom

Categories: Uncategorized Tags:

Gonzalo Lira is a shrill conservative who loudly supports the "Occupy" Movement

December 10th, 2011 No comments

Allow me to shill for Gonzalo Lira, a Chilean-American novelist, filmmaker, founder of the Strategic Planning Group, and an economic blogger who contributes  to Zero Hedge, naked capitalism, Seeking Alpha and Business Insider.

I ran across an interesting blog post by Lira that, in contrast with other pieces on LvMI (such as George Reisman‘s), expresses strong support for the “Occupy” movement. 

Lira kindly gave me permission to cross-post his piece. (I note that I seem to be more of a classic liberal and skeptic of government than Lira, and so I don’t fully endorse his ‘conservative’ positions.)

Why I Support The Occupy Movement (emphasis added)

I am a Conservative—and proud of it.

I am against abortion, including in the case of rape or incest. I don’t believe in any form of entitlement program, much less the concept of a welfare state. I am opposed to progressive income taxes—and in fact am against using the tax code as a vehicle to foment or discourage any social goal, as I think it inevitably leads to the tax code being gamed by interested parties (as has indeed happened with the U.S. tax code, beholden to paid lobbyists who have carved out so many loopholes that it looks more like a sieve than a tax code). Thus I’m in favor of a flat tax: Zero-percent for citizens, 20% for corporations.

I am in favor of a reduced government, a reduced military presence, compulsory military service, and a compulsory national guard system requiring 100% citizen participation, similar to the Swiss model. I am completely against foreign military adventurism, foreign military bases, and foreign military aid.

I believe that the government should be the enforcer of the law, and of a regulatory framework which—when it comes to issues affecting the common good—is strict to the point of anal.

For instance, food regulation, financial regulation, building code regulation—all of these regulations obviously serve the common good, and protect us all from unscrupulous people seeking to get an advantage by poisoning or otherwise hurting us all. Thus the government should have a tough regulatory framework—think of it like traffic laws: Tough government regulations that are simple, transparent, and which protect us all from each other, while making our interactions smooth, convenient and graceful.

I don’t have a problem with some people making boatloads of money, while others are homeless. I don’t believe it is the State’s or society’s or the government’s responsibility to take care of you in your old age—it is your responsibility.

Gun rights—yes. Gay rights—no. States’ rights—yes. Affirmative Action—no.

There are only three issues on which I don’t toe the Hard Right line: The death penalty, the war on drugs, and health care.

I am against the death penalty—not because I think that the State and society do not have the right to execute one of its members: They do, to my way of thinking, if the citizen has committed an especially heinous act. But the death penalty is permanent: You can’t take it back if you screw up. And since no justice system made by fallible men is infallible, mistakes are inevitable. So I am of the opinion that it’s better to have 1,000 murderers sit in jail at society’s expense, than allow one innocent man be put to death. Because you can free an innocent man after twenty years in jail for a crime he didn’t commit—but you can’t bring back the dead.

I am against the War On Drugs: First of all because it doesn’t stop the consumption (and thus flow) of illegal recreational drugs; second because I believe recreational drugs (up to and including cocaine, heroin, meth and acid) ought to be legalized and taxed, like booze, and its production regulated for safety standards, again like booze; third, because the “War On Drugs” has created a huge penal class—citizens who have spent time in jail for non-violent offenses, and thus are marginalized from general society because of this stigma on their record—which hurts people who have committed non-violent infractions, and enriches people who thrive on building and staffing more and more needless prisons.

I am in favor of trashing the current American health care system, and making it either entirely private, or entirely socialist: This hybrid system the United States has not only does not work, it is extraordinarily expensive. The fact that the French of all people spend less of their gross domestic product on their socialist health care system, yet have a lower infant mortality rate and a longer median and average lifespan than people in America, is a wake-up call: If the full-Commie Frenchie system is better and cheaper than the American one, then literally any health care system is better than the one that exists in the United States.

But all in all, I’m a good Conservative. (Though certainly not a Republican—a political party dominated by Neo-Conservatives, who are not Conservative at all, but rather, Corporatists.)

I believe that America should be the land of opportunity and risk: You can fly high—but you can also crash and burn. A society that eliminates risk—that tries to somehow torque risk down with “safety nets” and “systemic protections”—is begging for a Mommy Dictatorship when all is said and done.

Now, why do I go into all this detail about my political beliefs and ideas? Because I want to make clear where I stand, before I come out and say that I am in favor of, and fully support, the Occupy Movement.

The Occupy Movement is inarticulate—but not because of it nonsensical: The protestors are against the travesty that has become the American Republic. And though its origins are on the political Left, it should not be considered a “Leftist” movement.

Rather, it is an anti-Corporatist movement.

It’s core issue is the One-Percenters: As we have currently organized the American Republic, everything seems geared to protecting and enriching the top 1% of the population—to the detriment of the 99% of the population.

The One-Percenters have made huge gains in income over the last 30 years, compared to any other tranche of the population—while the standard of living of the middle and lower classes has actually gone down.

There is less opportunity for the 99%—but more opportunities for the One-Percenters to enrich themselves at the public expense, by way of manipulating the law, the tax code, or the regulatory framework.

There is a revolving door between One-Percenters in the government and the private sector—so the former government employees make it a point to “help” the private sector One-Percenters, at the expense of the public good. Think of the Obama health care “reform”—which helped no one, save Big Pharma and Big Med.

There is zero chance that a One-Percenters who breaks the law will go to prison. He can put toxic substances in food production, inject toxins into groundwater to get at some oil, bankrupt a pension fund, steal and cheat people out of their homes—and there’ll be no consequences insofar as the law is concerned.

The things he might have done might be immoral—they might be despicable—they might even be outright wicked and evil: But they are not “illegal”—because the One-Percenters change the laws by way of their bought-and-paid-for politicians, and thus never do anything “illegal”. They only do things which are immoral, and wrong—and thus not subject to legal punishment.

Yet any member of the 99% caught smoking a little weed will go to jail for 90 days—and have a permanent black mark on his record, severely curtailing his ability to find employment, get a bank account, or otherwise participate in civil society.

How bad is this lawless among the One-Percenters? To give an example: The bankers. Not one banker has been charged with fraud, for the Robo-Signing scandal; for the fraudulent securitization scandal that led to the 2008 Global Financial Crisis; or indeed, for any of the heinous acts of financial terrorism which has essentially held us all hostage, while the banksters have raped and pillaged from us all, by way of bailouts.

How did they rape and pillage our society? By telling us through their bought-and-paid for politicians and media shills, “You better bail us out—or we’ll crash the economy by the bankruptcy of our financial institutions, and put you all out of work.” So we give them literally trillions of dollars to bail them out in 2008 and after—

—and once we bail them out, do they pay us back?

No!—don’t be naive! They don’t pay us back! Instead, they use the bailout monies to pay themselves huge bonuses. After all, as is public record, in 2009, the banks paid their executives more and bigger bonuses than ever before—even though they would have been bankrupt had it not been for the lifeline that we paid for!

Are any of these bastards cooling their heels in jail? No they are not. In other words, we pay—and the banksters get a tan in Tahiti.

And this same pattern happens in every other industry and sector of our economy—in every other area and concern of our society: The One-Percenters get all the breaks, the government “of the people, by the people and for the people” bending over backwards to give this oligarchy all these phenomenal breaks—while the rest of us in the 99% pay. And pay in spades.

This is what the Occupy Movement is against.

As far as I’m concerned, the people currently protesting are a bunch of Lefty, bongo-banging hippie-dippy metro-sexual turds—but that doesn’t make their protest wrong.

And in this case, those Lefty fools are actually right.

And we on the Right should join them.

As Al Gore accurately put it (and trust me, my skin is literally trying to crawl off my flesh as the reptilian part of my brain reacts to me praising something that Al Gore, of all people, has said), the Occupy Wall Street movement is basically a primal scream of democracy.

It is a primal democratic scream that we all feel—Lefties and Righties.

Those Lefty granola-munchers have a putatively granola-munching Lefty in the White House—but they’re out on the street anyway. Why? Because Obama might munch on granola, but he’s about as Lefty as Herbert Hoover.

Don’t get me wrong—Obama ain’t on my team. He’s about as Righty as Adlai Stevenson. No, what Obama is is corporatist—as are all the Democratic politicians. That’s why the Unions and the blacks and the other “approved” Left wing interest groups haven’t been able to co-opt the Occupy Wall Street movement:

The Occupy Movement instinctively—perhaps even inarticulately but accurately—realizes that the traditional “Left” politicians aren’t politicians of principles.

Rather, they are the best politicans money can buy: Corporate politicans bought with coporate money, via K Street lobbyists, and the revolving door between corporate interests and political power.

Just look at Michael Chertoff, the former head of Homeland Security, whom I wrote about here (a piece which by the way earned me my own HSA agent, who dilligently monitors me).

Chertoff headed the HSA under George W. Bush—so he ought to be on my team, Team Right. But he’s not—he’s Team Corporate. He’s a One-Percenter.

Chertoff served as director of Homeland Security, then left for the private sector, where he formed “The Chertoff Group”—which promptly went into business with RapiScan Systems, purveyors of airport bodyscanners.

And so what did Chertoff do? He hit every talk show and media outlet, peddling the bodyscanners.

The corporate media was happy to have him—and not once did they point out that his fear-mongering would make him wealthier. Not once did the corporate media portray Chertoff as what he was—a corporate shill. Not once did the corporate media do its job of informing the citizenry of Chertoff’s conflict of interest.

Instead, the corporate media gave Chertoff a platform, from where he could sell us all on the full-body scanners—lying and saying that they were for “our protection against the terrorists”.

Were the body scanners necessary? No—they have yet to catch a single terrorist. Do they work? No—a determined terrorist can easily defeat them, as has been demonstrated. Are they safe? No—they likely cause cancer, though no one is really sure, because safety testing of the scanners has been proscribed.

Ah, but do the body-scanners pay Chertoff a big phat fee, every time one of those $100,000 machines ($100,000 each!) is deployed in an American airport?

Guess.

Someone like Chertoff isn’t on the “Right” or on the “Left”—someone like Chertoff, or Obama, is on the side of One-Percenters: The interests of the One-Percenters are their interests—versus you and me in the 99%—because they are the One-Percent. They have more in common with each other, than with any paltry political “Left/Right” difference.

Chertoff and Obama certainly have more in common with one another, than either one of them has with us, the people whom they are supposed to serve.

Now, if I have put this issue in terms of class-warfare, it sure makes it sound Marxist—which ordinarily would make me dismiss it. After all, Marx claimed that everything that was bad in a society was the result of “class warfare”—which is bullshit, as far as I’m concerned.

But a broken clock is right twice a day. To my way of seeing things, our society has fallen into an oligarchic trap: We have confused the health and welfare of the top of the social pyramid with the health and welfare of the entire pyramid—and that of course is a mistake. The top can be just fine and dandy—while the rest of society rots, crumbles, and collapses.

This, in a nutshell, is what is happening. This is what the Occupy Movement is protesting. This is something that I support. Because the health and welfare of our society as a whole should never be confused with the health and welfare of the richest 1%.

GL

Categories: Uncategorized Tags:

David Brooks echoes Hayek’s warnings on ‘Market Morals’ in an observant piece on our crumbling order

December 2nd, 2011 No comments

David Brooks has an excellent op-ed piece in the December 1 New York Times that speaks to the very worrisome and ongoing destruction of crucial social capital – what Hayek called “market morals“, and what Brooks calls the “spirit of enterprise”.

I excerpt liberally from the op-ed (emphasis added):

Why are nations like Germany and the U.S. rich? It’s not primarily because they possess natural resources — many nations have those. It’s primarily because of habits, values and social capital.

It’s because many people in these countries, as Arthur Brooks of the American Enterprise Institute has noted, believe in a simple moral formula: effort should lead to reward as often as possible.

People who work hard and play by the rules should have a fair shot at prosperity. Money should go to people on the basis of merit and enterprise. Self-control should be rewarded while laziness and self-indulgence should not. Community institutions should nurture responsibility and fairness.

This ethos is not an immutable genetic property, which can blithely be taken for granted. It’s a precious social construct, which can be undermined and degraded.

Right now, this ethos is being undermined from all directions. People see lobbyists diverting money on the basis of connections; they see traders making millions off of short-term manipulations; they see governments stealing money from future generations to reward current voters.

The result is a crisis of legitimacy. The game is rigged. Social trust shrivels. Effort is no longer worth it. The prosperity machine winds down.

Yet the assault on these values continues, especially in Europe.

Over the past few decades, several European nations, like Germany and the Netherlands, have played by the rules and practiced good governance. They have lived within their means, undertaken painful reforms, enhanced their competitiveness and reinforced good values. Now they are being brutally browbeaten for not wanting to bail out nations like Greece, Italy and Spain, which did not do these things, which instead borrowed huge amounts of money that they are choosing not to repay.

The estimated costs of these bailouts vary enormously and may end up being greater than the cost of German reparations after World War I. Germans are being browbeaten for not wanting to bail out Greece, where even today many people are still not willing to pay their taxes. They are being browbeaten for not wanting to bail out Italy, where future growth prospects are uncertain.

They are being asked to bail out nations with vast public sectors and horrible demographics. They are being asked to paper over fundamental economic problems with a mountain of currency.

It’s true that Germans benefited enormously from the euro zone and the southern European bubble, and that German and French banks are far from blameless. It’s true that the consequences for the world would be calamitous if the euro zone cracked up. It’s true that, in a crisis, you do things you wouldn’t otherwise do; you do things that violate your everyday values.

But our sympathy should be with the German people. They are not behaving selfishly by insisting on structural reforms in exchange for bailouts. They are not imprisoned by some rigid ideology. They are not besotted with some semi-senile Weimar superstition about rampant inflation. They are defending the values, habits and social contract upon which the entire prosperity of the West is based.

The scariest thing is that many of the people browbeating the Germans seem to have very little commitment to the effort-reward formula that undergirds capitalism. On the one hand, there are the technicians who are oblivious to values. For them anything that can’t be counted and modeled is a primitive irrelevancy. On the other hand, there are people who see the European crisis through the prism of some cosmic class war. What matters is not how people conduct themselves, but whether they are a have or a have-not. The burden of proof is against the haves. The benefit of the doubt is with the have-nots. Any resistance to redistribution is greeted with outrage.

The real lesson from financial crises is that, at the pit of the crisis, you do what you have to do. You bail out the banks. You bail out the weak European governments. But, at the same time, you lock in policies that reinforce the fundamental link between effort and reward. And, as soon as the crisis passes, you move to repair the legitimacy of the system.

That didn’t happen after the American financial crisis of 2008. The people who caused the crisis were never held responsible. There never was an exit strategy to unwind the gigantic debt buildup. The structural problems plaguing the economy remain unaddressed. As a result, the United States suffers from a horrible crisis of trust that is slowing growth, restricting government action and sending our politics off in strange directions.

Europe’s challenge is not only to avert a financial meltdown but to do it in a way that doesn’t poison the seedbed of prosperity. Which values will be rewarded and reinforced? Will it be effort, productivity and self-discipline? Or will it be bad governance, now and forever?

Brooks’ insights are incomplete; he fails to note how government-establish deposit insurance underwrote and capital standards (most government bonds enjoy a 0% risk-weighting under BIS standards) encouraged the irresponsibility of German and other EU banks in lending to Greek and other national governments in the first place.

Right now, the Japanese government only funds 40-45% of its budget from taxes, and so is quietly looting its citizens’ banking, pension and insurance assets for the shortfall. US citizens are more fortunate, because our dollar hegemony has meant that our government has largely been looting foreign bond purchasers and their customers instead.

Categories: Uncategorized Tags: