Kahnfusion: Restoring Corporate Accountability

This is one of an occasional series of posts from CCLP's Special Counsel Ed Kahn, on topics ranging from public policy to the economy to politics to the media. Enjoy:

Although attention is being paid to the question of whether the federal government shall be given the power to seize non-banking institutions should they be mis-managed while being “too big to fail”, no one, so far as I am aware, has discussed the issue of how to restore or create the kind of corporate accountability which would prevent mismanagement in the first place.

The theory of capitalist corporate governance is that management is responsible to a board of directors, who will hire and fire –exercising the power to fire if management becomes poor. But one of the failures of contemporary capitalism is that many boards are composed of cronies of management, or persons who don’t have the character or knowledge to ask penetrating questions and pull the plug when they should.

One way to try to ameliorate this problem is to require, by federal law, all corporations over a certain size to have directors appointed who represent the public interest and who are required to scrutinize management performance (and vote on the level of compensation). These public directors could be required to be paid a fixed amount by the corporation, and could even be given staff assistance, such as accountants, to help their scrutiny. They could be given access, by law, to all corporate information, including “off balance sheet” items, such as Enron had. They could be required to separately report to stockholders, and/or the Government at least annually. These directors could be selected by a combination of community representatives, consumer groups, labor unions, retired journalists, and college officials.

Implementing such a system, on a pilot basis, for five years or so, would quickly tell us whether it is possible to change corporate accountability and corporate culture away from the sheltered, irresponsible conduct that has brought the financial crisis we share.

--Ed Kahn, CCLP Special Counsel