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Why Do We Allow CEO's and Senior Management to Have Unchecked Authority?
And how do we fix it?
What is it about society that causes it to think that if you give a person a title of vice-president, CEO, CFO, COO, etc., that he must be wiser, better, and more ethical or trustworthy than anyone else?
If they aren't; then why do we let them get away with so much, and give them so much unchecked power and authority?
Lately, we've seen a number of huge corporations tumble into ruin or near ruin (Enron, MCI WorldCom, Global Crossing, ABB, Tyco, etc.) largely as a consequence of what the media have taken to calling "corporate malfeasance", defined in Webster's as "Misconduct or wrongdoing, especially by a public official."
It is often argued that it is the shareholders obligation to hold the management accountable. We see time and time again that this is a ludicrous notion. Senior management controls the books and can hide or obfuscate so much from the stockholders that they don't have accurate information. In addition, most corporate stock is held by institutions and large funds. Do you know how many shares of Tyco are or were in your Vanguard Index 500 Fund? Individual stock owners are so far removed from day-to-day or even year-to-year management, as to make this mechanism for oversight worthless.
I maintain that senior management of companies are able to escape detection and accountability for gross misconduct, let alone plain managerial stupidity .The only human beings who are actually in a position to know what wrongdoing is going on, and what massively stupid decisions are being implemented, are the employees and other managers of the company.
Take, for example, ABB. ABB was hailed as the General Electric Co. of Europe. Its charismatic chairman and CEO, Percy Barnevik, was compared with GE's Jack Welch and celebrated on the covers of business magazines. The company became a global force in power-generation equipment, challenging titans such as Siemens AG and GE itself.
Now the company is trying to carry out a major restructuring, pruning jobs and drastically reducing its size, all the while facing huge liabilities in asbestos lawsuits. ABB, once a $40 billion company, is valued at about $3.91 billion today. Analysts predict a loss of about $600 million on flat revenue of some $23 billion for 2002.
In 1989, Barnevik arranged ABB's $1.6 billion purchase of Combustion Engineering, a maker of industrial boilers. Combustion Engineering, of Stamford, Conn., insulated its boilers with asbestos. It had been hit by a series of lawsuits by people who claimed the asbestos had given them respiratory damage. ABB lawyers warned Mr. Barnevik of the litigation risk, but it was even bigger than they thought. The coming years would see a huge wave of asbestos suits brought by relatively healthy people who anticipated greater medical problems later in life. Companies have made billions of dollars in payouts, and many have gone bankrupt under the financial strain.
Now, say lawyers and analysts, Combustion Engineering's asbestos liabilities could grow to $4 billion if they're not capped by the U.S. bankruptcy court where the company is seeking protection. Beyond that, Combustion Engineering turned out to be a dud, because its factories had outdated equipment and demand for its boilers never took off, ABB executives say.
What does this prove? Simply, that employees under the CEO recognized a stupid decision but were powerless to appeal to a higher authority because it was the CEO himself making the stupid decision. Do you think the shareholders knew of the asbestos issues? And what of many other decisions that affect the environment, safety of employees or otherwise affect the long term health and well being of the company, it's employees, it's assets, or the surrounding communities. Do you really think a 58 year old CEO or CFO who will retire in 3 or 4 years cares more about that or how big he can make profits for that quarter or fiscal year appear to be, so his bonus is bigger? Get real.
Solutions? The problem has several complex causes and require a multifaceted solution:
To guard against deliberate and willful wrongdoing (for example the ENRON and MCI-Worldcom cases), employees need legal protection if they provide information to the government about criminal wrongdoing. And this protection needs to be in the absence of any court involvement. George Bush's watered down proposal only covers employees after a court has decided to investigate.
Independent Members of the Board of Directors
In theory, a company's Board of Directors acts on behalf of the shareholders. In reality, it's a good old boy's club - they appoint each other to their boards and each collectively pockets huge sums to simply attend one or two meetings a year at a luxury resort! Make a federal law that requires both disclosure of connections and relationships, and that each member be truly free of relationship to the company and its senior officers.
Independent Auditors and Publicly Available Audits
Look at Enron and the Arthur Anderson complicity in that company's misdeeds. That makes a strong case for the independence of the auditors and for fiscal and other regulatory (environmental, department of labor, etc.) audits and inspections to be made readily and easily publicly available - which means the shareholders can see what is going on and monitor progress. At least, interest individual shareholders and the managers for large funds can know better what is really going on in their investments..
All of this adds up to accountability of senior management. During the boom years of the 90's, senior managers told us that their hugely bloated salaries and compensation schemes (much of which was carefully hidden or disguised) were justified because they made the companies successful. Not only is this insulting to the contributions of tens of thousands of mid-level managers and employees; but as is proven by the recent downturn, it is simply not true.
If they are such geniuses, then why didn't they foresee what lay ahead? Or at least prepare their companies for a possible downturn? And you certainly don't hear of them taking pay cuts that are in proportion to the company's losses. By the way, don't tell me that they suffer because their stock options are now worth less than before; remember, those options are usually subsided by the company and given to them way below the market price!
Accountability is what is needed. It is needed not merely to restore fairness to the business world, but also to put business planning and decision making on a basis that will cause the long term, not short term, success of the company, it's shareholders, the employees and the society in which they all exist!