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In 2010, Eric Jackson, an activist investor and hedge fund manager, averred that Goldman’s board was too cozy and too lacking in financial know-how to diligently oversee top management. He claimed the board was packed with honchos who led companies that had paid large fees to Goldman. Jackson pointed to Indian steel magnate Lakshmi Mittal and former Fannie Mae chief James Johnson as cases in point. The problem with these choices, Jackson said, is that “these people seem to be favorably disposed to senior management’s way of thinking,” and are therefore unlikely to act as a check on CEO Lloyd Blankfein and his team. Colin Barr of Fortune argued that the bank’s system of corporate governance was behind the times. He pointed out that Lloyd Blankfein continued to serve as chairman and CEO, even as the trend in recent years had been toward independent board leadership.

After all, one of a board's main functions is to oversee and evaluate the CEO as well as the other top executives. The duality of chairman/CEO is the epitome of a structural or institutional conflict of interest; a CEO who is also chair of the group whose job it is to evaluate the CEO is presuming to evaluate him or herself, in effect. The sheer existence of such an obvious conflict of interest can be viewed as presumptuous. Furthermore, the arrangement itself is an incentive to engage in duplicitous subterfuge. A board of directors is by definition independent of the management because the board’s function is to oversee it.  Overseeing and being cozy are like oil and water.  A “trend” away from conflating the two minimizes the decadence in the problem.  Instead, corporate governance ought to require independence.

When Armstrong was chair/CEO of ATT, I asked him whether giving up the chairmanship wouldn't enable his board to better evaluate him as there would not be the suspicion of a conflict of interest. He replied as though he were president of the United States, saying "the buck stops here."  He went on to say that he had to have complete control or he could not rightly be blamed if his strategy (which was broadband at the time) didn't work.  If his board said no to part of his strategy, it would not be fair to blame him for the failure of his entire strategy. Of course, he could have presented his strategy to his board and if it objected to part of it, the resultant strategy, it could be agreed, would not be considered to be his; he would be evaluated on how well he implimented it. The notion that any sort of check on power renders the power compromised or impotent ignores the basic difference between a board and a management. Managers work within broad strategic guidelines that are set as a matter of policy by a board, and managerial implimentation can indeed be evaluated without compromising it.  In effect, Armstrong wanted to go beyond managing to the property-rights goal-level of owning.  That he was overreaching is all the more reason why an independent board would have been a valuble commodity for ATT.

To be sure, it is difficult to counter the influence that a management has on account of its position vis a vis the company and its board. As a starting point, people having former ties to the management, or even hand picked by the CEO, ought to be barred from serving as directors. It should go without saying that a CEO ought to be barred from serving as the chair of the board.  Conflating these two roles is tantamount to suggesting that a CEO can (and should) oversee himself, which is nonsensical. For there simply to be a mere trend away from this duality essentially “normalizes” that which ought to be approached as an oxymoron--a contradiction in terms. That such a phenomenon would be allowed to exist at all points to the power that CEO's have to define social reality for society. Such power is very dangerous, especially if left unchecked even in the name of "the buck stops here."

Source: http://money.cnn.com/2010/04/20/news/companies/goldman.board.fortune/index.htm

In terms of corporate governance setting executive compensation to align the employee's incentives to the financial interests of the company even beyond his or her term of employment, it is apparently quite easy to go overboard. This can include severance packages for top managers--packages that may not reflect the performance of the executive. At the very least, it would appear that corporate lawyers are not writing very good contracts. Worst yet, insider board-management friendships may mean that the gap between achievement and severance pay may be intentionally wide. Sadly, the innocent non-management investors whose interests are not adequately represented in the board room pay the price, even if they don't perceive it on an individual level.  Even so, the lack of fairness alone calls for an end to the insider luxuriating.  The case of BP, whose rig exploded in the Gulf of Mexico in 2010, provides a good case study.

BP’s CEO Tony Hayward lost his CEO position—or he wanted out—at the tune of $1.6 million per year to be a non-executive board member at BP’s Russian joint venture. In addition, he could draw on his pension valued at over $17 million  and could keep all of his BP stock options that could be worth millions if BP bounces back. At the time of the announcement of his stepping down and BP’s 2010 second quarter loss of $17 billion, BP Chairman Carl-Henric Svanberg said in a statement: “The BP board is deeply saddened to lose a CEO whose success over some three years in driving the performance of the company was so widely and deservedly admired.”  The statement evinces either an attempt at PR or a state of denial.  Hayward became CEO promising to put safety first.  To say that he succeeded in his own priority would be to ignore facts.

In testifying before the investigative subcommittee of the US House Committee on Energy and Commerce a month after the explosion, Hayward stuck to his script in saying he is for safety.  “Since I became CEO, we have made a lot of progress [on safety],” he said. ”We have focused like a lazer on safety.”  When asked about the reports from company employees of unsafe corner-cutting at Deep Horizon, Hayward replied that the company’s investigation is in progress. ”I haven’t drawn a conclusion,” he said to Rep. Waxman the full committee’s chairman. Waxman replied, ”you are stonewalling and evading responsibility.”  Challenged by Rep. Peter Welch to point to even one bad decision made by BP, Hayward said, “I’m not able to draw that conclusion at this time.” Asked by the subcommittee’s chairman, Rep. Stupak, if it was improper for BP to have overruled the contractor’s recommendation that BP’s intended changes to the blowout preventer not be made because, as Hayward himself had written, the equipment is the failsafe mechanism (i.e., if it fails, nothing else can stop the oil from gushing out), Hayward replied, “the blowout preventer is the failsafe mechanism.”  In spite of BP’s role in the disaster, Hayward wasn’t giving anything away in his testimony even though being more forthcoming would have helped the committee write legislation to prevent such a disaster in the future. Another representative asked Hayward for his opinion on skipping tests at Deep Horizon. Again, he said he could not answer the question until his company’s investigation was complete because he wasn’t there.  “Because you lawyer told you not to answer?” the representative asked in reply. It is not beyond reason to suppose that Hayward’s lack of opinion on matters pertaining to his business is part of a larger effort of the people at BP to evade the charge of negligence, which would increase the company’s financial liability. In other words, BP’s management was still acting in their own interest, as well as that of the BP stockholders—even in the midst of culpibility for a major disaster. This can be seen in the red-tape in BP’s claims process.  In spite of the company’s role in the disaster, the management was oriented to determining “legitimate” claimants.

Such conduct is similar to that of the banks that fought more regulations in the wake of the bank’s own culpability in the financial crisis of 2008.  Even amid the culpability, the banking lobby owned Congress (according to Sen. Dick Durbin).  In treating the fiduciary duty to the stockholders as absolute, the banks and oil companies evince not only a reductionism in the face of a larger business environment, but also an apparent selfishness that borders on a personality disorder.  Even if such managers are vaunted by their stockholders, there is the question of whether corporate governance has a susceptability to rewarding managements that screw up.

Hayward claimed at the hearing that he set the tone from the top at BP (in stressing safety). Given the pattern of continued safety violations, including those at Deep Horizon, his function doesn’t appear to matter much.  Accordingly, one representative asked him what his bonus would be for 2010.  Apparently his bonuses were not always in line with the profitability of the company.  Having made safety his priority is particularly telling, given BP’s continued track-record. In terms of corporate governance, if a management of a company under which shirking safety has resulted in a disaster even as the CEO has made safety his priority is not removed by its board, the owners of the company have a legitimate grievance against their board members. It is difficult to say whether Hayward was pushed out or wanted out. He had become public enemy number one in the US.  Even if he was ousted, the financial conditions of his ouster were out of sync with the results of his “leadership” (e.g., a $17 billion loss, and a huge contingent liability in the Gulf).  The disjunction between executive compensation and the executive’s results reflect very badly on corporate governance itself.   For any BP stockholders bemoaning the drop in the company’s stock price and the deminished or delayed dividends, removing the strong bias in corporate governance itself that is in favor of incumbant managements (e.g., proxies, proximity to the board, the business judgment rule) might well be a priority in the wake of the disaster in the Gulf of Mexico.

Source: http://www.msnbc.msn.com/id/38423486/ns/business-oil_and_energy/

I contend that Robert Benmosche, CEO of AIG, had an incorrect understanding of corporate governance when he told Harvey Golub, then-chairman of the board, on July 14, 2010, “One of us should stay and one of us should go.” He should have, “Please let me know if the board would like me to go.” Put bluntly, the CEO works for the board, not vice versa. The previous May, Benmosche told Golub, “We can’t work together. I need a partner who I can bounce ideas off and give me advice.” However,a CEO and a chairman do not work together as partners. Rather, the chairman—and the board more generally—act on behalf of the stockholders to oversee the management, which the board has hired. In other words, a CEO is an employee whereas a chairman is not. Benmosche’s comment is actually rather presumptuous.

Benmosche’s upside-down approach to corporate governance is evident from the way he went about trying to sell AIG’s biggest overseas life insurer, AIA, to Prudential. Rather than being surprised that Golub did not support the sale, he should have taken note of Golub’s surprise that he had not informed the board earlier. As another example, rather than being annoyed that the board didn’t push Treasury’s pay czar harder to sign off on his $10 million pay package, Benmosche might have asked the board if they supported the proposed compensation.

One of the principal jobs of a corporate board is to assess the CEO (and hence the management) and to fire him or her if the board decides it would be in the stockholders’ interest. The CEO works for the board, not vice versa. It is not a partnership arrangement. It is the CEO’s responsibility to act within the support of the board, rather than to threaten its chair for not playing ball. Benmosche illustrates the arrogance that come occur when an employee is over-compensated and spoiled.  Benmosche should have been grateful to the AIG board for having agreed to a compensation package of $10 million rather than critizicing them for not essentially working for him in pressuring the Treasury.

From this case, we can extract the following lesson. A CEO should not chair the board whose task it is to assess him or her. Such duality is a contradiction in terms—effectively attempting to interiorize within the CEO accountability that is external (i.e., interpersonal). As Benmosche had already turned to Robert Miller, who replaced Golub, for advice and found him to be supportive, AIG may have essentially installed a puppet—hence compromising the board’s role in overseeing the CEO.

I once asked Armstrong when he was both CEO and chairman of ATT whether he saw any conflict of interest in his chairing of the body tasked with assessing him. He replied that the buck stopped with him—that he needed the authority to integrate cable, computer and telephone technologies into broad-band. However, in hiring him, the board should have signed off on his strategy, hence giving him all the authority he needed to implement it. In effect, Armstrong was over-reaching in claiming that such authority was not sufficient. When his strategy failed, the external accountability function of the board was compromised.

In general terms, CEOs are too powerful with respect to “their” boards.  In being an enabling partner rather than a parent, too many boards are unwittingly undercutting their raison d’etre. To the extent that the managements of banks contributed to the crisis in September, 2008, corporate governance with real accountability can be seen as critical not only to our financial system, but to the economy itself. We can ill-afford too many spoiled adult-children.

Source: Joann S. Lubin and Serena Ng, “Battle at AIG Board: You Go, or I Do.” The Wall Street Journal (July 16, 2010), pp. C1, C4.

The near credit-freeze that came to a head in September of 2008 meant that even in the ensuing recovery, managers at American companies would be hesitant to spend their companies’ cash reserves. $838 billion for S & P’s 500 Index in March, 2010, was up 26% from March, 2009. Accordingly, managers have been hesitant to hire. From late 2007 to late 2009, payroll employment dropped by nearly 8.4 million by July, 2010; only 11% of the lost jobs were regained. Robert Gordon, an economist at Northwestern University, points to the shift in executive compensation more in the direction of stock options. This arrangement gives managers more incentive to cut costs more in recessions and hold off in hiring in recoveries so that profits might surge first. However, one could point to the mandatory delay stipulated in some executive’s options to buy stock as giving them an incentive to look to the longer term.  Lynn Reaser, another economist, points to the lack of available external credit even more than a year after the financial crisis of 2008. She argues that managers conserved cash because they couldn’t rely on outside financing. However, firms like Apple, Yahoo, and Google are debtless and doing very well, so I would question the premise that outside credit is something to be desired.  Managers betting on leverage typically allow their irrational exuberance to distort their debt-to-assets and debt-to-profit benchmarks. If managers have become more averse to debt, maintaining higher cash reserves is not a bad thing, even when little interest is made on the cash. Once the new level is achieved, then only replenishments would be needed, so the diminishment of a firm’s investing in equipment or new hires would be temporary—to build the reserves and then to keep them stocked.  Drawing on their firm’s cash reserves rather than asking a bank for a loan or selling bonds proffers more freedom and self-reliance—qualities that are valuable even though they are difficult to quantify.  So we might view the recovery from the financial crisis of 2008 as a systemic correction in which managers were weened off their reliance (i.e., addition) on debt. Of course, the key lies in holding to the correction rather than falling off the wagon. Perhaps there should be an AA for debt-ridden businesses.

Source: Robert J. Samuelson, “The Big Hiring-Freeze,” Newsweek (August 2, 2010), p. 26.

In a 5-4 decision on January 21, 2010, the US Supreme Court ruled in Citizens United that federal restrictions on corporate spending in elections constituted a violation of free speech. Critics called it wrong to equate corporate “speech” with individual speech and said the ruling would allow special-interest money to flood election campaigns. The bipartisan nature of the opposition to this ruling is striking in these largely partisan times. The court’s ruling is opposed, respectively, by 76, 81 and 85 percent of Republicans, independents and Democrats; and by 73, 85 and 86 percent of conservatives, moderates and liberals. Majorities in all these groups, ranging from 58 to 73 percent, not only oppose the ruling but feel strongly about it. Even among people who agree at least somewhat with the Tea Party movement, which advocates less government regulation, 73 percent oppose the high court’s rejection of this particular law. In addition to overwhelming opposition to the decision, there’s also bipartisan support for Congress to try to reinstate restrictions on campaign spending by corporations and unions.

So when Target sent a check for $150,000 to MN Forward, a Minnesota-based political group backing a gubernatorial candidate with penchant for opposing gay rights, people wondered what business Target has in taking sides on that issue, even if the group was also pro-business. MN Forward endorsed and was paying for ads for the Republican gubernatorial candidate Tom Emmer. On Emmer’s website he defines marriage as a “union between one man and one woman” and he has come under fire for his $250 contribution to a Christian rockband that has been known to speak harshly of gays. Emmer told the Minnesota Star Tribune that the controversial rock band “You Can Run But You Cannot Hide,” were “nice people,” following band member Bradlee Dean’s reported comments that Muslim countries that support execution of gays are “more moral than even the American Christians.” To be sure, the managers of Target were not spending their companies’ “free speech” in defense of such a view, but that the wealth qua free speech was nonetheless being spent on a candidate who had made such a comment makes the Target CEO an unwitting accomplice.
Rather than viewing Target managers distancing themselves from Emmer’s view of gays as corporate social responsibility, I contend that the problem lies in taking spending as speech. Put another way, Target would have better stores if it sticked to its knitting, as it were.

Diverting money even to political campaign groups that further a pro-business agenda is off from the business’s main business, which in the case of Target is to sell retail. Besides the collateral damage from unwittingly helping campaigns on issues that are not even pro-business, diverting cash reserves to political campaigns puts corporations in the business of electoral politics, which is another sort of retail. In the case of Target, it is not as though the stores could not be improved from a business standpoint.  Once I accompanied a foreign friend of mine to a Target to return the coat he had given his wife for Christmas. Because he had paid by check, he had only the option, according to the “customer service” employee, of exchanging it. He could not get his money back—though he could have had he paid cash or by credit card. The “reasoning” of Target’s managers was that a check is “like kind” to an exchange voucher.  My friend and I left the store committed not to return, and I have not. Even in terms of influencing electoral politics in a pro-business general direction, Target’s management has plenty else to do closer to home—if indeed it is a home.  Rather than being socially responsible, a company ought to focus on its knitting.  That—doing business well—is the responsible thing to do because it is what a business’s owners expect from the managers of their property. Rather than being able to influence electoral politics beyond their expertise, managers ought to be restrained more by stronger corporate governance. To be sure, managers have a tendency to over-reach. Treating their spending decisions as “speech” only enbles them.

Sources:
http://blogs.abcnews.com/thenumbers/2010/02/in-supreme-court-ruling-on-campaign-finance-the-public-dissents.html
http://abcnews.go.com/Business/target-best-buy-fire-campaign-contributions-minnesota-candidate/story?id=11270194

Typically, responsibility is something people working in a business presume applies to the other guy…whether a customer, supplier or distributor.  The idea is that then the other guy will pay for the problem.  That someone working in the business might have been at fault is not even considered, at least outwardly, in this mentality of otherness-responsibility.  Responsibility here means “I won’t pay; you must pay!”  It is essentially immature self-centeredness and cheapness used as a weapon.

In general terms, responsibility follows, or depends upon, there being some action thought to be required of someone.  Only if Susan is to pick Billy up at practice at 4:30pm is it her responsibility to do so.  The attribution of responsibility depends on the premise that Susan is required, or has agreed, to make the pick-up.  Were it unclear whether she or say Mary were to make it, Susan could reply to someone’s claim that she is responsible for picking up Billy that she is not responsible because it is Mary’s turn.  The attribution of responsibility depends on an agreement as to function or action coupled with a particular agent.   In the case of a businessperson telling a customer what the customer’s responsibility is, the customer could reply “I did not agree to do X so I am not responsible for it; in fact, you are responsible for it because your advertisement states that your firm does X.”  So disagreements about responsibillity are actually disagreements as to who does what.

Corporate Social Responsibility as a movement presumes that managers do X beyond their respective firm’s maximizing or satisficing shareholder returns.   The managers have a fiduciary responsibility to act in the interests of the owners of the wealth that is the corporation because it is a requirement that the managers do so.  Expanding the managers’ functions beyond maximizing returns (and minimizing cost consistent with those returns) is a matter on which reasonable people can disagree because the question is really about what sort of society we want.   However, using responsibility as a way of imposing such an expansion beyond that which has been agreed to is to use the term prescriptively—meaning that there is over-reaching involved.   I would like managers to do Y as well as X, so I declare managers to have a responsibility to do Y (as well as X).   Responsibility really isn’t the right word here because the underlying agreement on the agent-function matter has not been established.  In other words, responsibility properly follows from a given agent-function rather than institutes it.   Claiming that corporations have a responsibility to act in concert with public opinion or extant social norms—to the extent that it goes beyond the business profit calculus—is to use responsibility in a way that presumes more than is presently the case.  This use of the term is really an instance of ideological prescription rather than a reminder of an agreed social contract that has modified the corporate fidicary duty to the owners of the private property.    Using the term responsibility to create an agent-action foundation puts the horse before the carriage.

So we over-reach when we say that the bankers of the commerical and investment banks that are too big to fail have a responsibility to act within public opinion on the bailout (e.g., concerning bonuses and trading on the banks’ own books).  Even if it is in the long term interest of the financial institutions that the financial system remain viable, the managers correctly point out that their responsibility (i.e., agreed upon actions) is to act in their stockholders’ interests.   To say that the big banks had a responsibility to rescue Lehman Brothers in September, 2008 even if doing so is not in their respective stockholders’ interests is essentially to express the public’s (and government’s) wish that Wall Street step up to the plate and do what is good for the system.   To make saving a bank too big to fail part of the big banks’ responsibilities, there would have to be a requirement that they do so (unless they agree that it is part of their activities).   That is to say, there would have to be a law or regulation because otherwise there is not apt to be the sort of mutual agreement out of which responsibilities can be extracted.  A person can say, “the law says you must do Z, therefore it is your responsibility to do Z.”  The response can’t very well be “Well, the law doesn’t apply to me so it is not my responsibility to do Z because I haven’t agreed to do it.”  This is not to say that a typical manager wouldn’t like to use such a line if he or she could get away with it.  Such a self-maximizing mentality makes the legal foundation of responsibility all the more important.

On the question of whether more government regulation is needed for banks too big to fail (as well as health insurance companies), I would shelve the use of the term responsibility and look instead at the mentality of managers in general (as well as in the industry in question).   Whereas the Senate can be likened to a herd of cats instinctively unwilling to be managed, a corporation can be likened to cats circling tuna.   The tuna is their required function: to act in the interests of the stockholders (typically short term).  To expand a business manager’s function to include working against systemic risk (banking) and working so all American citizens are covered (health-insurance) is an excercise in futility unless these functions dovetail with the stockholder/profit interests.  So in addition to government regulation being necessary (as responsibility is not sufficiently viable as a constraint because the agent-action foundation has not been established),  regulators would have to monitor the companies to keep the managerial feet to the fire.  Also, the regulators would have to be monitored because of the managers would have an incentive to capture the agencies that otherwise pin in the firms.  The managers will constantly be trying to turn toward the tuna.  Whether hardwired or socialized by managerial culture to do so, managers can be expected to incessantly strive for more tuna.

As an example of such striving being at the antithesis of constraint, logging companies that sold forests to the US National Parks in the mid-twentieth century continued logging even after the managers knew the sales had gone through.  Also, the managers of the banks too big to fail fought financial regulatory reform in the wake of the banks’ own culpibility in the crisis of 2008.  In addition to reading this as presumption to excess, it can be interpreted as the allure of the tuna always there.  Even if a cat could feel guilty for having knocked over a vase on the way to the food, the animal would turn right around and fight efforts to thwart it from the tuna.  The guilt is extrinsic to the animal as it pursues the tuna.  That is to say, we impose ought on an activity that is simply an “is” to the cat.   As Hume points out, you can’t get ought from is.  The cat’s mentality is essentially to keep striving for tuna, which ideally (to the cat) means ignoring constraints (if possible).   If managers could routinely ignore the law when it is in their interest, it is futile to believe that they would be the sort of creatures that would allow themselves to be guiled into acting within the contours of social norms.  What I am getting at is this: In the CSR movement, there is far too much reliance on the good faith of managers of companies—as if they can be lured away from the tuna, even for a minute for a good cause. The CSR movement ignores the managerial nature, or mentality, or tries to modify it with insufficient force.   The mentality is far too intractable and the use of responsibility far too over-reaching for CSR to be viable in the real world. Essentially, the CSR movement, even in its beginnings in the 1950’s by a few well-meaning though naive businessmen, presumes Hume’s naturalistic fallacy as somehow invalid (meaning that extant societal norms can be taken as normative on their own basis and managers can be presumed to have a responsibility to act in sync with them even if doing so is not in the stockholders’ interest).

We should not rely on CSR or good corporate citizenship in lieu of government regulation when business firms (or entire industries) put us or our society at risk of harm.  The business calculus understands requirements, not “oughts,” and responsibility follows (rather than establishes) the requirements.   To presume otherwise is mere wishful thinking along with a dash of imposing, which is really the self projecting itself on to the world—making the world in its own image.

In an executive meeting at Lehman in the summer of 2008, Skip McGee told Richard Fuld and the other top executives that the market was demanding “that we hold ourselves accountable.”  Essentially, he was pushing for Gregory’s outster.  What strikes me is what he didn’t say–namely, something like, “the stockholders are holding us accountable!”  Had he said this, Fuld might have laughed. Of course, Richard Fuld was a major stockholder, so he might have viewed it as “holding myself accountable to myself.”  Given the inherent ethical conflict of interest in such a statement, I don’t think we can rely on corporate governance as a check on excessive managerial risk-taking when executives hold a substantial share of the stock.  Therefore, in including stock options in executive compensation to align executives' incentives with medium and long-term firm performance, boards should add institutional safeguards or accountability mechanisms to corporate governance. In business-speak, there is a cost incurred that boards may not be aware of in aligning executive compensation (and firm ownership) with future profitability.

I believe the Lehman example demonstrates how corporate governance can fail rather clearly.According to a report by Anton R. Valukas, an examiner for the bank, Lehman used “materially misleading” accounting gimmicks involving repos to mask the perilous state of the bank’s financial condition. According to the report, Lehman utilized what amounts to financial engineering in order to temporarily shuffle $50 billion of troubled assets off the bank's books in the months before its collapse in September of 2008. The intent here was to conceal the bank's dependence on leverage, or borrowed money. Lehmans’ senior managers appear to have structured transactions such that they would sell securities at the end of a quarter, only to buy them back again days later. These assets were mostly illiquid real estate holdings, meaning that they were hard to sell in normal transactions. The effect of the accounting flash-of-hand was to artificially and temporarily lower the bank’s debt levels to hit certain targets, making the firm look healthier than it really was.

Lehman's managers managed to “shed” about $39 billion from the bank's balance sheet at the end of the fourth quarter of 2007, $49 billion in the first quarter of 2008 and $50 billion in the second quarter. At that time, Lehman managers sought to reassure the public that the bank's finances were fine. Herbert McDade, a senior exec at Lehmans, wrote, “I am very aware … it is another drug we r on,” in an April 2008 e-mail cited by the examiner’s report. Senior Lehman executives, as well as the bank’s accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas.  In certifying the “actionable balance sheet manipulation,” Richard Fuld was “at least grossly negligent.” Other executives named in the examiner’s report in connection with the use of the accounting tool include three former Lehman chief financial officers: Christopher O’Meara, Erin Callan and Ian Lowitt.  Notably, Lehman’s directors were not aware of the accounting engineering.  That not even the board’s audit committee was aware is telling from the standpoint of corporate governance–especially if the report is correct in its claim that the bank’s public accountants from Ernst & Young were in the loop.

The Lehmans case suggests that board audit committees ought not to rely exclusively on their public accountants.  The structural conflict of interest wherein CPA firms rely on the firms they audit for continued business was not obviated or solved after the Arthur Andersen case.  Years before that case (and computers), “as per comptroller, discrepancy resolved” was a regular “tick mark” on green CPA audit sheets. I can still remember the actual tick mark I used (a check with a line through the stem) as a young public accountant at one of the Big Eight.  We were so big.  Senior audit managers simply included the tick mark without any fanfare in going over the standard tick-marks in training. During audits, the tick-mark was simply thought of as a technical matter. New auditors fresh out of college would have no basis to question the check-mark because ethical considerations do not enter in when a technical language of business normalizes all practices. Accordingly, the conflict of interest issue was essentially below the radar when I was a public accountant.  It is difficult to spot something as sticking out from among the normal that is treated as typical. I suspect the partners in the firms knew of the obvious conflict of interst in "as per controller, discrepancy resolved," but I don’t know whether the tick-mark was intentionally portrayed as simply one technical matter among others in "how to do an audit."  Therefore, transparency had to come from outside of the industry–from the media in the wake of a major scandal--not from a government too involved with industry's lobbyists. One might wonder where (or whether) we can expect corporate governance reform.

In general terms, corporate senior managements have much too much leverage over stockholders and the boards that are meant to oversee the management.  Proposed reforms from the White House do not make a dent.  For example, requiring a “non-binding” stockholder vote on executive compensation strikes me as a declaration of surrender to the titans.  “Non-binding.”  Why waste our representatives’ time with such window-dressing designed to look like it is correcting for another kind of window-dressing.  Everyone, it would seem, is busy polishing windows and nobody has guts enough to come up with structural reforms with teeth.  No one is willing to take the drugs away from the children playing will millions and sometimes billions of dollars.  We, and our governments, are enablers, and we settle for far too little…then we are surprised when the kids are caught with their fat ruddy hands in the cookie jar again. Ultimately, we, the American People, are to blame…and as Lehmans shows, our financial system and economy may hang in the balance.

Sources:
Andrew Sorkin’s Too Big to Fail
 http://www.nytimes.com/2010/03/12/business/12lehman.html

See also: http://money.cnn.com/2010/03/12/news/companies/lehman_examiner/index.htm?hpt=T1

On a cold and rainy weeknight in the early spring of 2010, I treated myself to a light movie (Valentine’s Day) at a small movie theatre. Only a handful of moviegoers were there that night.  Before the film, I discussed movies generally with the manager, who had been playing cards on his office computer.  He had just one employee working.  She was acting as cashier, concessions clerk, and film projectionist.  The image of the manager playing solitare on his computer while the employee covered these functions reminded me of something that has bothered me about American management more generally.  This in turn prompted me to come upon an insight regarding managing and presiding (which in turn prompted me to write this post).
It struck me that the manager of the small theatre was essentially presiding.  That is to say, he was literally “sitting before.”  He misunderstood management as “being there” in case there are any problems that would compromise the theatre’s viability.  But with just one employee doing conventional tasks, the likelihood of such a manager being called into action for any “macro” problems was pretty remote.  I would argue that he was confusing presiding (something a president does) with managing.  To manage is to be actively engaged in the operations of an organization; it is not to “sit before.”  In other words, being the manager is not a free pass out of taking part in operations.  For example, the theatre manager could have manned the concession stand (or ticket counter) even if the other employee was not busy. The manager - employee distinction has been overdrawn in American business.  In effect, management has been replaced by presiding.

What makes the “management by presiding” oversight particularly interesting is that the reverse has been the case among presidents of large companies (and the US), who essentially manage.  The president of Microsoft, for example, does not function as a figure head.  Rather, he has a managerial function.  I submit that virtually every large American business is misusing the title “president” (and vice-president).  Essentially, what they mean by “president” is just another upper-level manager (with the emphasis on upper-level).  I think it could be argued that very large businesses could use real presidents, whose role it is to act as the figure-head—actively intervening only when intestine arguing within or a major incident compromising the continued viability of the company occur.  An ongoing management role would undercut such a president’s credibility (and power) in stepping in when there really is a major problem.  We see such undercutting in the modern US Presidents, whose ongoing partisanship has compromised the respect they would need in intervening in a major crisis facing the US.  The overwhelming majority of US Presidents have spent their “presiding capital” in putting out bush fires…hence they have too little water left for the rare but potentially devestating major forest fire.

Therefore,  in the US, we have small managers acting like presidents, and harried presidents acting like managers.  I suggest that the “management vs. leadership” fad that so mesmerized American business schools in the 1980s finally be replaced by “managing vs. presiding” because we need to clarify these two roles.  A potentially interesting question involves where to place “leadership” in this new dichotomy.
We should resist the temptation to apply “leader” to both managing and presiding.  Leadership too often in presiding undercuts that role (as one can lead the way to a bush fire), and leadership applied to management at a low organizational level can backfire as presumptuous and pretentious. Leadership applies to presiding only when a president 1) stands for the entire organization or polity in mapping out a general direction that the management/government can follow or 2) actively intervenes in a crisis that theatens the entire organization or polity.  Leadership applies to managing only when operational tasks or legislation are informed by a change in principles or ideal.  Just as managing should not be switched with presiding, leadership should not be applied willy nilly just because it sounds good.

Without realizing it, I was essentially following such a fad when I wrote my dissertation on leadership (and ethics) after swimming through a decade of the “leadership vs. management” fad. I have since dove deep into ethical and political theory to touch a more solid intellectual foundation.  From this vantage-point, I have looked back up at the water’s surface to see the frogs still playing on the surface—jumping from lilly pad to lilly pad as if the green patches were foundations.  For a while, I published articles in the Journal of Business Ethics, only to have a reviewer (and a section editor—a lawyer actually) so obviously not understand the philosophy applied yet still, in a presumptuous manner, procede nonetheless to pass judgment on that which they did not understand.  You can’t fight ignorance, especially when it is puffed up with itself and in a position of power. Would it kill a business ethicist to admit to not understanding Nietzsche, for example?  A while back, I received an email from a business ethics “scholar” boasting of having taught a college course on the philosopher after having read one or two of his books.  Incroyable!  Nietzsche would call such pretentious weakness utterly emetic. The literature on “corporate citizenship”—another fad following on the heels of corporate social responsibility in business ethics—is no better. Here “scholars” who have not studied political theory (beyond a few books) presume to spout their ideology qua scholarship.  I mention all this by way of uncovering the squalid state of the “academic” field that ran with “management vs. leadership” in the 1980s (and into the 1990s).  I would argue now that ethical principles (i.e., business ethics) are not the primary vantage-point from which to study “management vs. leadership.”  One would do better to consult organization theory and the leadership literature in political science.  I would like to think that twenty-first scholarship would put an end the ideological fads masquerading as scholarship and the related dilettantes that true scholars excessively tolerated during the last half of the twentieth century. However, the continued dearth of solid academic scholarship in business ethics and the continued wandering of its herd animals onto extrinsic pastures suggests that we will have to wait a while longer for the decadence of the twentieth century to finally die out.  There are of course exceptions to the rule.  Dr. William C. Frederick, for example, who was one of my professors when I was in graduate school, did some diving of his own. He transcended the superficial fad of corporate social responsibility by swimming down to the more solid rock of Ecology in order to apply principles of that science to human organization.  I am proud to think of Bill as one of my teachers.  We both began our dives in the early 1990s—perhaps we were both tacitly rendering a “verdict by direction” on the extant field of business ethics that had become preoccupied with corporate social responsibility (as if it constituted an ethical principle).  As scholars, both Bill and I wanted something more substantive intellectually.  As human beings, we don’t often know completely why we make changes of direction; we tend not to dive deep enough to question what we are doing and what changes we plan to make.  Yet from hindsight the reasons can be plain as day.

The practice of managers presiding and presiders managing demonstrates the innane tyranny of the status quo wherein doing simply follows doing.  That is: too many people not thinking about what they are doing (or not doing). Too many small-time American managers are like cows, chewing their cud while “lower” herd animals do the heavy lifting.  In true, such managers are herd animals themselves. There is no reason why someone who has a manager title can’t lift too…it comes down to laziness and presumptuousness utilizing “presiding” as a subterfuge.  Furthermore, there is no reason why people in authentic presider offices need to run around like rabbits in order to impose (or reproduce) themselves on others.