Corporate Regulation's Nasty Little Secret
I've spent a couple days digesting Delaware's court of chancery opinions on the AIG and Citi cases. AIG dealt with allegedly criminal behavior by the notorious hank greenberg; citi dealt with risk mismanagement dealing with subprime mortgage derivatives.
The court came out against AIG but for Citi. And this is why: for failure to act, the courts are reluctant to step in when it comes to stupid, greedy decisions--but not criminal ones. This kind of makes sense: otherwise, corporate leadership would be maybe a little too risk-averse when running their companies if they thought they'd be personally liable for taking a chance every now and then. True capitalist spirit and all that. But we'll draw the line at breaking the law. Or negligently allowing people in your company to break the law. I think, rather, that courts are reluctant to substitute their own business judgment, with the benefit of 20-20 hindsight, for that of (purportedly) business-savvy corporate directors.
There's this gaping hole, though. Citi directors shouldn't be able to get away with such...stupid greed. There's got to be SOMETHING we can do. Some sort of compromise.
well, maybe instead of waiting for a lawsuit, and relying on a judge's chutzpah and willingness to substitute her own opinion regarding what makes a good business decision for that of a company executive, we can make directors personally liable for their risk-taking from the start. You know, sort of like a partner is personally liable for the debts and misdeeds of her partnership.
We can make so if you're going to enter into certain kinds of transactions, or do a certain kind of business, you have to do it through a partnership--you wouldn't be able to take advantage of corporate limited liability. That way, director interests are more aligned with those of the shareholders. and that of the rest of the world. Certainly, in an environment like this, directors wouldn't gamble away their personal fortunes on a ponzi scheme of CDSs and other derivatives based on shaky assets...at least not after seeing all the red flags citi's directors did.
The securities laws and the state corporate governance laws don't cover "social and shareholder loss due to greed and ignorance." Sadly, they only get you when you blatantly lie, misstate your financials, trade on inside information, and give yourself and your friends contracts not on arm's length terms. A new anti-corporate-pro-personal-liability business regime might help us out. At least make them as responsible as regular folks are for their own financial decisions.
Maybe worth thinking about.
