Our Approach


Our Approach

Before remedies can be offered to fix the system, one must understand how the system works. We detail how the American corporate system works in the next chapter. Afterward, we can discuss where and why the failures have occurred in the system. In many instances, the executive leadership of companies failed. In Part 1 of the book, we describe how executive compensation systems can lead to unethical and greedy behavior.

To keep corporate managers working hard for the shareholders and to prevent them from undesirable behavior, several different groups monitor them. This monitoring system is made up of people such as boards of directors, accountants and auditors , analysts, and professionals at investment banks. Part 2 of this book illustrates how the monitoring system has failed. Were these monitors also greedy? Were they complacent? Indeed, in most cases the corporate system had developed conflicts of interest and incentive problems that distracted monitors from their main duty; we illustrate these problems. The American corporate system also includes regulatory agencies to watch over the system. We discuss the role of these regulatory agencies in the current investor crisis in Part 3. We also discuss how investors themselves have failed to watch over their own companies.

Once the system and its failures are known, we will then be in a position to offer solutions that improve and enhance the system for the long term . Most of the solutions coming from political leaders and regulators are focused on either punishment of offenders or more regulatory oversight. In our view, these proposals are analogous to changing behavior using a stick. Alternatively, we propose solutions in Part 4 that are incentive driven. That is, we offer ways to change behavior by offering the proverbial carrot . It might be useful if corporate leaders avoided wrongdoing because of fear of being caught, but we would rather they work very hard to do the right thing because they want to ”because they are rewarded by doing so.

In short, we think that a clear understanding of the interrelated incentives of the many individuals in corporate business will allow for the formulation of targeted policy changes that will both fix and enhance the American corporate system. A complete solution may also convince investors that U.S. companies and the U.S. stock market are the best places to invest for the long term. However, fixing the system may not be enough to restore investor confidence. In Chapter 14, we discuss what it will take to regain investors' trust in the corporate system.


Endnotes

  1. Carol Loomis, "Lies, Damned Lies, and Managed Earnings," Fortune , August 2, 1999, pp. 74 “92.

  1. Jon Birger, "Glowing Numbers," Money , November 2000, pp. 112 “122.

  1. Thomas Donlan, "Cisco's Bids," Barron's , May 8, 2000, pp. 31 “34, www.cbsnews.com/htdocs/cak/bizback.pdf.

  1. U.S. Trust Survey of Affluent Americans; a random sample of 150 affluent Americans was surveyed through a telephone interview, June 2002.

  1. CBS News Poll, "The Ethics of Business," July 8 “9, 2002.

  1. Amy Baldwin, "Investors Cling to Bond Funds," Associated Press , September 14, 2002.

  1. Stanley Fischer and Robert Merton, "Macroeconomics and Finance: The Role of the Stock Market," Carnegie Rochester Conference Series on Public Policy 21 (1984): 57 “108; Olivier Blanchard, Changyong Rhee, and Lawrence Summers, "The Stock Market, Profit, and Investment," Quarterly Journal of Economics 108 (1993): 115 “136.

  1. Malcolm Baker, Jeremy Stein, and Jeffrey Wurgler, "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," Harvard University working paper, December 2001.

  1. Rich Miller, "What's Crippling Capital Spending?" BusinessWeek , June 24, 2002, p. 44.