Nail the board

Companies are falling one by one. Banks, car manufacturers, insurers. Bankruptcies, bailouts, executives who ground their corporations into the dirt are getting millions in bonuses and, instead of being jailed, retiring to Bahamas.

People are frustrated and angry. But to my greatest surprise, the anger is directer towards completely wrong targets. Americans are blaming Republicans, immigrants, Democrats, executives, Obama, Chinese, Bush, and the wrong phase of the moon. It is nonsense.

We need to understand that everyone in a corporation have their little particular interests in mind. Executives want bonuses, option holders want to predate them, sellers look for kickbacks and buyers would rather destroy a company so that they can pick up pieces for peanuts. It may not be pretty, but it is a rational self-interest, for everybody except one group: the board of directors.

The members of the board have one and only one duty: to look after the overall well-being of the company, and safeguard the company on behalf of the owners (shareholders). They approve the compensation packages for executives, decide on business model, overlook balance sheets, control the debt levels. Or, at least, they should. That is their (fiduciary) duty.

However, even though it is both legal and moral obligation, there is no real punishment threat in case the board does not discharge its duty faithfully. The laws of Delaware, Caymans and Bahamas (where most big corporations are incorporated) practically hand the directors immunity regardless how bad they do. And that is the core of our problems.

As soon as the directors are actually responsible for the companies, as soon as they pay with their own money (or prison time) for their stupidity, things would change. No longer the directors would feel free to hand over hundred million bonus to the brother in law of their golf buddy. No longer they would feel it is all right to load a company with ten billion debt just to pay dividends to their daughter's sweetheart.

What we really need, it is to nail the board.