Among the various prescriptions to fix the financial markets, the calls for regime change in the management ranks of bailed-out institutions have been largely ignored. The Obama administration's approach seems to be: the people who got us into this crisis are the ones best equipped to get us out of it.
The numbers behind the sheer lack of management change on Wall Street are nonetheless shocking. According to a new report by Emma Coleman Jordan at the Center For American Progress, 92 percent of the top managers and directors at the top 17 companies that received TARP funds are still in their same positions (hat tip to Barry Ritholtz).
Coleman Jordan argues that those firms which took the most bailout money should be forced to include publicly-appointed directors. These directors, it seems, would function as part civic servant, part profit-minded manager.
For better or worse, she claims, the lines between public and private have been inexorably blurred by the bailouts. Rather than relying on behind-the-scenes pressure from politicians, the government should force bailed-out companies to accept sweeping management changes. The directors, the report suggests, should be installed in rough correlation with the amount of bailout money they've received -- (if a bank gets 50 percent of its market cap in government funding, 50 percent of its directors should be public appointees.)
From the paper:
The prospects for a robust prudently guided financial sector have been substantially clouded by the fact that the both the corporate governance structure and the executive leadership of the financial sector remain largely unchanged--92 percent of the management and directors of the top 17 recipients of TARP funds are still in office. The Obama administration has outlined an ambitious and sweeping plan to reform the regulatory system governing financial institutions and markets. This regulatory reform is certainly indispensable, but perhaps insufficient. The recent market crashes exposed severe deficiencies in the fiduciary obligations and public-regarding culture of financial firms. In order to prevent future crashes, we must not only seek to change how these firms are regulated, we must also seek to change the structures by which they are run. One major issue in this regard is the passivity, insularity, and narrow band of values represented by those who oversee these firms--the directors who make up the boards of the country's largest financial institutions.
According to Coleman Jordan, there's a central tension between the interests of managers at bailed-out firms and the interest of taxpayers. (Incidentally, this may be one reason why AIG employees threatened to quit over pay constraints, or why some banks have not increased lending.)
Managers and board members have a legal responsibility to act in the best interests of their companies -- not in the best interest of the economy. Here's more:
"Several problems that have emerged during the current crisis illustrate the negative consequences of blurred representation. Taxpayers are represented by elected officials in the legislative and executive branches. Accountability for elected representatives is the heart of all democratic ideals. Yet this issue of accountability posed a serious threat to the financial rescue, as taxpayers became understandably furious when the Treasury Department asked for $700 billion to rescue failing financial firms while ordinary citizens faced home foreclosure, dramatically reduced retirement and college savings, and the loss of home equity during the collapse. The first vote on the financial rescue failed, imperiling a fragile global financial system, until a series of compromises and arm-twisting allowed the Emergency Economic Stabilization Act to pass into law on the second try.
But the failure to impose accountability has led to its own problems. Taxpayers understand that it is their money being used to support these companies, so when the executives who lead these firms make decisions that are objectionable to the average American, there is understandably a public outcry. At the same time, corporate managers have a fiduciary duty to their shareholders, whose interests are often contrary to those of the taxpayer. The current situation is the worst of all worlds, because there is a total lack of certainty, and major stakeholders--shareholders, managers, and taxpayers--all believe that their interests are being un- or under-represented."
READ the entire paper here: