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Corporate accountability

From dKosopedia

The vast majority of the economic activity in the developed world by most measures (employment, share of GNP, sales, assets, etc.) is conducted by publicly held Corporations. There are about 14,000 publicly held corporations in the U.S. (defined, roughly speaking, by the Securities and Exchange Commission, as businesses with more than 500 shareholders and $1,000,000 of assets). These are regulated by the Securities and Exchange Commission, mostly with an eye towards full disclosure of relevant facts to stockholders in the stock market to prevent insiders from having undue advantages over others in the stock market.

These corporations have vast economic power, due to their size, but the decisions they make are mostly controlled by a self-perpetuating management group, since, as described below, even wealthy shareholders and institutional investors have only modest influence on their actions. This creates concerns about corporate accountability, and impacts the Economy.

Accountability To Shareholders

In theory, shareholders elect a board of directors responsive to it, which in turn appoints corporte officers (including the CEO) who are responsive to it, who in turn run the corporation. In closely held corporations where shareholders are employee-owners or venture capitalists or simply "angle investors" or "silent partners", this is a reasonably accurate description of how corporations work.

Publicly held corporations do not work this way. Small shareholders (including even institutional investors with a percentage or two of the total shareholdings of a company) of publicly held corporations have virtually no say in the appointment of the Board of Directors or corporate policy. They are routinely offered a slate of directors who must be accepted or rejected all at once, and the slate is virtually never rejected (i.e. less than 0.01% of the time). Essentially the only time a slate of directors is rejected is when a single hostile party has bought a majority (or at least a near majority) of the shares of the company and proposes a competign slate of candidates. Shareholders can propose policy issues for the shareholders generally to consider, but the number of times these proposals (called proxy fights) actually succeed among the 14,000 or so public corporations in the United States each year is typically a number you can count on your fingers.

Instead, shareholders dissatisfied with a corporation's performance apply the "Wall Street Rule" and sell their stock rather than trying to improve the company. The "Wall Street Rule", however, has limited benefit to institutional investors such as mutual funds, life insurance compannies, and pension funds that have large holdings and are required to be diversified. They have little choice but to stay invested in almost everything all the time. But, historically, alliances between institutional investors to act contrary to managment have been impaired by securities regulations.

Board members, in practice, are chosen by a self-perpetuating board, most of whom owe their positions to the CEO, and many of whom are subordinates of the CEO or the CEO himself who often also chairs the Board of Directors. A modern Board of Directors is more like a Vice President, around to insure orderly succession in the event of a death or disability or unexpected resignation, than a supervisor for the CEO that holds his compensation in check and fires him.

A corporate board of directors typically has half a dozen to a couple dozen members drawn from the ranks of senior executives, professionals and academics. It typically meets once a month, rubber stamps a CEO proposed agenda, and has virtually no independent staff (a corporate secretary subordinate to the CEO with a handful of staff provides the sole staff support for most boards).

No serious proposals outstanding seek to give the Board meaningful control over the day to day affairs of the corpoation. But, many proposals seek to make the Board a true advocate of the shareholders in setting top executive compensation and firing and hiring senior executives. Most of these proposals call for increasing the number of "independent directors" on the Board, but because the "independent directors" are simply people who are not direct subordinates of the CEO, and not people who are actually responsible to shareholders who actually elect them in competitive elections, this is actually only a modest impact.

Accountability To Society

The fundamental problem of large corporations in relation to the public is that it is often hard to hold the truly reasponsible individuals accountable for violations of law. Responsibility is often diffuse. Errors are often of omission caused by intentionally not looking at likely problems. And, the profit motive taints all decision making. Moreover, the decision makers are often playing with other people's money, and know that they are likely to receive a great deal of financial compensation for profit increasing success, and have only a dim chance of being held responsible individually for harms to the public (including for these purposes employees and customers and suppliers of the company and the communities these people are a part of).

This is not an accident. In fact, corporation exist expressly to shield investors and operators from culpability. The Corporation goes bankrupt, not the owner (they may lose money... or they may not...), the Corporation is sued, not the owner or officer, the Corporation is found criminally culpable, and even then many that did profit from the act are not culpable. It's important to be able to create an entity which acts as the focus of the risk, otherwise it would be too risky for entrepeneurs to invest themselves in many important kinds of endeavor. But it also promotes a lack of accountability, especially in the larger corporations.

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This page was last modified 14:27, 18 September 2006 by Chad Lupkes. Based on work by Andrew Oh-Willeke. Content is available under the terms of the GNU Free Documentation License.

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