September 18th, 2008
06:54 PM ET

Blame boards of directors for financial mess

[cnn-photo-caption image=http://i2.cdn.turner.com/cnn/2008/images/09/18/art.nyse.jpg caption="Traders on the floor of the New York Stock Exchange"]
Nell Minow
Corporate Governance Expert

Failure this broad and deep takes a village, and regulators, lawyers, compensation consultants, auditors, executives, shareholders, and the press all played a part. But the people who are most responsible for the massive meltdowns of these institutions are the boards of directors.

Their sole responsibility is to act as fiduciaries for the shareholders in managing risk. They not only failed to perform this task but indeed, in their approval of outrageous pay plans with perverse incentives, they all but guaranteed the current disaster.

I am a capitalist. I love it when executives earn boatloads of money. But it infuriates me when they get it without earning it.

If the executives' compensation is tied to the volume of business rather than the quality of business, we should expect dealmakers to be more attentive to the number of transactions than the value they create. This is the basis for much of the sub-prime mess, whose collateral damage is taking down the biggest firms on Wall Street.

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Editor's Note: Nell Minow is editor and chair of The Corporate Library, an independent research company specializing in corporate governance. Minow was named one of the 20 most influential people in corporate governance by Directorship magazine in 2007 and "the queen of good corporate governance" by BusinessWeek Online in 2003. She has written more than 200 articles and co-written three books. Since 1995, Minow has also written "Movie Mom," an online parents' guide to "media, culture and values."

Filed under: Economy
soundoff (12 Responses)
  1. Saad, NJ

    Indeed a great article – very articulate in putting the facts in perspective. Unfortunately, there's not much that can or will change. These are the downsides of free market and capitalism. These are also due to the fact that more humans are greedy than not. And also that the whole structure, financial and the political arena have become so complex and complicated that it is hard to govern. And when things are hard to govern, and there are more greedy people than not, the system will falter.

    I know one should always have hope. And I do try to follow that rule. But in this case, for the hopes to be realistic about the revival of confidence in the financial markets, we need to have good and honest leaders/people to put a system of checks-and-balances in place. Frankly, I do not see a lot of those. I know I could but neither am I in a position nor have the time required to do so. Our economy, which in turn derives the world economy in many ways, is tied more closely to consumer confidence than anything other single thing. Even performance, which is critical measure of how good or bad things are, comes second to consumer confidence. Consumer confidence is the #1 factor that creates the environment and allows for companies to perform. Whether they perform good or they perform bad, goes back to the beginning of my argument.

    September 19, 2008 at 11:54 am |
  2. Annie Kate

    Anytime you tie someone's pay to quantity of transactions rather than quantity+quality you are going to get a lot of shaky transactions. Its sad though that the rest of us are going to suffer for what a few really greedy people did.

    Annie Kate
    Birmingham AL

    September 18, 2008 at 10:26 pm |
  3. Greg Wolff

    I would like to know just how much the board members of the companied that are in such dire need of bail out are being paid. If history proves it's self, they will be rewarded handsomly for their failures.
    I feel that they should be paid according to the performance of their companies, and if their companies go in the toilet, then so should their compensation.

    September 18, 2008 at 9:06 pm |
  4. glen

    Im on a fixed income. Whatever happened to help your fellow American. When is enough, enough.or in this case to much!!!

    September 18, 2008 at 8:53 pm |
  5. Joseph Tampa

    Simple, Bush Administration allowed this to happen during his watch. Three months ago, all major oil companies posted record profits. To the Bush Administration it was business as usual. For every American, they struggled to put gas into the vechiles. The financial mess is similar to hurricane Katrina. Everybody saw it coming but failed to act. Now they will be plenty of blame to go around. Unfornately, this could wipe out the middle class.

    September 18, 2008 at 8:50 pm |
  6. Joseph Zayac

    The financial mess reminds me of hurricane Katrina that hit New Orleans, everybody new it was coming but failed to react. When it was over, their was plenty of blame to go around. Same with the financial mess. To gready executives, shareholders, and board of directors all demaning higher and higher profits. The Bush Administration saw the Katrina storm when record profits are posted by all of the major oil companies as Americans are struggling to put in $50, $60, and $70 dollars worth of gas into their vechiles. Business as usual, and no action was taken against these corporations. Now, every American will suffer some more severe than others for years to come.

    September 18, 2008 at 8:39 pm |
  7. Greg

    Don't forget to blame the uneducated Home Buyer who thought he/she could afford a $300,000 house on a $40,000 salary. Many in my generation have lost there homes. Luckily, my Parents taught me not to borrow more than you can pay back. I and those who will make it through this mess decided to actually put money down and spend alot less than they would have giving me. I was hearing about all these crazy loans that everyone was gleaming about. If it seems to good to be true-it probaly is.

    September 18, 2008 at 8:06 pm |
  8. Ed Lindsay

    Why is it the Government will spend hundreds of billions
    of taxpayers' dollars to bailout banks and businesses
    but won't spend a dime to help a taxpayer from losing
    his home?

    Why is that?

    September 18, 2008 at 8:04 pm |
  9. Mark from Atlanta

    Absolutely accurate. It is also these lazy boards that have allowed executive compensation, both on their way into and out of corporations, to run amuck.

    September 18, 2008 at 7:55 pm |
  10. Ratna, New York, NY

    THank you Nell Minow,

    Very resourceful article. My question to you: Who actually made these rules in free market capitalism? Looking forward to more information from you.

    September 18, 2008 at 7:38 pm |
  11. JC- Los Angeles

    The boards are merely check collecting do nothings that are often hand selected by the corrupt, worthless executives running the companies into the ground; they're merely on the payroll.

    This mess was started by Allan Greenspan; with each rate cut, he failed to comprehend that the fraud factories at Countrywide, Bank of America, WAMU, Wells Frago and Wall Street were ratcheting up production to unforeseen levels.

    Soon ethics were thrown out the window in exchange for 100%, pure, uncut, American fraud.

    The boards of most companies remind me a bit of General Stockdale who ran for Vice President alongside Ross Perot: Stockdale famously said: "who am I am what am I doing here."

    Sums things up.

    September 18, 2008 at 7:36 pm |
  12. Mike

    "Blame".. It's much more than 'blame'. It's down-right-fraud.. The CEO, President, CFO, Senior Management are to 'blame' for this mess. They get millions of dollars per year and "we the america public" take the lost. What's wrong with this picture ? Then we 'bail them out' of a mess that they created.., I am perplexed and puzzled. And President George W. Bush and Senator John McCain know nothing about "economics". What a minute.., what is going on here ? Wake up america.., we are being robbed. Mike in Montana

    September 18, 2008 at 7:13 pm |