If you provide incentives to an executive to boost the share price then the obvious occurs. Perhaps it is time to question whether a company's share price is really the benchmark of its corporate success.
The tip of the US business corruption iceberg is melting on a daily basis with whistleblowers (almost all of them women) exposing the shoddy accounting, management and boardroom practices that have been in place for the past 10 years or more. Australia is not immune. As with most things we simply lack the scale. But corruption whether it involves billions of dollars, a few hundred million or thousands is just as insidious in its implications. Laissez-faire capitalism is all very well but if this leads to unbridled greed and abuse of the system then there is a need to call time out. Governments, regulators and professional bodies are scrambling to investigate the circumstances and reassure a sceptical public that these were just isolated incidents rather than a systemic fault. The question being asked quite rightly is whether the system of corporate governance that was put into place following the cowboy days of the 1980s to prevent this type of behaviour is in need of a major overhaul or whether we need to go back to the drawing board for new concepts.
A boardroom is by nature collegiate. Boardroom solidarity is prized. If this is the case then how can individual directors, non-executive or not, operate in a truly independent fashion? The old adage says never do business with your friends, the reason why being that a business operates for the benefit of myriad shareholders and stakeholders; a decision made for the benefit of the majority may not advantage "the friend". The sorry saga of One.Tel and the school friends who apparently knew and trusted each other came horribly unstuck by the realities of the business world. The boardroom of Burns Philp was very collegiate but no one thought to ask what was happening to its cash position just before it tumbled from grace. The reason that we have rules, whether black letter law or self-regulation, is so there will be enough checks and balances to ensure that any natural human tendencies to lie and steal are countered by incentives to prevent, catch, expose and minimise their effects. The stockmarket bubble of the past 10 years or so has burst. History is pockmarked by similar occurrences. The tulip bulb bubble in 16th century Europe and the Teapot Dome scandal in the early part of the 20th century are classic examples.
If you invest in your son's lawn mowing business you can make a judgment based on prior knowledge of his trustworthiness, business judgement and his ability to do what he says he will do. But if you invest in someone you don't know you have to rely on information provided by the company. However, we limit the liability of public companies, protect privacy and espouse boardroom confidentiality. Nevertheless, to arrive at some sort of view of what is happening inside the company we have outside auditors and boards of directors who represent our interests to keep us informed. It is this system that failed – and it failed not because it wasn't any good, but for the age-old reason that greed and self-interest will always supersede any rules legal or self-imposed. No company is immune from this behaviour. Over the coming months, as the air escapes from the stockmarket bubble, many more companies will hit the wall. The over-inflated prices of assets will come back to haunt everyone not least the investors who believed them.
And the reality is that you can't legislate against greed. But what can happen is that executive salaries are aligned not with the share price but with the long-term interests of the company. If you provide incentives to an executive to boost the share price then the obvious occurs. Perhaps it is time to question whether a company's share price is really the benchmark of its corporate success. The much-vaunted concept of improving shareholder value should not simply be measured by the share price. All the companies now in disgrace had great share prices – but that share price was based on deception. If corporate governance is to work then companies have to find a far more substantial and long-term benchmark of success than share prices. The abuses resulting from this obsession with share price and the greed that has flowed from its manipulation is coming at too high a cost to the reputation of business, to the marketplace and to the reputation of company directors in general.
Disclaimer
The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.