Democracy in corporate America

Dædalus Summer 2007 “If men were angels, no government would be necessary.” James Madison’s perceptive warning in The Federalist, No. 51, provides an appropriate place to begin a discussion of the role of shareholder democracy in the governance of America’s giant publicly held corporations. Paraphrasing the great Madison’s words, “If chief executives were angels, no corporate governance would be necessary.” Yet if anything is clear about corporate governance during the recent era, it is that chief executives, like the rest of us, are not angels. I am referring not only to the headliners–convicted felons such as Enron’s Ken Lay and Jeffrey Skilling, WorldCom’s Bernard Ebbers, Tyco’s Dennis Kozlowski, and Adelphia’s John Rigas–but to a far larger cohort of chief executives who stretched generally accepted accounting principles to their very limit, and even beyond, in order to create accounting earnings that measured up to the guidance they had provided the professional security analysts of powerful Wall Street investment banking 1⁄2rms (the ‘sell side,’ promoting stocks to money managers) and the giant institutional investing 1⁄2rms (the ‘buy side,’ purchasing those stocks). This accounting gimmickry was too often performed right under the knowing eye of public accounting 1⁄2rms. These 1⁄2rms compromised their independence by providing management-consulting services to the very companies whose 1⁄2nancial statements they were providing attestation. In the aftermath of the 1998–2000 stock market bubble, many companies were required to restate the audited earnings 1⁄2gures they had reported. There have been some 6,441 restatements of earnings by publicly owned companies since 2001. These restatements have come not only from companies of marginal standing in the business community but also from some of the largest and most highly regarded corporations in the United States, including General Motors, General Electric, Fannie Mae, Xerox, Bristol-Meyers Squibb, Citigroup, and Marsh & McClennan. Restating earnings is not a crime. But it is a symptom of the ‘1⁄2nancial engiJohn C. Bogle