Recently, a judge denied Bank of America’s (BAC) attempt to settle with the SEC for $33 million dollars under accusations that the Bank presented false information to its shareholders about Merrill Lynch (MER) employee compensation packages. The judge reasoned that the $33 million would end up being paid by shareholders, effectively forcing them to pay a bill twice which they should have never had to pay at all. While we agree with the decision we clearly can not continue operating in a manner where shareholders are helpless in running their own companies.
Does it not seem odd that the owners of the company are not responsible for hiring corrupt or incompetent management or for allowing that corruption to continue? Unfortunately, the reality with the current Board of Directors system is that shareholders cannot be responsible because they have very little power to decide who will sit on that board or to quickly remove board members when their attitudes or behaviors work against the shareholder interests. If shareholders could have ousted Ken Lewis at any point in time, then they should have been responsible for any wrongdoings under his leadership.
Because, however, shareholders have little say in who serves on the Board of Directors at ANY point in time, American public companies are allowed to run without the owners’ capacity to take full responsibility. Owners ought to be able to prevent corrupt behavior and bad management, but the current Board of Directors system strips them of their power. The obvious implication of this judgment against Bank of America is that since the shareholders can’t be made to pay ethically, everyone will pay by necessity. The American public will pay because the SEC will need a bigger budget to prosecute companies for their misdeeds, and the shareholders will still pay because of legal fees accrued through run-ins with the SEC.
It is time that we start thinking of shareholder empowerment as another step towards greater corporate responsibility with a less costly price tag for the American public. If shareholders were held responsible for their company’s behavior then they would act as a regulatory body against corporate excess and criminality, and would be held responsible, through the payment of fines, should the leadership they elect and maintain acts against our nation’s laws and regulations.
Disclosure: No positions