Evaluating the 'Doofus Factor' In Corporate Governance

PolygamousRanchKid writes with this quote from an article in the Economist: "The directors of Yahoo! were 'so spooked by being cast as the worst board in the country' that they fired Carol Bartz as chief executive 'to show that they're not the doofuses that they are.' That was Ms Bartz's typically blunt verdict, offered to Fortune after she was dismissed with a phone call by the internet firm's chairman, Roy Bostock, on September 6th. She would say that. Yet Ms Bartz's criticisms of the board have been sympathetically received. Firing a chief executive by phone smacks of hasty, panicky decision-making. And Yahoo!'s board already had a poor reputation, having turned down an offer from Microsoft that valued the firm at several times what it is worth today. It is not just Yahoo!'s board that is feeling the heat. The directors of HP, another stumbling Silicon Valley giant, have been accused of serial ineptitude spanning the appointment and dismissal of Carly Fiorina as chief executive, the firing of her successor, Mark Hurd, and the selection of his replacement, Léo Apotheker. ... There is growing demand for boards to undergo a formal evaluation process, to assess both the performance of each individual board member and how they work together as a group. The European Union is considering new regulations that would require an independent evaluation of the board every three years."

Comments

The real job of the board of directors

[Required Snark]

is to suck up to the CEO. One way or another the CEO is in charge of their selection, and they are beholding to their boss. In fact they have no actual responsibility to stockholders or even to the authorities like the SEC, or even the DOJ. Have any directors every suffered from making a bad mistake or hiding their head in the sand? Of course not. The corporation buys insurance for them, so they are completely insulated from legal actions based on bad results. They have minimal responsibilities, and they make ridiculous amounts of money for the small amount of time they spend rubber stamping whatever the current management desires.

They get cash and stock, so what is the worst that can happen to them? If the company goes down the tubes they still have the cash, and even if the stock goes down it is still free money. I think this is true for failing companies like HP or soaring companies like Apple.

And as the original post points out, when a board does act they are usually irrational. Their decision process is about as useful as a Magic Eight Ball.

Directors of big publicly traded companies are like landed aristocrats in a socially stratified feudal society. Once they join the wealth class they are given more wealth and power because they are the ruling class. Who gets to be a board member? Someone who as already made it. The ruling elite skims wealth out of the economy to stuff into their own pockets, and thus maintain their strangle hold on the economic (and often political) life of their country.

You want a recent example? Just read what the Wall St. Journal says about Warren Buffet when he says that the tax rate for the wealthy is too low. It's like he went into a church and got up in front of the congregation and said "There is no God." They react with a combination of contempt, condemnation and condescension. It's like the crazy rich uncle showing up and talking about flying saucers from inside the hollow earth. The only reason they cut him any slack is that he so successful and rich that they can't ignore him.

When it comes to describing how wealth and power accumulate at the top, Marx was right. He was wrong about everything else, like Hegelianism, the end of history and the workers paradise, but he was right about how the ruling class will sacrifice anything to keep their wealth and privilege.

What is the difference between how Wall St. behaves and how Gaddafi ran Libya? Not much. The US power elite is much more slick, and they have much better PR, and they have some understanding that it's more cost effective to not starve the peasants. A rancher get more meat from a well fed cow that is not sick, but that is in the rancher's interest, not the cows.

If they think that starving the populace will get them more wealth and power, they will. In fact, they are. In the US you can make a lot of money in the immediate term by putting people out of work rather then by investing for the long run. So ship those jobs overseas, merge what remains into a few dominant companies to form cartels, and squeeze the existing wealth out of what remains. If you're rich enough, you can justify anything by insisting that your wealth proves you are righteous.

Of course, this only works for a while. In the longer run it ends up like the situation in many South American countries. A tiny minority with most of the wealth, a very modest size middle class, and a vast majority of dirt poor peasants. Then politics devolves to a seesaw between right wing nationalistic elitists who protect the wealthy and loot the economy (Argentina under the generals) and left wing despots who nationalize everything and buy off the peasants to stay in power while destroying the productive economy (Chávez's in Venezuela).

It may seem like a long way from useless boards of directors, but that is a trick used to keep the cows quite on the way to the slaughterhouse.