February 1, 2011
"We Have Met the Enemy and He is Us"
As Stefan pointed out on this blog last week, the Financial Crisis Inquiry Commission has issued its report on the financial crisis. The Commission concludes that “a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.”
Three (relatively) recent sources raise the possibility that, in Shakespeare’s words, “the fault, dear Brutus, is not in our stars, but in ourselves.”
1. In a recent article in the Business Lawyer, Delaware Chancellor Leo Strine argues that the focus of corporate executives and directors on short-term returns is often in response to pressure from their corporations’ shareholders. [Leo E. Strine, Jr., One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?, 66 BUS. LAW. 1 (2010).]
2. In a presentation at Case Western Reserve College of Law in October, John Coffee points out that Dodd-Frank’s attempt to make public companies, including banks, more responsive to shareholders is problematic given the pre-crisis pressure shareholders put on corporations to increase risk and leverage to produce higher returns.
3. Jay Kesten, who will be joining the legal academy next year, has a provocative paper in which he finds that companies with management entrenchment devices actually performed better in the recent economic downturn than companies without such protections. In other words, managers who were somewhat insulated from shareholder pressure to perform did better than manager who weren’t.
It may be, to quote Walt Kelly, that “we have met the enemy and he is us.”
February 1, 2011 | Permalink