A New Capitalism?
After writing the post on “The Nationalization of Big Business,” I received a number of emails and comments that made me take a closer look at this issue. Since I’m not a futurist, economist, nor academic, I rely on the following definition of capitalism, which pretty well spells it out for me.
Capitalism is an economic and political system characterized by a free market for goods and services and private control of production and consumption.
Princeton University’s Wordnet defines capitalism as an economic system based on private ownership of capital…antonym of socialism.
To me, capitalism means that if the market (we consumers) likes what a business has to offer, we buy from that business and it becomes successful and continues to grow and prosper. If the market does not like what the business has to offer, we don’t buy from that business and it fails. That is the simplest form of capitalism. Capitalism is totally market driven, and it has worked well for American companies for a very long time–until now.
Now, although we have over 30 million American businesses that fit the basic definition of capitalism…Robert Reich, former Secretary of Labor, has pointed out in a recent article, that we also have companies which operate outside our capitalistic system, because they are no longer accountable to the market. If they were accountable to the market they would close–with mass loses of jobs, which would heavily impact our entire economy. Therefore, they cannot be allowed to fail, because they are too big to fail.
So, if we have companies that are not accountable to the market, and operate outside our capitalistic system, who should they be accountable to? If some of these companies can only survive by living on taxpayer’s money, shouldn’t the taxpayers hold them accountable? Unfortunately, that would mean the government would become involved in the operation of these companies, and does anyone think the largest bureaucracy in America can better manage them?
There are no simple answers, but lots of questions-for instance:
- When is a company, no longer accountable to the market, and becomes too big to fail?
- Should large, unaccountable, businesses be forced to break up into smaller, more manageable (and accountable) units…similar to the former Bell system breakup?
- Should the government take control of these large “too big” companies and dictate who should manage them, and how they should be run?
- Or, should these large unaccountable companies simply be allowed to fail–putting 10′s (maybe 100′s) of thousands of people out of work?
These are pretty heady questions for just a street guy, but I would really like to hear the opinions of anyone out there who wonders what is happening to our capitalistic system–and should it be happening? Better yet, how can it be made more successful in our global economy?
Board of Directors??
Enron, WorldCom, AIG, Lehman, Merrill Lynch, Big 3 automakers, bank after bank…and on…and on. Failed, and failing, companies all—and the employees and shareholders (not to mention the public at large) would like to string up all the executives of the failed companies to the nearest “hanging tree.”
Yet, I have seen very little mention of the roles played in these failures by their Board of Directors. The buck does not stop with the CEO; it stops with a company’s directors. A board of directors oversees the assets of the company for the good of the shareholders. More specifically, the board of directors is the highest governing authority within the management structure at any publicly traded company. It is their job to:
- Select a chief executive to whom responsibility for the administration of the company is delegated.
- Evaluate his/her performance regularly and set compensation (including bonuses) accordingly. (We can hardly blame a CEO for taking a huge bonus from a failing company when it is handed to them by the board of directors).
- Govern the organization by broad policies and objectives.
- Ensure adequate financial resources (where were the boards before the bailouts?).
- Account to the stakeholders for the products and services of the company.
- Provide for fiscal accountability. Yes, this is one of the primary duties of the directors. In fact, the Sarbanes-Oxley Act introduced new standards of accountability on the board of directors for any company listed on U.S. stock exchanges. Under the act, internal control is now the direct responsibility of the directors…for all the good that has done in recent weeks and months
The executives of the failed and failing companies in the U.S. are often just incompetent, or self-serving (a few are criminals), but the boards of these companies is where the blame should ultimately lie. Directors of public-traded companies receive substantial compensation for sitting on a board, and many of them have certainly been derelict in their duties…or lazy…or stupid…or all of the above. Many of them serve primarily to rubber-stamp the actions of the CEO (the person they hired), without demanding that he/she perform successfully.
Someone needs to hold the Board of Directors, of these failed companies, accountable for the poor performance of their respective CEOs. If no one in government cares, then it needs to be the shareholders.
If you own stock in any company, do not let others select the board members for you—do your homework and vote for the member you think would be best for the company, and its shareholders. Better yet, become an activist and make sure the best people possible are nominated for your company’s board.
Now, where’s the nearest hangin’ tree………
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