There are a myriad of issues contributing to our current economic predicament. But when you look at the dysfunctional and potentially addressable aspects of how we got here, a single phenomenon appears to be at the heart of it all: conflict of interest.
People throw around the “regulation” word like it’s a cure all, but how does regulation help when the career path of the regulators leads to the regulated? What then?
But then, this isn’t just about regulation. Conflicts of interest plague corporate governance and just about everywhere politics and business intersect.
Here are five relatively current examples of how the incestuous nature of business and politics in America has grossly and negatively impacted all of us and triggered our current economic woes:
CEOs and their rubber-stamping boards
Boards are supposed to hire and fire CEOs, but in the case of startups and adding or replacing directors, CEOs typically do the recruiting. Not to mention that directors are often current or former executives. They’re just one big happy family. Rubber-stamping boards are not only behind every major corporate scandal - Enron, WorldCom, Tyco, Adelphia - but also exorbitant CEO compensation and exit packages. And the courts have been reluctant to hold them accountable.
The SEC and Bernard Madoff
The SEC was apparently tipped off about Bernard Madoff and did nothing. Why? Because, the career path for SEC enforcers is, you guessed it, Wall Street. In general, federal employees eye the far more lucrative private sector. You don’t expect them to retire on a government pension with all those millions to be made, do you?
Fannie, Freddie and Frank
How about Capitol Hill? You don’t think oversight committees are ever conflicted by political agenda, do you?
“These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Eliot Spitzer’s lofty aspirations
As New York State Attorney General, Eliot Spitzer aggressively prosecuted corporate fraud cases and other white collar criminals. But his motivation was clearly to make a name for himself and become Governor of New York. Just an example of the motives behind political grand-standing and how they affect the corporate world.
Wall Street’s investment banks and research analysts
Remember the conflict of interest between Wall Street investment banks and their research analysts during the dot-com bubble. Prosecutors (including Spitzer, by the way) negotiated a record $1.4B settlement among the nation’s top ten investment banks, but that was only a fraction of their profits. Meanwhile, investors lost more than half a trillion dollars when the bubble burst.
Of course, the ink on the settlement release was barely dry when those same banks got themselves into hot water with mortgage backed securities, and now here we are.
If conflict of interest is hard-wired into the framework of American business and politics, what do we do about it?
I don’t pretend to have all the answers. But one thing’s for sure. Politically motivated overreactions labeled as regulation, without transparent and objective analysis of the interrelationships between the regulators and the regulated, create a false sense of security while allowing serious issues to get out of control. We’ve all seen the results, and business as usual means more of the same. How much our nation can withstand is a question none of us can or should have to answer.