Thursday, August 03, 2006

Corporate Misconduct a Minority Activity

A welcome, because rare, example of an appropriate use of Adam Smith’s legacy on a modern topic, the self-serving of corporate managers in today’s corporations. Smith also remarked that, while such ‘misconduct’ is to be deplored, because it took capital funds away from productive investments which would thereby have stimulated growth towards opulence, and turned it into mere revenue spending on ‘immediate consumption’ that detracted from growth, it was, fortunately, a minority of persons who behaved in this manner (see Book II, chapter iii, Wealth of Nations).

Gene Laber writes:

The finance professor behind the Wall Street Journal study concluded that the probability that decision makers could have been so successful in timing the awards was essentially zero, and he concluded that the only plausible explanation was that awards were being backdated. In other words, when the awards were made, the date for the exercise price was moved back to a time when the share prices were at their lowest points in the recent past. Of course, this would make the options more valuable to the executives.

After immediate denials, many companies began confirming that indeed there has been backdating. In some cases, financial statements will have to be restated, and some firms may have violated federal law. Perhaps even more important, however, is the damage done to the collective reputations of corporate executives. Over 200 years ago, Adam Smith wrote that it is very difficult to align the interests of corporate managers with the interests of stockholders. He was remarkably prescient.”

From: The Sun and weekly Herald re-published in The (Florida), (1 August) Gene Laber, Ph.D., is a consulting economist and professor emeritus at the University of Vermont


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