Corporate Objectives–Maximizing Social versus Private Equity

Abstract

Many scholars will declare someday that 2002 was the year of the corporate scandal since it was during this time that some of the most egregious examples of executive greed in history were revealed. Because the once-respected heads of large corporations such as Merrill Lynch, Enron, and WorldCom enriched themselves at the expense of other stakeholders, the public's faith in unfettered capitalism was shaken. In response, leaders ranging from populist politicians to the president of the New York Stock Exchange demanded corporate governance reforms to restore confidence in the free market system. Acting with uncharacteristic swiftness, the U.S. Congress passed and President George W. Bush signed into law the Sarbanes-Oxley Act in July 2002. Because this legislation was based on the assumption that the offending acts were isolated cases of individual deviance, the Act created a federal task force to police illegal behavior, threatened CEOs with criminal penalties, and required executives to certify their financial statements. As of late 2002, however, many of the Act's programs either had not been carried out or were inadequately funded by Congress. Even if lawmakers had been more resolute in this regard, however, its potential effectiveness is questionable. The basis for this opinion is that the recent scandals reflect a systemic flaw in contemporary capitalism. Over the last three decades, the global economy has evolved into what Hyman Minsky (1990) called a money-manager form of capitalism, in which increasingly powerful institutional investors have forced executives to at least meet their quarterly earnings expectations. Moreover,.because portfolio managers also encourage the use of stock options and equity-based compensation to align the interests of managers with their own, the temptation to misrepresent financial information is strong.

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