Punctilos and Prosperity

<!– @page { size: 8.5in 11in; margin: 0.79in } P { margin-bottom: 0.08in } –>Some weeks ago, I saw a young woman at a political event wearing a tee-shirt which read: “Impeach Everyone.” On Tuesday (Oct.13, 2009), the Wall Street Journal published a news/analysis piece entitled Rage at Government for Doing Too Much and Too Little by Naftali Bendavid, but which would have been more accurately titled, Rage Targets “Business and Government with Equal Fury.”  (http://online.wsj.com/article/SB125539072998381441.html)  In short, the prevailing zeitgeist seems to be one of diminishing legitimacy for many of the institutions that dominate our society.

This concern is hardly new.   Benjamin N. Cardozo, Chief Judge of New York’s highest court, The Court of Appeals, wrote the following in a 1928 case involving the breach of fiduciary duty by a joint-venturer:

Many forms of conduct permissible in a workaday world for those acting at arms length, are forbidden to those bound by fiduciary ties.  A trustee is held to something stricter than the morals of the marketplace.  Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928) (Cardozo, C.J.).

However, the decay of old standards and old ideals fuels our increasing skepticism.

There was a time when an eminent lawyer,  Elihu Root, Secretary of war under McKinley and Theodore Roosevelt, could say:

“About half of the practice of a decent lawyer is telling would-be clients that they are damned fools and should stop.”

In contrast, a decade or so ago, when Dot.com dreamers came to lawyers, accountants and venture capitalists, desiring to do initial public offerings (“IPOs”), but without profits, products, processes or any other kind of “deliverables,” they were greeted not with, “Are you off your mind?,” but with, “Would Tuesday be too late?”

Some people and professional entities, who, in the case of lawyers, are licensed as Attorneys and Counselors at Law, seemed to think they had no duty, perhaps no right, to offer clients the benefit of their counsel, that they had no duty or right to tell these people that they were probably not ready.

Those that did tell their clients that they “should stop” (or at least slow down) probably lost a lot of business, although the firms they did launch are probably still going concerns.  What happened, on a wider scale, was a vast obliteration of wealth and the mis-allocation of vast amounts of capital that probably could have funded better, if more pedestrian, ideas than “Pets.com” (to cite one storied misadventure of the period, by way of illustration).

The popular media make much of executive pay.  Conservatives in the media (Mark Levin, Glenn Beck and the Wall Street Journal Editorial Page), rightly, say that only markets can set pay scales and that the value of a truly innovative and effective executive, Jack Welch of GE or Roberto C. Goizueta of Coca-Cola, is far greater than they are likely to be paid.  However, for every Welch or Goizueta, there are Al Dunlops and Dennis Kozlowskis, men who probably should have been limited or held on a short leash (if hired at all) by their Boards.

In New York, after Delaware, a major center for incorporation of public companies, it is harder to move against a Director of a Public Company under the Business Corporation Law (Section 720 et seq.), an individual ideally selected for business acumen, who is given numerous valuable perks in return for service and who serves as a fiduciary for the shareholders in the firm, than it is to move against the executor of a small estate.

I pursued an MBA at the same time that I studied Law.  My Business Organizations professor, a very bright man who had been an attorney with the SEC, always told us to advise clients to have an uneven number of directors on a Board to avoid dead-locks.  During the Capstone course in my MBA program, I asked the instructor, the CEO of a local hospital system, if he did this.  He said that since he appointed the Board, there would be no dead-locks.  Now, this CEO was an honest man, known for his integrity and competence. But that even the scrupulously honest, highly competent corporate leaders of that time thought this way demonstrates the cultural issues that lead to the “Chainsaw Al” Dunlop debacle and to the failures of Enron and Global Crossing and Tyco and Worldcom and  . . . .

As a result of the Dot.com collapse, we had Sarbanes-Oxley (“SOX”), a law hated by Conservatives because it keeps us from doing as many IPOs.  However, if the IPOs that we would have been doing would have been of the quality of many of the ones being done in the late 1990s, we are better not doing them.  The problem with SOX is not that it is necessarily a bad law or that it has bad effects.  The problem is that SOX is needed at all.

Ivan Boesky, an arbitrageur convicted of insider-trading, once said:

“I think greed is healthy. You can be greedy and still feel good about yourself”.

This was altered somewhat by a fictional alter-ego of Mr. Boesky, Gordon Geko of Wall Street, who said:

The point is, ladies and gentleman, that greed — for lack of a better word — is good.

Greed is right.

Greed works.

Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.

And greed — you mark my words — will not only save Teldar Paper, but that other malfunctioning corporation called the USA.

Unfortunately, reality is better captured by an old saying of  the bankruptcy bar:

Pigs get fat, but hogs get slaughtered.

Greed has marked our financial system over the last 20 some years.  It has limited skepticism.  It has neutered thrift.  It has served to mis-allocate scarce capital in the service of credulity.  It has leveraged us—individuals; our businesses; our households; and our government at all levels—with little tangible to show for it.  It has even more utterly leveraged and ruined our institutions at all levels.  It has left us weakened.  This weakness has seemingly legitimized solutions, such as Keynesian Stimulus spending, that were completely discredited by their pervasive earlier failures.

What then is the solution?

We must learn the lessons of skepticism.  We must understand that the brilliant Milton Friedman was right when he said, “There is no such thing as a free lunch,” and that the statement applies as much to the private sector and the free market as it does to government.

We must reduce the size and scope of government, realizing that every dollar taken in taxes is money that might have started a business, hired an employee or allowed a working person to buy a Christmas gift for a beloved child or spouse.

We must bring back what the management gaon Peter Drucker called the Social Sector, not-for-profit charities and fraternal organizations, to replace the failed government programs of today.

Professionals must continue to embrace the responsibilities of their callings, rejecting forms of conduct permissible in a workaday world for those acting at arms length,” while not living up to George Bernard Shaw’s edict that Every profession is a conspiracy against the layman.” Business leaders asked to serve on Boards must embrace their roles as fiduciaries for shareholders, many of whom, like pension funds, represent the uniquely vulnerable.

Our legislatures must create laws that allow ordinary people to come together effectively to reinvigorate the Social Sector, for example allowing not for profit entities the same rights that ERISA Plans have to offer health insurance plans that preempt state insurance laws and to design their own plans for their own members’ needs.  We must give shareholders in Public Companies more legal recourse to vindicate their rights and oust entrenched or self-interested Boards, as a necessary adjunct to government regulation.

In short, all of us must embrace the responsibilities and limitations, as well as the privleges and benefits, of living in a free society. If we would build a society built on free men, free markets and free pulpits, all of us must play our part.