It seems to me, the concept of a whipping boy didn’t work in the Dark Ages, so I don’t understand why people think it would work today. When someone else is punished for one’s transgressions, the lesson learned is that bad actions won’t result in bad consequences. This seems logical when thought about for even a second. Then why is it, that when a manager in a corporation commits a crime, the shareholders are punished and the actual wrongdoer gets a raise? If we want our economy to grow faster, become more efficient, providing careers and high wages, this is an issue that must be addressed.
When punishment is considered for an infraction one thing that must be taken into account is preventing future wrongdoing. This should be one of the the paramount considerations. Preventing recurrence of criminality is the primary reason punishment is meted out. Why else penalize it? When punishment doesn’t stop wrongdoing, it cannot be said to be effective punishment, and if it creates an incentive to more crime, it is actually counter productive.
This brings us to an understanding of corporate punishment. When a business is reprimanded the punishment generally takes the form of a fine. If an executives steal from the pensions of the employees, the political backlash can result in criminal charges being drawn up against them, but more often than not, the executives escape all justice. This creates a situation where the wrongdoer is only punished tangentially by the backlash of the shareholders of the company. It is the principles, (owners), that are punished, but the agents, (management), who made the decision to violate the law, escape the consequences.
If the wrongdoing is not caught by regulatory officials, or worse there is regulatory capture, the resulting profit garners the criminal manager accolades and money. When a company makes such profits, it is always the case that the rewards go to management, and are not distributed to the shareholders. People are human beings, we all seek our good, often without regard for the good of others, this is called egoism. The executive who successfully engages in this type of behavior is the epitome of the egoist… as are the regulators that fail to punish him.
In a situation of poor corporate governance this inevitably makes a negative feedback loop. Bad behavior will not result in negative consequences but only positive ones for the wrong doer. The stockholder is the patsy. Take the example of BP and the Gulf oil spill. The fines are running into the billions of dollars. The shareholders have taken a bath in both falling dividend payments and stock values. They had no input as to how the company would extract oil, place drilling rigs or safety considerations. Their agents, the executives of BP, made those decisions. Yet it is the shareholders that are being punished.
This negative feedback loop, government’s policy creates, not only rewards the guilty at the expense of the innocent, but it actually creates a situation where more wrongdoing is encouraged. More and more we read about a company that has violated some law or another. Even the most egregious offenses like John Corzine and the MF Global fiasco are met with indifference by regulators. Corzine, being politically powerful, has escaped justice for stealing money from his client’s segregated accounts! The shareholders have been punished but had no hand in the thievery, the clients have been punished by loosing their savings, but the villain dances away with his ill gotten gains… free as a bird.
Until this situation is rectified, the problem of poor corporate governance will only grow, as it has over the past few decades. People see the game is rigged and will continue to pull away the investment that economies need to grow. There must be a paradigm shift in the way government’s deal with companies that violate the law. The answer is, of course, to punish the actual wrongdoers… criminally. It isn’t rocket science after all. To reward bad behavior always results in more bad behavior. Punishing an innocent bystander is patently counter productive but punishing wrong doing creates an incentive not to do it.
The main sticking point to a real change, however, is the fact that most governments around the World, engage in crony capitalism. The US is as egregious in this as most… look at GM, GE and Solyndra. Those that have wealth and power, as do those who make millions as an employee of a company they had no hand in starting, have accordant political power. They have the money to contribute to campaigns, they wield the power of the corporations they are supposed to run for the shareholders, they have the ability to hire lobbyists to keep the gravy train rolling, and they have proven themselves to be egoists capable of extreme malfeasance. Politicians are eager to look like honest men, but as Thrasymachus said, they only seek to appear honest while being secretly dishonest. Politicians happily slop at the trough of corporate largess, and corporate big wigs at the trough of government. So, we finally get to the crux of the problem, political corruption. The answer to that is a NUMA. But that is another blog…