Thursday, March 19, 2009

The Solution to the Financial Meltdown

One reason why the financial system has melted down is the lack of long term accountability for the management.

Its all very well to say - yeah, we'll let Lehman Brothers, AIG, Citibank go bankrupt.

But the main culprit is NOT the organization. It is the management, esp. the upper management who are running the show.

You can close down the organization - which will devastate the lives of thousands of people including customers who had no part whatsoever in the financial mischief. But the organization itself - is not the problem.

The key culprits are the CEOs, the traders who took risky trades, the accountants who fudged the books, the bankers who gambled the company's money, and their staff who DON'T GIVE A DAMN.

Do you honestly think they really give a rat's arse if they get fired/ or the company goes bust ? Why the hell would they care?

They are getting paid in cold hard cash - and therefore, it is of little relevance to them at all about the long term viability of the company... or even in the case of AIG - its short term viability. There is no serious impact on their lives if the organization fails.

Bankrupt AIG awarded $165,000,000.00 in bonuses to the same bunch of bastards who ruined the company. And they are being paid using the Govt Aid Package. The company claims it was part of their contract - written before the crash.

Do you think they care?

The problem is systemic. Its all over the civilized world.

10 years ago, in Australia - the CEO of the biggest bank - involved the company in a risky derivatives scheme. He had just stepped into the company and wanted to make a name for himself. His scheme failed and the bank lost over a hundred million dollars. The CEO resigned - and was awarded with $17 million dollars as severance pay.

That's just plain immoral. No one is going to complain if the man has a good plan and it succeeds. But if he screws up, why reward him?

However, that was the system.

The problem is with the reward. If you are going to pay them cash. Hard cash - preset amounts - contractually binding, there is virtually no incentive for them to do the right thing. Even if you pay them out in share scripts - the shares would still be worth something (in most cases).

Do you think someone who is getting paid one million dollars a year is actually going to really care if after (say) five years, his company goes bust. He's got 5 million dollars in cash - enough to last him a comfortable lifetime - and he'll probably land himself another cushy job somewhere else. He may be unemployed for a period of time - but his massive cash payment cushions him very comfortably.

The solution to this - is to not pay them in cash but in stock options or preference shares which are non-tradable and will be worthless if the company suffers from major reversals. Its that simple.

Of course they should receive a modest cash wage - but nothing approaching the million dollar payouts these people are receiving.

90% of their wage should be tied to those stock options or preference shares. They should get a good dividend if the company continues making profit. But should the company become insolvent or becomes unprofitable - then their stock options are worthless.

You have to find some way to tie the future of the top employees to the future of the organization. Right now - there is none - they come in, do their 3 - 5 years of work - then move off. The issue of ethics, sound business practices are irrelevant. They can cook the books, make up figures, sell off profitable sections of the company - then claim credit for this short term success. The shareholders - none the wiser - reward them with their fat cash bonuses. And the bastards ride off into the sunset leaving behind a company with hidden problems. Whether the company succeeds or fails in the future is totally immaterial to them.

But by giving the employees - from middle management to upper - the bulk of their pay in stock options or preference shares - you force them to care. They aren't going to turn a blind eye if their CEO is pulling some shit with the accounting books. They would want to "get involved" if they hear of traders doing unusual deals to hide their losses. And they will definitely want to be careful over who they select for promotion. In this case - they would want to choose someone who is competent and skilled as opposed to someone who is a great friend.

I had a friend who was in the Royal Navy in WW2. He said he loved the navy as opposed to the army. In the army, he said, you had fat cat generals sitting in the comfort of their bunker miles away from the battle directing men to their deaths. However, in the navy, everyone was in the same boat, from the admiral right down to the ship cook. Everyone cared about the boat.

Its got to be the same way with corporations. If it sinks, everyone's fortunes goes down with the bloody ship - including the CEOs.






No comments: