Month: November 2011

[Happy Thanksgiving, everyone.]

The corporation is one of the greatest intellectual innovations, enabling activity on a scale otherwise impossible and, I’m convinced, leading to technical and social developments centuries faster than would otherwise be possible.

Historically one of the great aspects is that liability is limited to the corporation and its assets, enabling entrepreneurs and investors to take risks building new technologies and exploring new geographies, from the Erie Canal to Hollywood to Silicon Valley.

But the corporation is not a Platonic Ideal, perfect in conception and required to be unfettered by restriction. Corporations are a tool conceived by and composed of imperfect humans and subject to all the fallibilities of same; how we organize and regulate must and should evolve as circumstances and our understanding change.

So today I assert that the time has come to reduce the liability shield corporations afford its executives. When companies pay multi-million and multi-billion dollar settlements in criminal investigations and civil suits the executives responsible must pay a personal price. After all a corporation doesn’t build a plant that dumps toxic waste or decide that some securities are so solid that insuring them is literally without risk, humans who work for them do.

Matt Taibbi, I think, pointed out that since its founding in 1869 the US Government has bailed out Goldman Sachs 14 times and the companies innovations have lead directly to the last five major recessions/depressions. But no Goldman Sachs executive has gone to prison or suffered much more than a (slightly) reduced annual bonus.

In 2008 we–the American taxpayers and, to be fair, the Chinese and other foreigners who buy our government bonds–put trillions of dollars into Goldman Sachs, AIG, Citi Bank and the other large financial companies so our economy wouldn’t collapse. These banks were “too big to fail” and the people in government and on Wall St who make such decisions turned on the cash firehose.

What the powers did not do, though, was rectify the problem of them being too big to fail but made them even bigger by merging, for instance, Citi with Merrill Lynch and JP Morgan with Bear Stearns.

What they also did not do is bring criminal charges against any executives responsible for such horrendous decisions. Even when independent investigations by ProPublica and others uncovered massive illegal activities in the Magnetar and Hudson Mezzanine offerings, billions of dollars of outright fraud, when the investment banks paid hundreds of millions in fines and restitution, not a single executive at Goldman Sachs or JP Morgan was held personally responsible.

This has to change. When a small number of executives can make decisions that end up putting millions out of work or thousands out of their homes, those individuals need to be held accountable. The nearly impermeable corporate veil must be loosened and I propose this:

When a company agrees to a settlement, criminal or civil, of more than $50 million or 10% of annual revenues in the year the actions in question took place (or the last year, when multiple years) the CEO and two other executives most closely involved in approving the actions are to be held personally accountable. At the very least they must pay a fine equal to their total compensation for any year in which the actions occurred and depending on certain criteria which I’ll leave unspecified here the fines increase to 150 or 200% of that amount. If the settlement is over criminal actions (e.g., SEC, FDA, etc. investigations) then the executives should also serve jail or prison time equivalent to a Class A felony.

Would such changes make companies far less likely to settle investigations and lawsuits? Of course but if the evidence, as in the Goldman Sachs/Abacus case is strong enough to command a $550 million dollar fine I expect its strong enough to win a conviction.

After all, corporations are increasingly claiming all the rights of real people as in Citizens United and other children of Southern Pacific Railroad vs. Santa Clara County. They should suffer the same consequences if they do wrong. Frankly I think this is one change the folks involved in Occupy Wall Street and the Tea Party ought to agree on.