NCPA - National Center for Policy Analysis

Corporate Managers are Ignoring Stockholders -- Again

February 20, 2002

Many of the activities that got Enron in trouble are pervasive throughout corporate America, says Bruce Bartlett, with the implicit encouragement of business schools, management gurus, money managers and financial analysts.

Underlying this trend is the problem of disciplining corporate management, which American businesses faced in 1980.

  • In a highly influential Harvard Business Review article, professors Robert Hayes and William Abernathy wrote 22 years ago that widely practiced management techniques were partly responsible for the decline of American industry.
  • Also, encouraged by government policies of high inflation and tax rates, and growing regulation, managers focused on the short-term and avoided long-term investments.
  • But under Ronald Reagan, tax rates were cut, inflation was sharply reduced, and risk-taking and entrepreneurship were celebrated. Whole industries, like the auto industry, completely reinvented themselves.
  • At the same time, innovations in finance, especially invention of the "junk" bond, made corporate takeovers easier, forcing complacent managers to shape-up or ship-out.

For the first time, shareholders had a way of disciplining corporate managers who failed to deliver profits, and this was a major reason for the 1980s' turnaround in American industry that established the foundation for growth in the 1990s.

Unfortunately, due to a backlash against corporate raiders, hostile takeovers are largely a thing of the past. Managers have gone back to ignoring shareholders, and giving themselves bloated salaries and perks, with little oversight from corporate boards.

Where Enron was exceptional was in suborning its own accountants to keep financial analysts and money managers in the dark.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 20, 2002.


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