Nearly seventy years after the last great stock market bubble and
crash, another bubble emerged and burst, despite a thick layer of
regulation designed since the 1930s to prevent such things. This
time the bubble was enormous, reflecting nearly twenty years of
double-digit stock market growth, and its bursting had painful
consequence. The search for culprits soon began, and many were
discovered, including not only a number of overreaching
corporations, but also their auditors, investment bankers, lawyers
and indeed, their investors. In Governing the Modern Corporation,
Smith and Walter analyze the structure of market capitalism to see
what went wrong.
They begin by examining the developments that have made modern
financial markets--now capitalized globally at about $70
trillion--so enormous, so volatile and such a source of wealth (and
temptation) for all players. Then they report on the evolving role
and function of the business corporation, the duties of its
officers and directors and the power of its Chief Executive Officer
who seeks to manage the company to achieve as favorable a stock
price as possible.
They next turn to the investing market itself, which comprises
mainly financial institutions that own about two-thirds of all
American stocks and trade about 90% of these stocks. These
investors are well informed, highly trained professionals capable
of making intelligent investment decisions on behalf of their
clients, yet the best and brightest ultimately succumbed to the
bubble and failed to carry out an appropriate governance role.
In what follows, the roles and business practices of the principal
financial intermediaries--notably auditors and bankers--areexamined
in detail. All, corporations, investors and intermediaries, are
found to have been infected by deep-seated conflicts of interest,
which add significant agency costs to the free-market system. The
imperfect, politicized role of the regulators is also explored,
with disappointing results. The entire system is seen to have been
compromised by a variety of bacteria that crept in, little by
little, over the years and were virtually invisible during the
bubble years.
These issues are now being addressed, in part by new regulation,
in part by prosecutions and class action lawsuits, and in part by
market forces responding to revelations of misconduct. But the
authors note that all of the market's professional
players--executives, investors, experts and intermediaries
themselves--carry fiduciary obligations to the shareholders,
clients, and investors whom they represent. More has to be done to
find ways for these fiduciaries to be held accountable for the
correct discharge of their duties.
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