Economics - Owners Victory ?

Background:

Gudovac is often focused on questions of owner-agent interests.  Management forget they are hired hands. Board of Directors forget who they represent. Owners forget to whom should accrue the profits of a Enterprise. 

The self-dealing and morally corrupt Manager became established as the norm sometime during the post WWII boom.  Gudovac isn't sure exactly when it became normal for Managers to loot their company at the expense of Owners. However, today's Managers engage in routine corruption with nary a thought. Today's CEOs spend owner's funds on personnel PR agents and make-up artists with nary a thought. Today's Boards backdate stock options which are easily in the money if Managers generate a mere 2% annual return. 

Gudovac is aware that Management corruption is as old as corporations. However, it is his observation that the boom years of 1982 - 2002 provided a climate for Managers corruption to flower.  Owners easily overlooked Management corruption as long as equity prices rose 12% CAGR. 

The Good Corporate Governance movement attempts to rein in the worst excesses of corrupt Managers to little effect. Private Equity has only made corruption worse. Owners need to be aware that Private Equity is run by Managers not by Owners.   Owners such as the all-powerful CALPERS are unable to restrain corrupt Managers .  Even the SEC enables Management corruption.  

Gudovac has no illusions about legislative remedies to redress the weakness of Owners.  Legislation is easily neutered. Gudovac believes the only method to eliminate management corruption is by forceful & continued effort by Owners. 

However, perhaps the Courts can be a force for Owners to realize it is possible to regain control of the companies they own.  

The latest ruling in the Southern District Court in New York may just be the catalyst Owners need. 

Return of Owner's Rights ?

Owners can't be certain that the Wicked Witch of management hubris is dead.

But, Federal Judge Rakoff's order clearly rejects the insider dealing and looting commonplace today.   Rakoff's pithy quote summarizes the situation in stark terms: 

Rakoff signals that he wants charges filed against everyone. He wants to understand why charges haven't been filed against the BoA lawyers who drafted the merger documents.  Rakoff recognizes that corporate lawyers are the great enablers of management looting. He realizes that lawyers believe they can hide behind attorney-client privilege. He makes it clear that lawyers are not immune from prosecution. 

Rakoff's order is a forceful condemnation of the SEC.  Readers should note that the SEC was asking for the Judge to approve a multi-million dollar fine. The SEC thought this would be a proforma approval process. Rakoff does not precisely accuse the SEC of collusion with BoA, but he comes close enough in this statement: 

Raskoff wants full disclosure from BoA. He wants the SEC to fill its adversarial role and prosecute the BoA Managers who 'lied' to their shareholders.  Owners should read the complete Order - it is worth the effort. 

For readers who wish to learn more about Raskoff, the wikipedia entry with list of notable cases is a good start.  Raskoff was the Judge for the WorldCom trial.  He is an expert on white collar crime. A perfect Judge to sit on the Southern District Court.  Raskof also teaches at Columbia Law School. 

Owners should heed Raskoff's call to arms. Owners should no longer accept self-serving corrupt managers. 

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Don't Get Massacred !

Gudovac1941

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