Executive rewards and independent accountants
“Enron” has raised its head and reminded me of our recent discussion about conflicts of interest. This is not an obscure subject; it is there in front of us every day. It matters enormously because it lies at the center of a fault line running through our current corporate thinking.
I hear on all sides the claim that all business needs is highly motivated boards of directors rewarded hugely for achieving great results. Simplistic to the point of almost being wrong in every way.
Wrong first in that it implies huge personal rewards are the secret of achieving something as complex as long term growth and profitability in a company. In my experience the best managers are balanced – yes they live for the company, they care about it enormously but they care as much for their own homes, their families and their loved ones. They are balanced and they have to be so if they are going to go on managing groups day in and day out, keeping them, and motivating them. No quick fixes here. Nor do they look for “huge rewards”.
Wrong secondly because the prospect of huge rewards creates the conflict of interest right there with the CEO at the heart of the company. It is the CEO who pressures his accountant, his lawyer, his banker. If he can make this year’s numbers, beat the forecast by 1 cent, then the share price goes up, his options become valuable, he can cash out. Why should we expect him to be interested in anything else, why should we expect him to go straight – the incentive to fiddle the books is too great.
As for the auditors, of course they are collaborators. Everyone knows this, everyone has always known this. Self regulation, wrist slapping, even the breaking of one firm or another will do little. Auditors should be paid by central government, an extension of the tax collector – any other reporting line will create further conflicts, any other fix is a fudge.