Featured Research

from universities, journals, and other organizations

Flawed Corporate Watchdog Methods Helped Fuel Economic Crisis, Expert Says

Date:
October 10, 2008
Source:
University of Illinois at Urbana-Champaign
Summary:
Archaic corporate governing systems that failed to ferret out risky business deals helped stoke the nation's deepest financial meltdown since the Great Depression, a University of Illinois business law expert says.

Archaic corporate governing systems that failed to ferret out risky business deals helped stoke the nation’s deepest financial meltdown since the Great Depression, a University of Illinois business law expert says.

Law professor Larry E. Ribstein argues the traditional, corporate-run firms that dominate the nation’s Fortune 500 are ill equipped to prevent dicey management decisions that have choked credit markets, sparking a massive, taxpayer-financed Wall Street bailout.

But he says those problems could be averted by shifting to the partnership-style structure of hedge funds, private equity firms and other “uncorporate” businesses, which have better weathered the crisis through controls that include more closely tying managers’ compensation to company financial fortunes.

“There’s nothing like the fear that you yourself are going to lose money,” said Ribstein, an authority on corporate and partnership law. “With corporations, everyone has long known that the oversight of managers is imperfect and it’s always going to be.”

Shareholders in traditional corporations have limited options to monitor powerful managers, said Ribstein, who wrote an article titled “Partnership Governance of Large Firms” that will appear in the University of Chicago Law Review. Even those scant alternatives, such as electing directors to oversee company operations, offer little direct control, he says.

“In corporations, boards of directors are supposed to be independent, which means that they don’t really have strong incentives to pay a lot of attention to what’s going on,” Ribstein said. “They worry more about making some embarrassing mistake than trying to identify the fundamental problems that need to be fixed.”

In contrast, he says, hedge funds and other “uncorporations” rely on incentives and discipline that essentially make managers partners in the operation and less likely to take needless risks that could ultimately cost both them and owners.

As a result, those partnership-based firms ducked miscalculations about the real estate market that sank traditional corporations such as Lehman Brothers and forced a $700 billion government bailout of others, Ribstein said.

He says the relative success of “uncorporate” firms during the nation’s financial crisis earned a de facto government endorsement recently when the Federal Reserve relaxed restrictions prohibiting private equity firms from investing in banks.

“It was a desperation move by the Fed that was consistent with current economics, where the better governed firms are the ones with money,” Ribstein said. “Whatever prejudice there was against private equity firms is diminishing. We can’t afford to have prejudice against anyone who has money today.”

Ribstein hopes the recent failure of corporate governing systems resurrects a wake-up call for corporate America that was overlooked when the aftermath of Enron’s collapse veered toward criminal charges rather than an investigation of internal problems.

“The Enron board was actually very sophisticated, but it turns out they didn’t really understand what was happening in the company,” Ribstein said. “And I think that we’ll find that’s true with the boards of the companies that are going bust today.”

“There are now governance mechanisms demonstrated by hedge funds, private equity firms and others that are actually superior to the corporate form,” he said. “And it’s not just a matter of superiority. It’s apparent that traditional corporate governance mechanisms just can’t keep up with the modern world of finance.”


Story Source:

The above story is based on materials provided by University of Illinois at Urbana-Champaign. Note: Materials may be edited for content and length.


Cite This Page:

University of Illinois at Urbana-Champaign. "Flawed Corporate Watchdog Methods Helped Fuel Economic Crisis, Expert Says." ScienceDaily. ScienceDaily, 10 October 2008. <www.sciencedaily.com/releases/2008/10/081009144329.htm>.
University of Illinois at Urbana-Champaign. (2008, October 10). Flawed Corporate Watchdog Methods Helped Fuel Economic Crisis, Expert Says. ScienceDaily. Retrieved October 21, 2014 from www.sciencedaily.com/releases/2008/10/081009144329.htm
University of Illinois at Urbana-Champaign. "Flawed Corporate Watchdog Methods Helped Fuel Economic Crisis, Expert Says." ScienceDaily. www.sciencedaily.com/releases/2008/10/081009144329.htm (accessed October 21, 2014).

Share This



More Science & Society News

Tuesday, October 21, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Traditional Farming Methods Gaining Ground in Mali

Traditional Farming Methods Gaining Ground in Mali

AFP (Oct. 20, 2014) He is leading a one man agricultural revolution in Mali - Oumar Diatabe uses traditional farming methods to get the most out of his land and is teaching others across the country how to do the same. Duration: 01:44 Video provided by AFP
Powered by NewsLook.com
Your Birth Season Might Determine Your Temperament

Your Birth Season Might Determine Your Temperament

Newsy (Oct. 20, 2014) A new study says the season you're born in can determine your temperament — and one season has a surprising outcome. Video provided by Newsy
Powered by NewsLook.com
How Nigeria Beat Its Ebola Outbreak

How Nigeria Beat Its Ebola Outbreak

Newsy (Oct. 20, 2014) The World Health Organization has declared Nigeria free of Ebola. Health experts credit a bit of luck and the government's initial response. Video provided by Newsy
Powered by NewsLook.com
Ebola Worries End for Dozens on U.S. Watch Lists

Ebola Worries End for Dozens on U.S. Watch Lists

Reuters - US Online Video (Oct. 20, 2014) Forty-three people who had contact with Thomas Eric Duncan, the first person diagnosed with Ebola in the U.S., were cleared overnight of twice-daily monitoring after 21 days of showing no symptoms. Rough Cut (no reporter narration). Video provided by Reuters
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins