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OpEdNews Op Eds    H2'ed 5/16/10

Skin in the Game

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Follow Me on Twitter     Message Paul Cohen
Capitalism seems to work reasonably well when it operates on a small scale. A young entrepreneur opens a small store or factory, works hard and thinks hard about how to balance the problem of attracting customers while still making enough profit to stay in business and maybe even grow. Maybe the business is successful, making the entrepreneur prosperous and able to provide good jobs for employees, but often the business fails.

It is said that small businesses provide most of our new jobs, but it is also true that small businesses provide most of our job losses. There are no guarantees for the small business owner and failure is commonplace.

The situation is different for the corporate executive. Whether or not the corporation prospers, the executive is rewarded handsomely. This is surely one of the symptoms of an economic system that has gone awry and that something needs to be fixed. The problem is that unlike the small entrepreneur, the corporate executive has no real skin in the game.

We have recently seen some truly awful examples of this phenomena. For example, the executives of Goldman Sacks and of other big banks led their firms into a disaster of international significance. But instead of being punished for their dismal lack of good judgment they are rewarded with promotions and bonuses, not to mention a promise of golden parachutes beyond the dreams of ordinary mortals.

Today we are in the midst of another example in the Gulf of Mexico. This is not the first time that BP has been involved in an oil rig failure and it will probably not be the last; but what are the chances that a BP executive will be held personally responsible in the matter. What about more than one?

There is a terrible moral hazard in operation around corporations that allows their executives to take great risks that damage the environment and innocent bystanders but suffer little or no personal risk. This is not just wrong in an abstract sense of what is just, it is foolish and counterproductive.

The corporate structure was invented for the purpose of limiting personal risk of capital. It is healthy in the case of the small business that there is this way of limiting personal financial risk. However it is not in the public interest that this limitation of risk should keep the public from being protected from risk to the environment and to the economy.

A small step in this direction could be made when a corporation interacts with the government. Individuals should be made personally responsible for egregious offenses like the oil spill in the Gulf. I would suggest that current senior executives, board members and even consultants involved in this event be designated as "toxic" and that in the future any corporation with a "toxic" executive, board member or consultant be denied drilling permits.

This concept could be extended to banks and other corporations that have required bailouts, preventing the extension of government contracts, loans, loan guarantees or other government largess if they hire toxic employees for senior positions. The idea is to make these executives more responsible for what they do, to make it clear that their future employment in their industry is at stake. The idea is to reduce the moral hazard and to push these executives to behave with more prudence. They don't even have to go to prison.

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Attended college thanks to the generous state support of education in 1960's America. Earned a Ph.D. in mathematics at the University of Illinois followed by post doctoral research positions at the Institute for Advanced Study in Princeton. (more...)

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