Friday, March 26, 2010

Something Delaware This Way Comes!

Senator Ted Kaufman's righteous indignation is killing me.  I'm reminded of my all-time favorite South Park episode.  Wikipedia has an excellent's my not so excellent one: The kids want to stop the WallMart(sic) from opening in South Park.  They seek out the psycho-sage-current CEO who tells them they need to find the "heart" of the store and destroy it.  They find it.  The heart of WallMart is a mirror.

So, what's Ted Kaufman's mirror?  Corporate governance and Delaware corporations.  I've discussed corporate governance before.  To me, just about every investment decision comes down to principal-agent problems and governance.  In the end, people will do what's in their best interest.  You need to design structures that encourage people to solve these problems.  "Moral Hazard" has turned into the buzz phrase of the financial crisis, but there's nothing new here.

[This book on the subject, written by Robert Townsend, has great insights.  Although he was possibly the worst lecturer I've ever had in school, I loved the class.]

So, why do I blame Delaware?  Delaware won the original race the the bottom in corporate governance.  In order to attract businesses to the state, long ago Delaware set up a system that allowed managers to protect themselves from pesky shareholders.  One hundred or so years later, virtually every major corporation in the United States technically resides in Delaware.  Because you, the shareholder, can't really hurt them in Delaware.

No, I have no fix here...yet.  Logically, we, the people who own the corporations, would vote with our feet.  We'd stop owning companies with terrible governance.  But that doesn't happen.  In fact, our greed gets the best of us. 

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