After another incidence of “wilful blindness” (in the case of Rupert Murdoch and phone hacking) it’s time to change corporate law, writes Cormac Hollingsworth.
The report says Murdoch Snr:
“…turned a blind eye and exhibited wilful blindness to what was going on in his companies and publications.
“This culture, we consider, permeated from the top throughout the organisation and speaks volumes about the lack of effective corporate governance at News Corporation and News International.
“We conclude, therefore, that Rupert Murdoch is not a fit person to exercise the stewardship of a major international company.”
The phrase has important pedigree.
In the instructions to the jury in the Enron trial the judge cited wilful blindness, defined as:
“…if there is information that you could have know, and should have known, but somehow managed not to know, the law treats you as though you did know it.”
Back in the early noughties, it was thought Enron’s board was alone – but now it is becoming so common it is threatening our pensions, and our economy.
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For example, in March 2007, two of the largest dividend payers in the stock market were RBS. However, RBS told shareholders in March 2007 it wasn’t engaged in subprime lending, and yet we now know from the FSA report (pdf) that RBS had decided to ramp up its business in this area in mid-2006 and won American securitisation house of the at the end of the year.
No non-executive director has been charged while shareholders have been wiped out.
It’s easy to explain much of the financial crisis on this flaw. But it goes beyond the banking sector.
After its oil spill, BP’s chief executive walked, and has paid $32.2 billion, all charged to their shareholders wealth, the value of BP is still $40 billion less than before the spill, but no board member has been charged.
Timothy Noah’s new book, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It puts corporate pay as responsible for 30% of the rise in inequality in the US. But what about the unfairness of the fact that being on the board of a global company means your shareholders monetise your liability while you walk?
As Michael Sandel argues in his new book What Money Can’t Buy: The Moral Limits of Markets this is not only unfair, it corrupts social norms. And it is this corruption of norms that is costing our pensioners too much.
But if you’re not convinced by the cost of corporate board wilful blindess to shareholders, then how about taking a look at the benefits of board accountability to News Corp shareholders?
The BSkyB bid was cancelled on July 13th 2011; on July 1st 2011, News Corp’s share price was at $18, but with the cancellation it slumped to $13.5 over July 2011 as the market discounted the shares because the company wouldn’t benefit from BSkyB’s cashflow. However, as the spotlight turned on the Murdochs, the market started to price in the removal of them from the board, and the share price rallied. Yesterday it was almost $20.
Transparency is profitable.