October 14, 2007
Greenspan on Corporate Governance
Posted by Lawrence Cunningham

Alan Greenspan's The Age of Turbulence contains an interesting chapter on corporate governance. Highlights:

1. The "most nettling" governance problem is the dramatic rise in the ratio of CEO pay to average employee pay.  Greenspan believes the solution rests with shareholders, for it is their "pockets that are being picked," and cannot be handled by regulation or tax policies.

2. "Accurate accounting is central to the functioning of free-market capitalism" yet accounting inevitably reposes considerable discretion in managers.  Greenspan applauds requiring expensing of stock options and requiring senior executives to personally certify financial statements.  He thinks the latter resolves the "very thorny issue" in accounting about whether vague principles or detailed rules are more effective (despite how using vague principles significantly increases managerial discretion).

3. "Independent" directors are not a good solution to governance challenges despite the longstanding habit of celebrating this construct.  [I am finishing a piece called Rediscovering Board Expertise for a chapter in Troy Paredes's new book elaborating this position and demonstrating the increasing use and evident effectiveness of accounting experts on boards, especially on audit commitees.]

I don't agree with all of Dr. Greenspan's points, natch, but the chapter is useful. This surprised me because I did not know that Greenspan was an expert on corporate governance.  But with similarly informed analysis of numerous other subjects (like trade, energy, education, population trends, etc.), the book shows Dr. Greenspan as a polymath.

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