Anat Admati on Internal Versus External Corporate Governance

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Anat Admati on Internal Versus External Corporate Governance

Business academics love to talk about internal governance – aligning managers’ interests with those of shareholders and the corporation.

Anat Admati on Internal Versus External Corporate Governance
Anat Admati

But rarely do you see a business professor focus on external governance – public law enforcement – also known as corporate crime enforcement.

Anat Admati is a Professor at the Stanford Graduate School of Business. She is the co-author of a new paper titled – Why “Good” Corporate Governance is Not Always Good.

  When you say good corporate governance is not always good, what do you mean?

“In the title, the first good is in quotation marks – because it’s not good. Corporate law, which is all about Delaware law, fiduciary duties – that kind of thing,” Admati told Corporate Crime Reporter in an interview last month. “Even when they want to do good and do well, it’s ignoring where society’s problems have to be solved, which is at the societal level of democracy. That’s where the government creates and enforces rules. If we did that, we wouldn’t need to beg CEOs to do it.”

“The corporations consider good governance as aligning the interests of the shareholders with the interests of the managers of the corporations. That can actually undermine external enforcement. And this has to do with the question of whether you enforce the law against the corporations or against the executives or both.” 

“In banking, we have very bad rules. But enforcement is also an issue.”

Isn’t there actual good corporate governance that align the corporation and executives with the needs of society?

“The examples are few and far between. They often depend on heroic CEOs. Ralph Nader has written a book about this recently. (The Rebellious CEOs: 12 Leaders Who Did it Right, Melville House, 2024). You occasionally get the CEO who has broader thinking. And they think of various ways in which long term shareholder values are aligned with societal values.”

“In the paper, we are saying that if you assume that in many cases, the laws, the rules, are badly written or poorly or ineffectively enforced, the corporations will see misconduct as profitable and the managers will create a compensation system that would at last shield the managers from the consequences of misconduct.”

Why is it then that the focus in academia is on internal compliance as opposed to external compliance?

“At the Stanford Business School, we have no teaching about the law. We are ignorant of it. It’s – don’t look over there. Maybe our donors don’t like it. Universities and businesses schools included, are impacted implicitly at least, by what their community of supporters and alums want. And they don’t want to look there. They assume that everybody is good, that enforcement is good enough.” 

“They don’t go there. And the field of economics doesn’t go there. If you look at the National Bureau of Economic Research (NBER), which is the premiere place where economists do their research, they have a section called the Economics of Crime. If you look there, you will find only violent crime. You will not find any corporate crime whatsoever. It’s as if it’s not there. They ignore it. Economists ignore it, business schools ignore it, economics departments ignore it. It’s not a subject that the field of economics and business education looks at.”

“I have tenure here. But I’m one of the only ones who would bring a whistleblower to class and a judge to class to talk about corporate justice and injustice.”

“It’s not just that economists don’t look at criminal law. They don’t look at bankruptcy law. They don’t look at any law. They don’t look at the political economy of the law at all.”

Since the banking crisis, what moved you to start this process of teaching these courses in business, law and democracy?

“I just dug deeper into it. I was not aware that so many of the outcomes were determined by politics. For the last six years, I’ve been running an initiative called Corporations and Society.”

“We bring speakers here that usually are not brought by the speaker series. They primarily bring CEOs. We bring the investigative journalists, the judges to talk about corruption. I had Bill Browder here to talk about the Magnitsky Act and the need for the rule of law.” 

“I’m teaching a course in the winter called Power and Institutions in the Global Economy. It will look at democracies and autocracies interacting, about money laundering. I am now deeply into transnational corruption issues.” 

As the Justice Department moves away from corporate criminal prosecutions, they are telling corporations – investigate yourselves, come to us with the results of the investigation and we will be lenient on you. The corporation might at the same time throw a lower level executive under the bus. But we will be lenient on the corporation and cut you in on one of the deferred or non prosecution agreements.

The corporations say – we come forward with our own wrongdoing, we blow the whistle on ourselves, we pay the multi million dollar fine and we come clean. In return, we don’t have to plead guilty. What’s wrong with that?

“The question is – does it deter? If they do it and it’s worth their while, they will do it again and it will be worth it again. They continue to control the information. The top people who benefit most from the crime get away with it – almost every time. Has any top level executive been thrown under the bus in this process? No.”

“It doesn’t work. My thinking has evolved after many conversations with Judge Jed Rakoff. He’s my mentor on these issues of corporate justice. There has to be a way to go after executives for willful blindness.”

“Purdue is a clear example of how it doesn’t work. The deal was cut in 2007 and the corporations continued to cause massive opioid harm for twelve more years. The amount of harm is in the trillions of dollars. Now they are in bankruptcy.”

The corporation nixed the prosecution in 2006. That prosecution could have saved hundreds of thousands of lives. It’s all documented by Barry Maier of the New York Times.

“I write about something similar in my book – The Banker’s New Clothes. In the chapter titled – Above the Law, I discuss all of these settlements. In particular we discuss the 2013 case against JP Morgan Chase. It was a $13 billion settlement in which they buried a case brought by a whistleblower. JP Morgan Chase by paying a lot of money buried that case. You might say this works. But I don’t think so. Crime pays.”

“You asked me how I got into all of this. In 2017, I was asked to testify in California on the Wells Fargo account opening case. At that point, I didn’t understand much about law enforcement because I was at the time looking at the writing of laws. And this was about law enforcement. What laws did Wells Fargo break? What happened with this account opening scandal that was so much in the news?”

“I was asked to testify before the banking committees of the legislature. It was the first time I testified before a state body. At the same time, I was hosting Judge Jed Rakoff here at Stanford for a whole week. I spent a lot of time with him. That’s how I got this bug about law enforcement.”

“What did Wells Fargo do? Their low level employees were under enormous pressure. They were put in this impossible position of opening eight accounts per customer. The mantra was – eight is great. They either talked people into opening accounts they didn’t need or they just opened the accounts for them when they felt they were under pressure.” 

“The employees were in a tough position where they could be fired either for opening the account fraudulently or for not opening enough accounts. The problem was covered in the Los Angeles Times back in 2013, which wrote about the sales culture at Wells Fargo. At that point, the board of directors knew full well that they were giving incentives to employees to mistreat customers – to open accounts they don’t need. But the bank didn’t do anything about it because they wanted to present to investors that they had all of these cross selling of accounts.”

“It was a corporate crime that people could understand. Many of these financial crimes are complicated and hard to understand. But people understood this crime – opening accounts that people didn’t need or want.”

“Congress beats up on the CEO. The CEO eventually leaves. The corporation investigated itself. They hired Shearman & Sterling to produce a report to the independent directors of Wells Fargo. And I was called to testify about this report. It was a 110-page report submitted to the independent directors of Wells Fargo Bank.” 

“The report says – we are Shearman & Sterling. We investigated this case on behalf of the independent board. We read thousands of documents, we interviewed hundreds of people, we employed other consultants. I’m reading this report saying – how many billable hours? How much did this report cost? And to what end? I couldn’t believe it.”

Did the Shearman & Sterling report exonerate the executives?

“Here’s my favorite quote from the report. The CEO, John Stumpf, and the executives and the board – “had a disinclination to see the problem as systemic.” Stumpf was an optimistic guy. He wanted to believe it was just a few bad apples. It wasn’t just a few bad apples. It’s a no brainer to understand that if you give people incentives to open accounts, they are going to try and respond to those incentives.” 

“The executives didn’t ask the obvious questions – why are these low level people doing this? What’s in it for them? Obviously, we gave them incentives. But they didn’t want to look. The problem is willful blindness. The problem is – you are making money, don’t tell me how.”

What are you doing now to shed light on the problem?

“I’m organizing a conference on capitalism and democracy in April. It’s called Global Capitalism, Trust and Accountability. There will be a website soon. There will be a panel on corporate crime. It will be about basic law enforcement.” 

“I will bring in legal experts. And a big question is – will my colleagues from the business school engage with them? The problem in academia is the silos. The faculty don’t want to talk about it. The faculty rarely engage on these issues. So, instead I’ve been working with undergraduate students and MBA students.” 

“There is a big blind spot in business and economics education about the law. And in political science, there is a big blind spot about the role of corporations.”

“There was a previous conference in 2020 called Corporations and Democracy. You can watch it online.”

[For the complete q/a format Interview with Anat Admati, 38 Corporate Crime Reporter 43(13), November 4 , 2024, print edition only]

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