Bernie Munk starts with the corporate frauds of Enron and Worldcom, noting that option based compensation created powerful incentives to manage earnings and ultimately enter into massive accounting fraud. This was aided and abetted by an uninformed and compliant board of directors. Munk notes, Too often, however, directors are celebrants, not investigators, cheerleaders as opposed to watchdogs.
Before the ink was dry on comments about these scandals, the financial crisis began in 2007. Far from being a random macroeconomic shock, Munk argues persuasively that it was a logical extension of the same type of behavior that produced Enron. Excesses, warped incentives and bad governance was everywhere in the financial services industry, and given that the problems affected the largest banks in the world, the ultimate impact threatened the entire system
The book is compelling throughout, but Chapter 6 is worth the price of admission on its own. In it the basic agency problem that conflicts management is discussed, and why option based compensation isnt the solution many hoped it would be. To many readers the idea of risk adjusted earnings will be a revelation, but it lies at the heart of why the system is currently broken.
Readers looking for another moralistic tome bemoaning the evils of a greedy society should look elsewhere. Munk brings a seasoned economists discipline to dissect bad incentives and recommend change. Chapter 14 provides a healthy agenda of what could be done to address these business and governance issues. None of these changes will be easy as they challenge decades of corporate practice and legal structures, but if our capitalist society has a chance of solving its problems itself rather than wait for some ineffectual government meddling this is an agenda that should be embraced.