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the takeover threat, and gives it time to create defenses against takeovers, such as poison pills. It
also causes the stock price of the takeover target to rise in anticipation of an offer by the raider to
buy a controlling interest in the stock at a premium price.
If laws that protect incumbent management, like the Williams Act, were repealed, a corrupt
incumbent management would have less incentive to fake the financial statements to make them
look better than they really should look. It would also have the effect of reducing excessive top
management compensation, because corporate raiders would see the opportunity to launch a
takeover in order to cut excessive top management compensation; this would raise profits and
thus increase the stock price, giving the raider a capital gain over the price it paid for acquiring its
stock.
• Conceivably, the outside auditors should no longer be hired by the corporations that they
audit. As long as auditors are hired and fired by their audit clients, they cannot be truly
independent. They don‟t want to bite the hand that feeds them. Instead, it may be advisable to
increase the independence of auditors by having them hired by:
• The major stock exchanges, like the New York Stock Exchange or NASDAQ, to
audit listed companies. That would create competition between stock exchanges to attract
listed companies and investors in listed securities by assuring the integrity of reported
financial information. And companies would compete to be listed on an exchange known for
honest financial reporting.
• Insurance companies that sell directors and officers insurance against negligence to
corporations. These insurance companies would require auditors to be truly independent and
diligent, because that would reduce insurance claims for negligence by directors and
officers.
• If the auditors are not employed by the major stock exchanges or insurance companies, as
just suggested, there is an alternative method to protect auditors from being fired for standing up
to a corrupt top management. That method would be to require a shareholder resolution with a
75% majority in order to replace an independent audit firm.
• Boards of directors could be strengthened by requiring:
• Separate individuals to be CEO and chair of the board of directors. One person
should not hold both offices; that concentrates too much power in one individual.
• No more staggered terms of office for directors. That is a defense against
takeovers, and takeovers are a good way to replace top management that is serving its own
selfish interests rather than the interests of stockholders. All directors should stand for
election at the same time.
• Individual shareholders should nominate candidates for directorships—no more
voting for or against one official slate of directors.
• Cumulative voting for election of directors; that would allow any stockholder to
use all of his or her director votes for or against any single director.
It’s Not Just the Private Sector
In viewing financial improprieties, we should understand that the problems go beyond corporations.
There are serious problems in the public sector as well as the private sector.
For example, here are some financial issues relating to our federal government.