It is bizarre that there was never any mention of two key reasons for boards so often being rubber stamps: (i) anti-takeover statutes and regulations that eviscerated the market for corporate control that was beginning to put pressure on corporate management in the 1980's; and (ii) the expense of proxy solicitations that comply with the federal securities laws and regulations.

Were "Your Chicks For Free," too? John

Terrific discussion. There is something about the Blogginheads format -- in which the discussants don't see each other but are having, in essence, an ordinary telephone conversation -- that encourages free and frank expression. It is much more revealing than a conventional first-person interview for instance or even a call-in format like on C-Span. Anyway this was a remarkable "insider" exchange between two well-informed students of Wall St. and a real education for the eaves-dropping audience. It deserves to be widely listened to in the years ahead -- maybe even linked to in the forward to Gillespie's book or in targeted e-mailings promoting that book. Thanks guys very much.

This seemed very worthwhile.

I enjoyed this one. It's a terrific topic. If you go way back to Adam Smith, corporations were strange and generally unsuccessful. A lot of them were really just scams. Most businesses were privately owned -- sole proprietorships and private partnerships. In "The Wealth of Nations" Smith doubted that traded companies could be successful because of what's now called the principal-agent problem:

The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand anything of the business of the company, and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend as the directors think proper to make to them. This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. Such companies, therefore, commonly draw to themselves much greater stocks than any private copartnery can boast of

Two points of interest. While Bill and John talked about board capture in the context of the recent financial implosion, the best modern example of this phenomenon--and how more active investors can fight it--comes from before the boom, from the case of Michael Eisner at Disney. Widely heralded as a genius, he turned out to be a megalomaniac who insisted on having the board in his control and routinely purged both the board and the top management to avoid having anyone to challenge him. As a result, he ran out of competent people to run the company and Disney tanked. It was sustained protest by investors, including institutional investors, which finally kicked him out. Read Disney War, by the always brilliant Jim Stewart. Secondly, just before I left the States, I participated in a conference on this exact topic. I think there are some conference minutes due out soon. If they go up digitally, I will post to this thread.

I liked Cohan's suggestion about abolishing D & O insurance, but the implication of the suggestion is that the insurance is underpriced. This is the implication, in an attenuated form, even if the board members do not pay for their own D & O insurance but get the shareholders to pick up the tab. In this case, it sounds like the legal system keeps the price of the insurance low, that the risk of the insurance company ever having to make a big payout on D & O is in fact quite low. So the liability incurred by board members is nothing like the liability incurred by doctors. This is also the conclusion to be drawn more generally from the credit default swap market, that the swaps were too cheap. What this suggests to me is that an awful lot of insurance is underpriced, that people don't know how to estimate insurance risk any more than they know how to price anything else. That's why health insurance will have to be regulated. In a competitive market, it will be too cheap, the insurers will deny more care than even reasonable citizens who understand that resources are

Quoting ledocs: I preferred Cohan's point of view in his earlier bhtv appearance, that the investment banks should never have been allowed to become public corporations. They functioned much better as private partnerships. I still think it's a great mystery why investment bankers get paid so much. No one I've ever spoken to about this, who was not himself an investment banker (and not Cohan himself, who was an investment banker), seems to have a clue about this. Put another way, they don't seem to be bearing risk commensurate with the rewards, and that was true even in the private partnership days.

Another book rec: The Accidental Investment Banker, by Jonathan Knee. He made the same point that Cohan made (it was better in the private partnership days), but years before the crash. Also, it's a great read.

Thanks, Preppie. Note taken.

Quoting PreppyMcPrepperson: Two points of interest. While Bill and John talked about board capture in the context of the recent financial implosion, the best modern example of this phenomenon--and how more active investors can fight it--comes from before the boom, from the case of Michael Eisner at Disney. Widely heralded as a genius, he turned out to be a megalomaniac who insisted on having the board in his control and routinely purged both the board and the top management to avoid having anyone to challenge him. As a result, he ran out of competent people to run the company and Disney tanked. It was sustained protest by investors, including institutional investors, which finally kicked him out. Read Disney War, by the always brilliant Jim Stewart.

Secondly, just before I left the States, I participated in a conference on this exact topic. I think there are some conference minutes due out soon. If they go up digitally, I will post to this thread.

Thanks for the book recommendation - I hadn't heard of it until now. Now, I've ordered it! Looking forward to delving in.