Restoring Trust After the Bubble
Lawmakers are Addressing Only One Side of the Problem
By John Plender
The American model of capitalism went through a subtle metamorphosis during the stock market bubble of the 1990s. The growth of the stock option culture in the boardroom led to a shift in the balance of power in favour of managers at the expense of shareholders and the system acquired many of the characteristics of the “insider” models of continental Europe and Japan. At the same time the structure of boardroom incentives encouraged excessive risk-taking and a narrowly financial view of corporate performance. In their efforts to reregulate after the rash of corporate scandals and governance mishaps, lawmakers have failed to address the damage caused by distorted incentives, including pervasive rewards for failure. At a more fundamental level, it will be difficult to restore legitimacy in capital markets because the governance framework is ill-matched to an economy in which human capital increasingly holds the key to competitive advantage.