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How to Prevent Future Financial Crises

Friday, January 9th, 2009
Posted in Education by Joel Gross

How can America prevent future financial crises like the current one in the housing market, the dot com bust and the big crash in 1987?

The solution is simple, requires no government regulation and is virtually foolproof: Make company leaders personally financially liable to shareholders for the performance of their companies.

Corporate bureacrats will scream bloody murder at this suggestion, but true entrepreneurs and business leaders will appreciate the straightforward incentive to carefully manage risk.‚  Essentially, making corporate leadership personally financially liable will make even giant companies act as carefully as small business owners.‚  Our current situation is seriously flawed- corporate leaders make tens of millions of dollars a year if their company is successful, but lose nothing if it fails.‚  The result of this is that company leaders take enormous risks with shareholders money and when the stock goes up, the leaders become super rich but when it fails they lose nothing.

Misguided people will argue that establishing this policy would drive away all the business leaders who want to be CEO’s, board members and top executives.‚  However, simple logic reveals how ridiculous this thought is.‚  If I offered you a job as CEO of a major company and told you I would pay you $12.7 million a year (average Fortune 500 CEO compensation), would you say yes or no?‚  Any business leader who believed in his own abilities would instantly answer “Yes”, as would most anyone in the general population.

If you want to prevent future financial crises, contact your local representatives and tell them to push for making top executives and board members personally financially liable for their performance.‚  We have seen too many idiotic CEO’s drive their companies into the ground, then gently away with multi-million dollar golden parachutes.‚  Making these guys directly financially liable to shareholders for the success or failure of their company will enormously benefit the American economy by reducing ridiculous gambling.