Obama to stress test bank executives and their compensation


The American system of corporate governance is deeply flawed. The theory is that a company's board of directors should keep an eye on management on behalf of shareholders. If the management boosts the value of the firm, directors reward management. If the company gets in trouble, the board determines whether management can fix the problem -- and if not, replaces it.

But that theory is just a legal fantasy. In most companies, the board is in management's pocket. So if management has most of its personal wealth tied up in the company stock, chances are good that it will do things to boost the value of the stock. But if management gets most of its money from corporate cash, it will shape the company's financial results so it gets the biggest possible bonus each year.