Corporate Strategy and Corporate Corruption
Guest Blogger: Prof. Troy A. Paredes

I’d like to thank Jim Hamilton for allowing me to be a guest blogger. Jim’s blog is wonderful, and I appreciate the opportunity to contribute to it.

Let me dive in by questioning the post-Enron era reforms.

Fraud, looting, and disloyalty are problems, and such agency costs are worth addressing. That said, the singular attention aimed at going after wrongdoing has been misplaced. More emphasis needs to be placed on crafting corporate strategy instead of policing corporate corruption.

It is appropriate to stress the importance of rooting out fraud, looting, etc. But more attention needs to be paid to improving the strategic decision making of corporate actors who are well-intentioned and hard-working and who are acting in good faith. Sometimes corporate actors have bad information; sometimes they suffer from bounded rationality; and sometimes they just exercise poor judgment. Whatever the cause, bad business decisions and faulty execution can destroy much more firm value for many more companies than huge CEO pay packages or financial restatements.

At a minimum, top managers and boards need to get back to running their businesses full-time, even if this means that officers and directors will dedicate less time and attention to compliance. Improving corporate decision making, however, is about more than just redirecting the efforts of executives and directors from compliance to strategy. Corporate governance changes also could be adopted to promote the crafting and implementation of strategy. One fairly significant change would be to institutionalize dissent in firms by having companies appoint a formal devil’s advocate on the board. This suggestion responds to the concern that the CEO dominates corporate decision making too much and isn’t challenged enough. While boards are certainly more independent today than pre-Sarbanes-Oxley, my sense is that independent directors are focused primarily on compliance, not strategy. (By the way, even if the devil’s advocate exists to improve strategy, it may also improve compliance.) Others have floated another possibility – that is, to have more "friendly" directors who might be willing and able to dissent without the CEO taking it personally or feeling threatened (see, e.g., Adams & Ferreira, "A Theory of Friendly Boards" (forthcoming, Journal of Finance)). This suggestion is in direct tension with the push for more board independence.

As we focus on headlines and scandals – the most recent of which concern stock option backdating – we should not lose sight of the fact that the business of corporate America is business. Better business decisions benefit all corporate constituencies.