Dear Nell:

Which fireworks are you referring to? If it's the trials of Bernie, Kenny Boy, Sam, and Martha, I fear the suspense will be somewhat attenuated by the time we get there. If you're talking about the Fourth, I will be beating a strategic retreat from Manhattan to watch them from my command bunker in Jersey. How about you?

On the subject of business corruption, your revolutionary ardor certainly gave way to revolutionary ennui pretty fast. By the last graf you were noting that Enron met all the "good-governance" standards and, heck, maybe we can't prevent corporate crooks with a bunch of new rules. Maybe we just have to try to be more skeptical next time. Oh yeah, and throw the bad guys in jail this time.

That's where I started! (Since everything leads to ennui anyway, why not just begin there?)

Your father was a Great American, destined to be remembered for two words that hang over the heads of TV programmers like a permanent cloud. But he was right about the other thing, too. It pays to be trustworthy because then people will trust you. Sometimes it's takes a while for the sequel to come around, though.

Funny how we've managed to conduct an entire dialogue about management without mentioning Jack Welch. His name has been dragged through the muck lately because of his philandering with a Harvard Business Review editor and also because of his practice of "managing earnings" at GE. Nobody can quite figure out whether this was a very bad thing or a very good one (the earnings part).

I think the point is that, over many years, investors learned to have confidence in Jack and ceded him discretion about when, whether, and how to realize on accounting statements the results of GE's business empire. Jack's critics today simply have no answer to the observation that the market was willing and delighted to pay a premium because Jack "managed" earnings. Another CEO who tried the same thing might find investors dropping his stock like a second-hand syringe and running for the hills. As you say, it's all about trust.

On another Web site that begins with "S," Joseph Stiglitz, the Nobel economist and former Clinton employee, gave an interview blaming today's whole corporate mess on stock options that rewarded CEOs for saying and doing anything that would quickly move the stock higher.

This strikes me as akin to blaming the gold medal for Olympic cheating—in fact, worse, since even an Olympic cheater still has to get down the mountain in a record time—i.e., there's an objective measure in there somewhere.

Stock prices behave as investors make them behave. The CEO can be a showman, but he can't dictate how investors will respond. In theory, if investors are smart and use good judgment, then stock options are the perfect incentive. They reward executives for delivering exactly what investors want, striking the right balance between risk and opportunity, between short-term and long-term. All through the 1990s, I made fun of CEOs being reduced to richly-paid dray mules, plodding after a carrot held two inches from their noses.

Ok, so I oversimplify. But my point is the market is supposed to know what it's doing. We've drunk deep from the theory that it processes all available information, but we never stopped to think that some of that information has nothing to do with business fundamentals. Keynes once worried about markets becoming too liquid and transaction costs becoming too low. If it's easy and painless to get in and out of investments, people will begin to invest on whim and treat it like a game—while others will try to make money by anticipating and encouraging whims and mood swings of the mass of investors.

My question about the size of CEO compensation packages is: "Does $100 million really have more incentive effect than $10 million?" I don't think so. Obviously something else was going on to make CEO packages so big, which I think was related to the power of CEO celebrity itself to move the share price. Presumably we've gotten that out of our system now.

By the way, on your point about why institutions index their investment portfolios—i.e., to keep transactions costs down and so they can have a permanent relationship with corporate management and "provide some real oversight." Uh-huh.  I'm sure many WorldCom, Enron, etc. shareholders would like to thank you for the great job the institutional investors have been doing.

I end where you end. This problem, and every other, fixes itself when investors, having had their fingers burned, become more rigorously skeptical.

Have a fun Fourth! Avoid all terrorists!