The financial page; shredders through the ages.(The Talk of the Town)

For a while, the Central Pacific Railroad looked like a sure thing. Started in 1861 by four Sacramento merchants known as the Big Four -- one of them was Leland Stanford, the founder of Stanford University -- the company owned the right to build the western end of the transcontinental railroad. The Central Pacific was blessed with immense land grants, taxpayer subsidies, and an apparent monopoly on rail traffic into California. In anticipation of big profits, outside investors, many of them British, snapped up the company's stocks and bonds. But the big profits never reached England. Instead, they found their way to the pockets of the Big Four, who had set up an outside construction firm that just happened to win the contract to build the railroad. The construction company vastly overcharged for its services, so that by the time the railroad was built the Big Four had taken in some fifty million dollars in overcharges alone. When investigators came calling, they found that the construction company's records had been -- wouldn't you know it -- destroyed.

The paper shredder has come a long way in the past hundred and thirty years, but little else has changed. The collapse of Enron looks a lot like a reprise of the Central Pacific swindle. In both cases, company executives took better care of themselves than of their shareholders or their creditors. Enron's top executives set up murky outside partnerships, and though these may not have been quite so egregious as the Big Four's, the result has been pretty much the same.

The Central Pacific and Enron are classic examples of what's known as the principal-agent problem -- the problem being that corporations tend not to be run by the people who own them. Shareholders (the principals) can never be sure what a company's managers (their agents) are up to with their money -- the managers may be paying themselves too much, lying about earnings, or channelling funds to their own outside firms. In theory, there are a few remedies for the agency problem. One is the granting of stock options, which are designed, in part, to align the interests of managers and owners. If the bosses have an ownership stake, the thinking goes, their own best interest dovetails with that of their shareholders. But it rarely works out that way. Most stockoption plans just fatten executives' wallets without protecting shareholders at all.

Another remedy is formal regulation: requiring companies to issue quarterly reports, undergo audits, disclose important news, and so forth. Obviously, companies can't disclose everything, but in the stock market the general rule has been: the more information, the better. For the most part, American corporations now have to reveal more about themselves, more often, than ever before. Yet corporate blowups and scandals have not gone away. If anything, they seem to be on the rise. Waste ...