The problem with Wall Street is that there’s no accountability – from top to bottom. It’s not just the nameless, faceless Millennials building a huge bubble in the stock market – poised to wipe out the 401(k)’s of older Americans – the lack of accountability goes all the way to the top.

A recent article in Axios highlighted recent examples of corporate bad behavior and the lack of accountability at the top.

Here’s a sample:

• Goldman Sachs paid more than $5 billion in fines for stealing billions from the people of Malaysia. Goldman Sachs pleaded guilty to bribing Malaysian officials to the tune of $1.6 billion to get deal mandates in the bond and stock markets. They were prosecuted under the Foreign Corrupt Practices Act. It gets worse. The $1.6 billion in bribes was not paid from Goldman’s funds. Instead, it was skimmed off of bond-issue proceeds that belonged to the Malaysian people.
• Wells Fargo paid a $3 billion fine for taking advantage of millions of customers by opening accounts in their names that they weren’t even aware of.
• JPMorgan, which lost billions in the “London whale” trading scandal, paid $920 million in fines to settle charges that it manipulated futures markets in Chicago.
• Citigroup, which has been considered “too big to manage” since at least the financial crisis, was fined $400 million for its management’s failure to effectively stay on top of its operations.
• Morgan Stanley paid a $60 million fine for failing to protect its customers’ data.

Based on these examples of corporate misbehavior, you would think a lot of executives would be going to jail. Sadly, in most cases, nobody’s going to jail. That’s because there’s no accountability. They know they can get away with it because just like those in government who abuse their power, the system will help them get away with it.

You’ve heard of the term “too big to fail?” That’s why these Wall Street banks get away with bad behavior.

Just look at the banks bailed out by the government during the last Financial Crisis:

• Bear Stearns.
• AIG.
• Goldman Sachs.
• Bank of America.

What do the CEOs of big Wall Street firms have to worry about if they know Uncle Sam’s there to break their fall?

Do you know who ultimately pays the price for corporate sins:  the taxpayers and investors.

Bloat and lack of accountability are why large institutional investors like university endowments and ultra-wealthy individual investors shun large corporations for smaller firms in the private markets.

They prefer investing in projects and people they’re familiar and comfortable with – not large public corporations run by nameless, faceless individuals with zero accountability or direction.

The problem with large firms is that because of their size and bloat, warts can easily be hidden, and as the recent examples demonstrate and as history has proven time and again, the corporate maze allows unscrupulous CEOs, CFOs, and accountants to fudge numbers to fool investors, employees and shareholders.

The result is a picture being painted by executives that’s rosier than reality – in the name of self-gain and self-preservation. Reality can often get lost in bloat and dishonest and immoral managers know this and can often hide not only mismanagement but outright theft and fraud for long periods before getting exposed.

Can you blame institutions and ultra-wealthy investors for avoiding Wall Street?

With private markets, these sophisticated investors have access to management to hold them accountable. Moreover, because of the long investment windows of private investments, each investor is held accountable to other investors.

No investor or group of investors can wreck the business for everyone else because of the long lockup periods and restrictions on transfer. Anyone attempting to cash out prematurely will be called out by their fellow investors.

Sophisticated investors prefer smaller, private companies not only for superior returns but also for easily accessible management.

• With management transparency, an investor can more easily align their investment strategies and objectives with that of the companies they invest in.
• They’re no longer investing in a soulless corporation.
• They’re able to invest in people, strategies, philosophies, and even trends.

Why do sophisticated investors shun large corporations for small, private companies?

Because they succeed – consistently delivering above-market risk-adjusted returns.

Why do they succeed?

• Because management is held accountable – often with compensation tied to performance and not whether their investors make or lose money. You won’t see CEOs receiving millions in bonuses even as their investors lose money here.
• Transparency, accessibility, and accountability are reasons sophisticated investors are drawn to private companies and avoid the large corporate ones.