Wharton: Tying Exec Comp to Shareholder Value Lead to Meltdown

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  1

  ENetArch

  09/25/08 | Report as spam

  RE: Wharton: Tying Exec Comp to Shareholder Value Lead to Meltdown

  The biggest thing that everyone seems to be forgetting is that when the middle class can't pay for goods and services, everything falls apart. We experienced this in 2001 - Dot Com Bubble Burst & 150k Layoffs from GM, Ford and Chrysler, then 2003 GM, Ford and Chrysler sold their Leasing Debit, then 2005/6 people can't buy houses, 2007 people can't pay their mortgages, 2008 Large Banks with huge debt loads are failing, and next is the Stock Market - these same people will eventually start pulling their money out in order to just survive.
  
  So what is 250 million times 10k - say that's the average amount that people have invested in the stock market. What would a 10 to 20% sell off cause?

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  2

  thommyguns

  09/25/08 | Report as spam

  RE: Wharton: Tying Exec Comp to Shareholder Value Lead to Meltdown

  Do you think the analysis - that tying executive performance to shareholder value - goes far enough? Any time you focus on the value of return for one specific group (i.e. 'the shareholder') over the other stakeholders of a company you run the risk of negatively affecting the broader economy for the benefit of a few. Yes, executives received ample, and sometimes spectacularly excessive, compensation for what have become highly visible failures, but this was only possible because boards, and shareholders, allowed it. Seems that this is becoming the modern version of a witch hunt, with executives on the dunking stool. In a witch hunt everyone is usually a little bit guilty, but fear and uncertainty allow us to cast our guilt on others.

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  3

  ming888

  09/26/08 | Report as spam

  RE: Wharton: Tying Exec Comp to Shareholder Value Lead to Meltdown

  In my view, this article correctly attributes the current financial crisis to the human capital of Wall Street???s institutions, in particular executive management and the Board of Directors. Agency risk - defined (loosely) as the potential financial consequences to an organisation of a mis-alignment of managerial and owner/investor interests - has been around since the inception of corporations.
  
  One possible solution to the separation of ownership from control could be an executive remuneration structure that incentivises and rewards only behaviours that generate sustainable improvement in a company???s real economic value over time, as measured by consistent improvement in annual earnings, net cashflows, liquidity and solvency ratios, the overall health of the balance sheet, funding costs (of debt and equity capital), and importantly, clear evidence of consistent compliance with relevant legislation and regulation including the Sarbanes-Oxley Act, with particular emphasis on those provisions mandating the establishment of a robust and rigorous corporate system of risk management and internal controls. Under this framework, it is suggested that the entire reward-at-risk component of executive remuneration could be directly pegged to achievement of composite targets based on the above financial and compliance measures, rather than being linked in part (as is the case currently), to short, medium and longer term improvements in the market share price.
  
  My point is two-fold:
  
  1) The market share price, particularly in the short to medium term, is not necessarily an efficient indicator of real corporate performance or value. Whilst there is little doubt that current and forecast economic fundamentals will find their way into price, share value in the market place can also be influenced by white noise, including potentially incorrect information generated by spin, rumour and the perceived implications of actions undertaken by market participants (shorting ??? whether justified or not, is a case in point). Longer term movements in share price could also conceivably be affected where this noise is persistent and sustained in nature, hence creating a self-fulfilling prophecy. Obviously, in these environments, factoring market share price into the remuneration equation could result in significant over or under-compensation of executive performance, and potentially motivate future behaviour that diverges from owner/investor interests.
  
  2) Organisational values and culture are created and fostered by executive management (in particular the Chief Executive) and the Board of Directors. A remuneration structure that encourages real value-adding behaviours from the leadership will inevitably drive similar behaviours at middle to lower management levels, through the development of risk-managed compensation that rewards managerial actions supporting, and penalizes actions detracting from, the accomplishment of targets/goals (corporate objectives) consistent with owner/investor interests.

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  4

  icmcl

  10/01/08 | Report as spam

  RE: Wharton: Tying Exec Comp to Shareholder Value Lead to Meltdown

  It seems to me that some of the most fundamental governance issues are consistently overlooked by academics and regulators.
  
  Market mechanisms are only capable of valuing shares on perceptions of profitability and corporate risk, and those perceptions are clearly susceptible to the influence of the Board by profit "smoothing" and overlooking corporate risks.
  
  The hard fact is that Boards will continue to do this because the Market punishes profit volatility and the disclosure of risk because it creates uncertainty. Good news is always good news and sometimes rewarded with price rises, but bad news is always punished by price falls.
  
  So whilst Execs continue to sit on vast tranches of share options, their self-interest in reaping vast financial personal fortunes will ensure ever more creative ways to "smooth" profits and overlook risks, at the expense of long term value-adding strategies that may jeopardise short term share values.
  
  Similarly, it has yet to be realised that the strive for the greater independence of non-Executives, but without a compensating reward system, means that independence has become a proxy for disinterest, creating an absence of challenge in the Boardroom rather than the robust oversight that is so badly needed.
  
  My view is that the time could well be right for a global "Son-of-Sarbox" standard of regulation to protect the financial interests of us all.

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  5

  pgaluszka

  10/03/08 | Report as spam

  RE: Wharton: Tying Exec Comp to Shareholder Value Lead to Meltdown

  Compensation rates that are several hundred
  times what the average worker in a business
  makes leads to a culture of arrogance and C-
  Suite entitlement. I have dealt with more than
  my fair share of CEOs who sincerely believe
  they are gods. They tend to be surround by
  sycophant yes-men whose role is to protect and
  patronize the King and not ask reasonable
  questions.
  It is sad that academics can't get this.
  Unfortunately many are rent-seeking parts of
  the same system, just as consultants and
  ratings agenices can be.
  
  Peter Galuszka

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  6

  ailin_chin

  05/05/09 | Report as spam

  RE: Wharton: Tying Exec Comp to Shareholder Value Lead to Meltdown

  In my view, this article correctly attributes the current financial crisis to the human capital of Wall Street?s institutions, in particular executive management and the Board of Directors. Agency risk - defined (loosely) as the potential financial consequences to an organisation of a mis-alignment of managerial and owner/investor interests - has been around since the inception of corporations.
  
  One possible solution to the separation of ownership from control could be an executive remuneration structure that incentivises and rewards only behaviours that generate sustainable improvement in a company?s real economic value over time, as measured by consistent improvement in annual earnings, net cashflows, liquidity and solvency ratios, the overall health of the balance sheet, funding costs (of debt and equity capital), and importantly, clear evidence of consistent compliance with relevant legislation and regulation including the Sarbanes-Oxley Act, with particular emphasis on those provisions mandating the establishment of a robust and rigorous corporate system of risk management and internal controls. Under this framework, it is suggested that the entire reward-at-risk component of executive remuneration could be directly pegged to achievement of composite targets based on the above financial and compliance measures, rather than being linked in part (as is the case currently), to short, medium and longer term improvements in the market share price.
  
  My point is two-fold:
  
  1) The market share price, particularly in the short to medium term, is not necessarily an efficient indicator of real corporate performance or value. Whilst there is little doubt that current and forecast economic fundamentals will find their way into price, share value in the market place can also be influenced by white noise, including potentially incorrect information generated by spin, rumour and the perceived implications of actions undertaken by market participants (shorting ? whether justified or not, is a case in point). Longer term movements in share price could also conceivably be affected where this noise is persistent and sustained in nature, hence creating a self-fulfilling prophecy. Obviously, in these environments, factoring market share price into the remuneration equation could result in significant over or under-compensation of executive performance, and potentially motivate future behaviour that diverges from owner/investor interests.
  
  2) Organisational values and culture are created and fostered by executive management (in particular the Chief Executive) and the Board of Directors. A remuneration structure that encourages real value-adding behaviours from the leadership will inevitably drive similar behaviours at middle to lower management levels, through the development of risk-managed compensation that rewards managerial actions supporting, and penalizes actions detracting from, the accomplishment of targets/goals (corporate objectives) consistent with owner/investor interests.