Quote:
Originally Posted by Prestidigitweeze
Until two University of Rochester economists in the '70s (one liberal, one conservative) decided that doing the opposite would engender responsible management,* the way to avoid your scenario was not to make CEOs major shareholders of the companies for which they worked.
The purpose of the economists' idea was to prevent ridiculous abuses, cf. renting a Lear jet for a supposed business lunch in Honolulu. If you owned a stake in the business, they reasoned, you would be less likely to bill rash expenditures to it, and would probably take your obligations to it more seriously.
The result was to create a worse situation than the one they attempted to fix.
After they were made major shareholders, many CEOs chose to inflate stock prices by any bloody means necessary (see the short bleak career of "Chainsaw Al"). Many were willing to doom their own companies in the name of selling their own shares at a high profit.
----------------------
* See " The Greed Cycle: How the financial system encouraged corporations to go crazy," by John Cassidy, The New Yorker (Sep't 23, 2002). |
Bang on. I'll quibble over one thing. The 1976 SEC ruling (13-D) that required buy-ins of over 5% of stock to be made public. Before then, underperforming companies could be quitely taken over and the underperforming management fired, without a bidding war. This gave an incentive for management to perform, or they might be out of their "phony-boloney jobs"...