Reforming CEO pay
‘... in years in which the CEO has significant equity vesting, he cuts investment in many forms – R&D, advertising, and capital expenditure. Moreover, in these years, he’s more likely to exactly meet or just beat analyst earnings’ forecasts – if the forecast is $1.27 per share, he reports earnings of $1.27 or $1.28. Indeed, the magnitude of the investment cuts is just enough to allow the CEO to meet the target. Thus, vesting equity induces the CEO to act myopically – to cut investment to meet short-term targets.’
Defining and achieving good governance
‘Stakeholders can be expected to have views that are contrary to those of management. In this way directors can not only cross check management reports on the known knowns, but also obtain different views on the known unknowns and expose themselves to becoming aware of the unknown unknowns. This is not possible in command and control hierarchies where contrary behaviour or views may not be tolerated.’