Corporate (Mis?)Management

Via Gruber, an article about the business anti-pattern of maximizing shareholder value.  I don’t disagree in principle with the idea that CEOs should have better things to do than negotiate expectations with market analysts.  But I think that the article’s central analogy, that of a CEO to a football coach and a business to a football match, is fundamentally invalid.

A football match is time-bound.  This rightly requires that a football coach focus on winning the game in the required timeframe, not on beating the spread.  I can’t think of any type of business that’s similarly time-bound (in fact, I think a competent economist could argue that in an efficient market, all corporations are growth-bound).  In an environment that isn’t time-bound, it makes sense that the best metric of a corporation’s value is not its position or “score”, but the first and second derivatives of its position (that is, velocity and acceleration).  And isn’t this what market analysts are really getting at when they try to define expectations for a corporation?

Bonus amateur economist theorizing: there’s been a lot of talk lately about executive pay and the perverse incentives it creates.  For what it’s worth, I think the best rationalization of executive pay comes from tournament theory applied to the workplace.  This is probably best explained by Tim Harford in various places, including this YouTube video from the Logic of Life.  To summarize: lavish CEO pay is not only a reward for the CEO’s labour, it’s an incentive for his underlings to aspire to the top position.  This creates its own set of perverse incentives, prioritizing individual success over the success of the corporation.