Wednesday, September 16, 2009

The trope of shareholder value

Once the crisis is over (yes, despite the fact that some have declared that the recession is over, there are signs the crisis remains) and the financial industry moves towards serious cultural adjustment, it will eventually have to consider the role of standards, compensation, and rewards. As Marshall Goldsmith recently argued in the Washington Post, financial incentives in the industry need to be more in line with desired practices (he even cites Steve Kerr's article about the folly of rewards). (see Goldsmith's article here

At many major firms now on the government doll, as well as organizations across industries, incentives remain exactly where leadership wants them -- in finding clever and resilient forms of executive compensation. The issue isn't that incentives aren't aligned with organizational goals, the problem is the goals themselves -- the goal is high executive compensation, not return to share holders – in many cases, little regard exists for long term consequences, risk or even in many cases the shareholders. It wasn't a problem of poor goal setting, it was the goals themselves, and they rewarded exactly the kind of behavior that was desired.

Another set of incentives that will need to be considered comes in the form of other people's money. CNBC reporter Charles Gasparino argues that what allowed investment banks to take on such huge risks (measured often in borrowing as much or more than 30 times equity), was the fact that these publicly traded companies were gambling with shareholder's money. (See him talk about it here

We can talk all we want about shareholder value, but until incentives are aligned with shareholder value, not simply short-term one time profits, often in the form of short term trading returns, - the whole discussion of shareholder value is simply a trope.

Wednesday, September 2, 2009

Financial crisis and leadership

The current financial crisis provides some incredible examples of leadership -- especially the challenges and unintended consequences of action. The situation faced by then Treasure Secretary Henry Paulson represents some of those challenges. A recent article in Vanity Fair (as well as other sources including PBS Frontline Series - Inside The Meltdown) paints him as a reluctant government interventionist. Here is a link to the Vanity Fair story that was provided to me by Mike Nothum a student in my MBA class:

Despite the still unknown consequences of these decisions, we can begin to see some of the short term consequences, as Erik Ballinger drew my attention to a story by David Cho in The Washington Post about who benefited and who has yet to benefit from the bailout cash -- suggesting that the too big to fail banks grown even bigger.

Not only are consequences unforeseen, our interpretation of the events is likely to continue to shift for some time.