The world is getting used to a cycle of business collapses turning into financial crashes which, in turn, become economic meltdowns with disastrous social consequences and costs. We saw this during the dotcom bust in the early 2000s, in the Enron and Worldcom bankruptcies a little later and the sub-prime crisis in the late 2000s. And it may happen again in an impending mob-com (e-commerce, if you will) implosion in a few years.
Move over Sarbanes-Oxley’s, the US Act that protects shareholders and the public from accounting errors and fraudulent practices in the company. Every time there is an economic crisis, most governments react by tightening the rules and bring in more laws and legislations hoping to prevent history from repeating itself.
How naïve! Governments can’t stop scandals just by tightening the rule books. As they say: more rules, more loopholes. People, and companies, will always find newer ways to circumvent the rules.
Yes boss
What is very likely to happen is that ‘entrepreneurship’ will be killed as a CEO may wonder whether he/she needs the permission of the Fed chief to take a toilet break during working hours and whether it may constitute a violation! Lawyers and accountants will, of course, continue to become rich.
How does one stem the rot?
The basic issue is that of incentives. The problem of agency has existed since the time human beings started working in an organised form. Unless individual goals are congruent to organisational goals, people will do things to further the former at the cost of organisational/societal goals.
The average tenure of a CEO in the corporate world is around three-four years. This often comes in the way of a CEO taking a long-term view in making a decision. Generally, long-term gain involves short-term pain. The sacrifices of today help build a sustainable future. When one doesn’t see oneself in this organisation in 7-10 years, why would one take decisions that make their present more difficult?
Quarter to quarter
To add to this, shareholders and stock markets stress heavily on short-term performance. Yes, CEOs are expected and mandated to manage both short-term and long-term simultaneously, no doubt. But how much focus is brought to bear on long-term consequences of strategies that show great short-term results?
The attitude is: “We will cross the bridge when we come to it’. Quarter-Se-Quarter-Tak (like Qayamat Se Qayamat Tak, the Amir Khan film!) is the reality that the CEOs of today have to live with. This, of course, also smacks of the view that only shareholders matter.
To make matters worse, the incentive system is skewed heavily in favour of short-term performance (quarterly EPS). A significant proportion of the CEO’s salary is linked to quarterly and stock market performance. It is not uncommon to have 70-80 per cent of the annual remuneration linked to quarterly results.
A combination of short tenures, emphasis on quarterly performance and significant incentives for short-term performance make for a good cocktail but it’s a recipe for disaster. At best, CEOs will favour strategies that guarantee great short-term results even at the cost of long-term performance and, at worst, they will simply find ways to cook the books.
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