They will always
bribe auditors to bend the rules. In other words, they will always act
in their self-interest. In their defense, they can say that the damage
from such actions to each shareholder is minuscule while the benefits
to the manager are enormous. In other words, this is the rational,
self-interested, thing to do.
But why do shareholders cooperate with such corporate brigandage?
In an important Chicago Law Review article whose preprint was posted to
the Web a few weeks ago - titled "Managerial Power and Rent Extraction
in the Design of Executive Compensation" - the authors demonstrate how
the typical stock option granted to managers as part of their
remuneration rewards mediocrity rather than encourages excellence.
But everything falls into place if we realize that shareholders and
managers are allied against the firm - not pitted against each other.
The paramount interest of both shareholders and managers is to increase
the value of the stock - regardless of the true value of the firm. Both
are concerned with the performance of the share - rather than the
performance of the firm. Both are preoccupied with boosting the share's
price - rather than the company's business.
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