CEO Comp
The following is a comment to Merk Cuban’s recent post on blogmaverick.com
Mark,
An well understood point by experienced investors; sadly, not a well understood point by “mom and pop” investors.
In law school, we gave a presentation to our professor (a very experienced investor) about options and how they incent management to meet a target for their stock price. The incentive does not align the interests of management with long term investors. Management is incented to barely beat numbers they provide to analysts so they can get a “pop” in the stock price.
They are also incented to create volatility in the stock price (which increases the value of options) by playing games with their numbers. Experienced investors know that accounting is more art than science; management also knows this and uses this fact, legally and sometimes illegally, to their advantage. (Our professor had problems with our analysis, thinking that options were good, but I still stand by our analysis.)
The emphasis on diversification and long term investments (although both good things in the abstract) exacerbate the problem. Since each holding is only a small part of your portfolio, the agency problem becomes bigger.
Sadly, I don’t see an end to this problem. The only solution is more active management which brings its own greedy set of problems. (See, e.g. Warren Buffet’s latest letter to shareholders at berkshirehathaway.com.) As public markets become more public, the agency problem grows and management will continue to enrich itself at the expense of shareholders.
Experienced investors can only help themselves; they cannot help everyone else. I wish there was a better solution to this problem, but until investors are smart enough to solve this problem for themselves they will suffer the consequences of their mis- or non-information.
By the way, I loved your reality TV show. It was much better than any of the ones still running. In particular, the “you’re fired”, everyone selfish, B.S. show. Thanks for trying to inform people about what it takes to be successful.
