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When CEOs’ Equity Is About to Vest, They Cut Investment to Boost the Stock Price (hbr.org)
261 points by joeyespo on Mar 2, 2018 | hide | past | web | favorite | 107 comments

In other news, people are found to act in their own self interests and game whatever rules and systems are in place for their own personal advantage.

Further research reached the surprising conclusion that CEOs are people too, and game the system just like any other person.

[Edit: adding color, as my comment lacked substance to abide by HN's guidelines]

Snark aside, this is a great example on how we need to design robust incentive systems that minimize the chance of gaming them. People are amazing optimizers, and will find any loopholes or gaps that allow them to use any system to their advantage.

CEOs delaying investments, CFOs colluding with industry analysts, rushing product launches, technical debt, etc. are all examples of the same symptom.

"Detecting Earnings Management", by Richard Sloan (a former professor of mine) is a great article that shows the same behavior as this article: managers will anticipate or delay earnings and investments in a way that maximises whatever metric they are evaluated on.

This is further exacerbated by the non-linearity of the market response to earnings surprises. Unsurprisingly, the distribution of earnings surprises over time are not symmetrical to the average market return.

Sure, but your comment breaks the HN guidelines, which ask:

Please don't post shallow dismissals, especially of other people's work. A good critical comment teaches us something.

It also breaks this guideline, since you've ignored the substantive core of the article:

Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize.

We all know how easy and satisfying it can be to fire off a bit of snark into the internet, but it makes for poor discussion, and actually causes harder systemic problems than outright personal attacks and the like. So please don't post like this to Hacker News.


I added some content making it more useful, thanks for the feedback :)

Much better—thanks!


Sorry, couldn't resist.

I will show myself out now.

I think this is one of many bits of data that I add to support my personal hypothesis that public equity markets are increasingly failing at their job of being an efficient way for our economy to allocate capital.

They almost certainly can't be too efficient. There's a proof that if markets are efficient then P = NP.

This isn't really about whether markets are or can be efficient. This is about corporate governance. Boards of directors should not permit CEOs to play these games, and compensation of CEOs should be structured to not create such destructive incentives.

Beware of "perfect" as a requirement. For instance, if you can do perfectly accurate calculations with real numbers in constant time, that also leads to P=NP (because you can encode entire problems in very long strings of digits and solve them with a few operations.)

You can have efficient-enough markets, like ±0.001% efficient, without requiring P=NP.

Perfect efficiency does not exist. Some efficiency does. There are three variants of the hypothesis: "weak", "semi-strong", and "strong" form. [1] Insider information isn't some conspiracy -- people have gone to jail over it year after year. With information disparity, efficiency is always going to be a fraction of what it could be. Just think about two parties -- one thinks the stock should be high because of insider information. And lets say they are also mega-rich big bucks. The other party is people without the insider info, they think the stock should be low. So Mr. Mega-Rich buys a lot of shares, the stock goes up. Then it falls back down because no one else wants to buy it at that high price. These oscillations will continue as Mr. Mega-Rich takes advantage of his insider information - and the more trading volume on the buying end, that he provides, the more choppy the market for that equity will be. If Mr. Mega-Rich is continuously buying, that choppyness won't go away - lest other parties take his actions to be information itself, and adjust their appraisals.

Wall Street I and II aren't the most accurate pictures, but they certainly aren't fiction. If you aren't the shark, you're getting sharked. But because of 21st century prosperity, you still might be happy with your returns, even while paying the tax of giving money to those with better information.

[1] https://en.wikipedia.org/wiki/Efficient-market_hypothesis

> If you aren't the shark, you're getting sharked

People say this a lot, but I think it's misleading to most who hear it. This is certainly true in a trading context (i.e. where the buy/sell time horizon is short enough where the underlying asset's economic value doesn't change, though the market price might), but not in an investment context (where it's expected that the inflow of capital will create economic value and the stock price will reflect that).

The takeaway is that you should leave daytrading to the pros, and instead bet on humanity improving the means of production over long time horizons. Unless you're actually a pro and have good reason to believe you can beat the market.

I think it's not efficiency in the sense that you're talking about, it's that the picking and pricing of stocks as a signal of their effectiveness back to the company that is broken.

There's a proof that if markets are efficient then P = NP.

The only "proof" of this I've seen asserts that there are 2^n boolean-valued functions on n-bit vectors.

Does the apparently dubious proof assert that there are exactly that many functions? Because if the assertion is rather that there at least that many, that assertion is true but really understating the case. E.g. for n=3 there are 2^(2^n)=256 functions, and after that it really blows up.

It gives that as an upper bound on the size of the search space of boolean functions with n-bit input, representing technical strategies that consider the last n market movements. It goes on to claim that if there is a historically winning technical strategy, a nondeterministic Turing machine can write out a full description of that strategy in polynomial time.

The remaining problem is how to uniquely describe in polynomial space an element of a set with doubly exponentially many elements, but the authors don't bring that up because they're working under the assumption that there are 2^n functions rather than 2^(2^n).

The assertion that the efficient market hypothesis is equivalent to P=NP also comes with no proof that future performance of a trading strategy will match its past performance or that anyone will actually deploy a perfect strategy if one exists.

Hahaha ok if that was supposed to be an upper bound then something is very wrong!

Stock markets are the worst way to allocate capital... except for all the others that have been tried.

What's your proposed alternative?

The first step in correcting a problem isn't proposing an alternative. It's identifying the problem.

Given that the powers that be clearly have no consensus on the existence of the problem (nevermind that they may have a vested interest in not identifying the problem), and that identifying a problem, while non-trivial, is typically orders of magnitude easier than identifying a solution, it's a little disingenuous to dismiss the point by asking for a solution. Just because the solution is unknown doesn't mean we can't discuss the existence of the problem.

The promise of public markets isn't perfection though, it's just "better than the alternatives." Austrian economics doesn't claim that short-term inefficiencies do not exist in markets, but rather that they are less harmful than attempts to fix them.


The sibling comment that asks if the markets are failing more than in the past is more productive because if they are that means that something is different; I personally am disturbed by the degree to which "a rising tide lifts all boats" is no longer true.

I wonder if it's because the wealthy and powerful have gotten better at cornering the market on gains (which would beg for some check on their power), but I also worry that it's actually because material growth has actually stalled, and the market gains are mostly illusion (which would require some other correction).

I wonder if rent-seeking and other forms of non-productive passive income aren't at the root of it all. We're generating wealth and value and "growing" the economy, but how real is that growth when a) nothing is actually being produced (i.e., there's no product with inherent value), and b) wages don't increase anyways.

All this wealth is being generated, but it's going disproportionately (historically speaking) to the wealthy. Well, the problem with that is that the wealthy have an extremely low marginal propensity to consume, so, all they do is invest. That means that both more wealth is available to build businesses and less wealth is available to purchase the resulting products. So, it's easier than ever to create a business because investment dollars are cheaper than ever, but it's harder than ever to make it profitable because nobody's buying. That should depress costs, but the race against inflation has got to catch up eventually. You can keep making it cheaper and cheaper to run a business, but if wages don't increase and cost of living continues to increase just due to inflation, then it doesn't matter how cheap your goods are. There's no middle class left with the money to purchase luxury goods. Then what?


> Austrian economics doesn't claim that short-term inefficiencies do not exist in markets, but rather that they are less harmful than attempts to fix them.

This seems -- at least partially -- bogus on it's face. Sure, you can definitely regulate a market into collapse (see the Soviet Union) but deregulation can just as easily create supermonopolies which are equally unjust and ineffective. The point of the market isn't to generate wealth, it's to distribute resources efficiently so that the nation as a whole (or state, or world, or whatever collective noun you want to use for human civilization) gets their required products. Generating wealth is a complete side effect of the market as far as the benefits to society are concerned.

I assume you are at least passingly familiar with Piketty's Capital? He argues that as long as the rate of return on investments is higher than economic growth, wealth will concentrate, and the 2nd half of the 20th century was so equalizing because of rapid post-war growth.

This makes a lot of sense, but it doesn't automatically imply unilaterally implementing a wealth tax will solve the problem. It's not like there aren't a lot of people who want to tax wealth rather than income, but it is much harder to hide income than wealth (and yet we still have people who do so to a large degree).

> Austrian economics doesn't claim that short-term inefficiencies do not exist in markets, but rather that they are less harmful than attempts to fix them.

They seem to assume this a priori.

We've had these discussions for hundreds of years. You really think the powers that be will reach a consensus on this issue if we talk about it some more? The only path forward is really to suggest reforms or an alternative imo and convince people it's superior. Basic Income / Negative Income Tax / changes to corporate governance / whatever.

> You really think the powers that be will reach a consensus on this issue if we talk about it some more?

Do you really think ignoring the issue or remaining silent will fix the issue? Do you know what happened historically when wealth distribution and societal demands got wildly out of balance? Crime, famine, revolution, war, and death.

GP didn't suggest remaining silent though, they suggested pushing for alternatives instead of just talking about it.

They seem pretty efficient to me. If you disagree, then you can simply short/long the inefficiencies that you see and make a profit.

That only works if the equity price is a sufficiently correlated representation of the fundamental efficiencies of companies. That's the failure.

If CEOs are managing to manipulate the stock price for personal gain having nothing to do with how efficiently that company manages actually delivering products and services then that's a failure of the market as an economic allocation tool. Choose winners and loser stocks all you want - you can engineer a profit, but all that work might not do anything as a signal for companies to manage their fundamentals better. Now - you can argue about if this is just a short term influence and it doesn't matter because maybe it all still balances out in longer terms. But I lean towards thinking it's a systemic long term disconnect problem.

It's not. It is, at best, a short term incentive problem. The publishing of articles like this one is how this incentive problem corrects itself.

Consider: you are an investment manager considering allocating capital. You know that company A is engaged in short term manipulation tactics to the detriment of their long term business prospects, and company B doesn't care at all about short term market movements and focuses entirely on growing and sustaining their business. You also know that there was this McKinsey study recently that showed that companies like company B earn higher market returns long term. Where are you going to allocate your capital?

Now, I grant you, some investment managers are under pressure from their clients for short term performance. And that can skew the results here. But in aggregate, over time, the machine is efficient, and it will eventually price these things correctly. And in so far as i'm aware, there is no better known mechanism for allocating capital.

Now that this problem is published, to the extent that it's true, you, I, and anyone else who wants to can make it go away by allocating our own capital accordingly. And the nice thing is that we get compensated for doing so in the form of superior returns.

I assume your opinion is informed, in which case it is based on past information that includes outcomes. Your challenge, therefore, is asymmetric.

Where do I put a bid for a short on the ability for the earth to support human life comfortably?

Because of buy backs the net of amount of investment financed in the US stock market is less than zero. The purpose of equity markets is not to raise capital, it's for equity owners to cash out.

Are they "failing" any more than they did in the past?

Yes, if one looks at productivity numbers in the last decade, as well as more indirectly via new business creation, perhaps at lifetime of businesses, and at an even wider scale if one looks at inequality (failing at distributing of wealth). Just to name a few factors I'm thinking about.

Can you blame them? People act in their selfish self-interest.

It's the same thing with cops and firefighters. Their pensions are calculated based on the earnings of the last few years of employment. So that save vacation days the last few years to inflate their earnings the last few years.

If there is one thing you can count on, it's human greed. And I'm not pretending I'm above it myself.

The problem is that the system is set up to be exploited by the CEOs/etc.

Can you blame them? People act in their selfish self-interest.

Hoo boy, but if a CEO has self-interests that involve steering the company in a socially responsible direction (or maybe just being less extractive), cries of fiduciary duty to shareholders ring out.

What you're describing is a selflessness, almost the exact opposite, which doesn't get you promoted to that position in the first place

You ignored the core concept

I'm really not sure what that is...that some are forced to be that way but secretly want to act ethically? The people who get promoted to this spot tend to fall into the culture of the industry and company, and they've been extensively socially vetted by the people with say beforehand. Companies who tear down rain forests and pollute rivers aren't going to hire someone who wants to change that. This is the reality of how the big corporate world works in America.

Can I blame them? Yes, the same way that I can blame a thief for stealing a car even though society "gave him an incentive to steal it."

One of these is an ongoing source of considerable societal damage. The other is illegal.

Making something illegal does create incentives against it, and if stealing cars weren't illegal I'm sure we'd see much more of it.

Generally stealing cars is clear-cut and easy to prosecute. The opposite is true for insider trading. As a result, things that look an awful lot like insider trading occur all the time without any interest from the SEC.

I'm not very equipped to judge legally what is or is not a crime, but it does seem like there's a lot of leeway for people in control of public companies to effectively take money from their investors.

Yes but it's important that the "crime" of "insider trading" exist so that investors might imagine that executive aren't doing that every single day. Also it's important that the crime is totally discretionary so that prosecutors can punish every single non-executive who somehow gets wind of non-public information while never bothering executives who donate to the right PACs.

It's kind of a fascinating thought experiment, to imagine our society changed in just that one way... lots of cars would have better security, anyway. Also one suspects there would be less demand for public parking, which would probably improve urban life.

Would we? We already know that harsher sentences doesn't necessarily translate into a better deterrent, and we know that when something becomes legal it doesn't mean increased activity.

Most laws are just enforcing social norms

This might just be a whoosh moment for me, but what's the actual societal damage here? My takeaway from the article was that CEOs try to optimize their personal payouts but there was little that seemed to imply this is a serious problem versus an interesting but already accounted for part of how these companies operate.

It's stealing from investors and employees. Investors in an abstract, probabilistic way and employees in a very concrete, immediate, and dramatic way. "Interesting but already accounted for" doesn't make it right in the same way that an insurance policy covering auto theft doesn't make auto theft right.

Interestingly, it's well known that the stock of firms with high levels of investment does worse than the stock of firms that do not invest as much -- see https://www.sciencedirect.com/science/article/pii/S0304405X1.... One possible reason for this is that managers may channel investment funds into unproductive empire building.

This is cross-sectional returns over a month so it basically confirms the OP, don't invest money if you want the stock to up in the next month (or quarterly report).

Neat fact: the publishing of this article has caused its headline to stop being true. Since CEO equity vesting schedules are public, all it takes is a few algorithmic traders acting on this to make the strategy stop working.

Algorithmic traders focus on short-term market movements. The investment decisions described in the study are about long-term foundamental of companies. As long as enough investors prefer cash flow to capital reinvestment on the earning report, the strategy will continue to work.

Cutting costs and investments can easily dress up short-term financial performance at the cost of long-term productivity. But it will look good for investors who don't understand the underlying matter and rely on simplistic metrics to make investment decisions.

Is that really true though? How do you know?

I hate to break it to you, but this isn't exactly a revelation.

One of the interesting things which has egged on the current bull run has been the abundance of cash. I need to find the exact link but it seems lot of companies are buying back stocks which then masks the nonperformance under the garb of market beating EPS growth.

What's the under or non-performance? If a company is generating enough cash to buyback its shares, that's every bit as much a real return to shareholders as a dividend would be.

If a company retires 10% of its shares from a buyback, each investor now owns ~11% more of the company than they did before.

It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie.

Of course markets are not perfect, and nobody knows for sure if the market value of the company is fair or not. When a company engages in stock buybacks, it’s essentially saying that it believes its stock to be undervalued, which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run. After all, who has better information about the company and its prospects than itself?

But as they say, the market is a voting machine in the short run, but a weighing machine in the long run. If it turns out that the market value of the company is higher than its intrinsic value, then stock buybacks are actually destroying shareholder value. The cash would have been better spent buying shares in an index fund.

>It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie.

That's not right. You have a larger piece of a smaller pie, but you have the same amount of pie.

Edit: the confusion is you are talking about total market cap while the parent is talking about share price. Total market cap is irrelevant to stockholders. Share price is all that's relevant.

You have a larger piece of a smaller pie, but you have the same amount of pie.

Yes, this was my point. Stock buybacks are value neutral if the market value of the company is correct. Ie. the share price stays the same.

> which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run

All large stock purchases have the short-run effect of elevating the stock price. It would be shocking if this didn't happen; it is not surprising in the slightest that it does.

It’s “surprising” because—assuming the company is correctly valued by the market—the company should become less valuable when the cash is spent. The company doesn’t “get” anything for the money, because the shares it buys, get retired.

Edit: Sorry, I got myself confused and mixed up the total market cap (which should go down) with the share price (which should stay the same, because there are now fewer of them).

> In a perfect market, the market value of the company will go down when company buys back stock

Consider a company worth $100 with ten shares of stock with $10 of cash on their balance sheet. Each share is worth $10. They company uses the $10 to buy back one share of stock. The company is now worth $90 and has 9 shares outstanding. Each share is still worth $10.

Right, it depends whether "market value" is referring to share price (your example) or market cap (which indeed should go down).

Yes, I was referring to market cap.

Unlike dividends, this channel of return seems distributed according to shareholder's trading savvy. It's often said that a company is overpaying for its shares (1) but the phenomenon minus narrative often seems that the company is intentionally playing the losing side of the trade to offer up value to shareholders who sell. This makes it an active exercise to capture that value, compared to a rule-allocated return like dividends.

Another interesting thing is that this form of buyback return channel would seem to exclude passive index funds unless they were actively shrinking (i.e. selling).

(1) Example from this morning talking how GE bought $30B of shares and later tanked. That's a pretty significant although unequally distributed return of value to those shareholders who sold vs. those still owning GE. https://finance.yahoo.com/news/general-electric-company-stoc...

> They call it “returning money to shareholders.” I call it “wasting shareholder money,” because they almost always buy at prices that are too high

The same thing happened to Borders before declaring bankruptcy in 2011.

You're missing the point. When there's less shares, the EPS increases, making it appear the company is performing better.

It's the easiest lever a CEO can push on to look good.

The numbers don't lie, right?

> When there's less shares, the EPS increases, making it appear the company is performing better.

When there are fewer shares, my individual stake in the company is actually performing better.

No, there's less shares (which are priced higher) but also less cash available. Your individual ownership is the same value, but the optics are better for the CEO.

Also, and most importantly, the CEO is now in the money and can sell, so his compensation increased just by increasing the share price.

That's not really an honest interpretation.

The part you're ignoring is future earnings. Assuming a company maintains its earnings, you have a bigger slice of the pie next quarter. If the company trades at the same EPS multiple, your stake definitely has gained value. You're totally ignoring enterprise value.

In a vacuum, nothing has changed about a company's future earnings when they repurchase shares.

The kind of bizarre roundabout way to consider it is if Apple bought 25% of itself with its money mountain (they can't, beside the point), your stake in the company goes up because you own shares in Apple, which in turn owns 25% of itself.

You effectively have more equity in Apple when it buys its own shares.

Buybacks make sense only if you have more cash than you know what to do with.

What the previous poster is trying to get at is that a big-ticket buyback signals an inability to invest that sum in a way that will improve growth or profitability. The best move to increase EPS is invest in capital improvements to increase earnings. If you can deploy money effectively, that means you're also growing in the long-term. Reducing the number of shares via a buyback also increases EPS, but it doesn't improve the top line.

In other words, a buyback is a way to increase your (and the CEO's) earnings per share even in the midst of stalling growth. So what I'm getting out of the previous comment is: don't confuse a buyback with continued growth; it's actually a "cashing out" moment.

I think a rational CEO/CFO looks across intrinsic/organic investments in their own company, possible mergers and acquisitions, and share buybacks and "horse races" each of those possible uses for excess cash.

Whichever combination of those items provides the best risk-adjusted return is the one (or several) that they should choose. The risk of share buybacks is quite low. You more or less know what the outcome will be, so even if the reward of a successful M&A or an organic expansion project is higher, it may still be smarter to buyback shares once you discount the former possibilities for the uncertainty. This is even more true if you believe the stock market is undervaluing your firm's shares, which of course then becomes a very common storyline when buyback programs are announced or expanded.

Absolutely. It's a low-risk move that reduces the number of shares rather than increasing earnings. But it follows (if the leadership of company you bought is rational) that they've decided there aren't enough organic investments or good M&A prospects to make a full deployment of their cash worthwhile. They are effectively giving the money back.

If you invested because you believe in the long-term growth prospects of the company, then you expect them to plow their cash into increasing the top line, and a buyback can be a disappointing signal. If you invested because you believe it's a good income stock, a buyback is exactly what you want.

>Your individual ownership is the same value,

No it's not because it can be sold in the market for more money. Value is what the market will pay for your shares.

It may underperform in absolute terms, but or shareholders per share is what matters.

If a company has lots of projects that can exceed the cost of capital, then they reinvest profits and ingest more capital. When this is no longer the case, the responsible thing to do is return money to shareholders via dividends or (more tax efficiently) via buybacks. Then investors can use the money elsewhere.

The issue here is it seems like on the margin CEOs get more risk averse on long term projects as they vest, and can grab the bird in the hand.

After the financial crisis, people were demanding that CEO pay be tied to company performance. So instead of large salaries, CEOs were given large equity positions ( options ). The politicians/people thought this was a punishment, but it was actually a great boon for CEOs. Not only do they pay 20% on capital gains instead of nearly 40% on salary, they can boost stock prices artificially over the short term by taking out loans ( nearly 0% for the last 10 years ) and then buy stocks back.

This is also a favorite hedge fund raid. Hedge funds open up large positions on companies. Demand board seats. Get board seats and then get the execs to sell assets, layoff employees and take out loans to buyback shares. Get out with a nice profit. And the company is left with a huge debt loan that'll crush them once interest rates rise.

What? You pay income tax on the value of your options, and also capital gains tax on the appreciation in their value after vesting. That’s only a tax advantage if you get options in a worthless company that later becomes valuable. The luckier startup employees are in that boat, not Fortune 500 CEOs. For public companies, you can reap this advantage yourself by buying and holding their stock using your cash compensation.

> You pay income tax on the value of your options, and also capital gains tax on the appreciation in their value after vesting.

Yes. That was my point.

> That’s only a tax advantage if you get options in a worthless company that later becomes valuable.

What? Since 2010, most large companies had their stock prices double, triple or even more.

> For public companies, you can reap this advantage yourself by buying and holding their stock using your cash compensation.

Except you don't get all your salary upfront.

Has anyone read the paper? What is the effect size? I'm assuming the author means "statistically significant", which is worthless from any decisionmaking perspective (e.g. policy).

Effect size is ~0.2% of annualised net investment in R&D ($2m for median firm size) per standard deviation in vesting equity (unvested equity and remaining vested stock have minimal effect on equation as specified). So not huge but not trivial.

Paper is pretty thorough, including looking at changes in actual measures of firm efficiency, forecasts by friendly analysts vs actual earnings growth and an attempt to defeat the reasonable alternate hypothesis that boards time vesting decisions according to when they think massive investment is no longer needed and earnings growth will kick in.

It does however focus on [estimated per quarter based on annual info] vesting schedules and not actual share sale decisions. Actual share sales are found not to be statistically significantly related to investment drops (likely due to a variety of other reasons for offloading and reluctance to offload if the investment drop is due to short term dips)

Somewhat relevant topic into how many of these CEOs got to where they were: "New Study Reveals How Many CEOs Fast-Tracked Their Way To The Corner Office" https://goo.gl/Bz8fP5

Actual URL: https://www.forbes.com/sites/markhall/2018/03/01/new-study-r...

I think URL shorteners are frowned on here.

Not to mention, Forbes "articles" are frowned on.

It's a rewrite of https://hbr.org/2018/01/the-fastest-path-to-the-ceo-job-acco...

>> Could the investment cuts actually be efficient? Perhaps stock price concerns are motivating, because they induce the CEO to make tough decisions, such as cutting wasteful investment. If so, we would expect the CEO to improve efficiency in other ways as well, such as increasing sales growth or cutting other expenses. And we find no evidence of that.

I imagine looking for ways to increase sales growth and cut costs is something a good CEO does on a regular basis, so maybe there's not much low hanging fruit in that respect. I honestly don't see an issue with the explanation that CEOs are simply more motivated to cut wasteful investment prior to their equity vesting.

This is well known. Mostly what (public) companies spend money on these days is share buybacks. Especially for retail, they'd be better off in the long term paying benefits for their hourly employees.

Doing this would be foolish since they are taxed as income when they vest but capital gains after. If their aim was to unfairly take advantage they should wait until right after vesting not right before.

The article address this: "Only once this period is over can they sell — and they typically do, to diversify their personal investments."

CEO's have a great deal of exposure to the upside of their company doing well, they want protection from the downside of it doing poorly.

They missed the real fix for the problem--change how vesting works.

They are talking about changing vesting from 3 years to 5. Instead, how about take that pile of options and split it into 5 piles. Pile 1 vests in 3 years. Pile 2 vests in 4 years and so on.

The point is to spread it out over time--they'll do better with a long term approach.

Relevant to the impact of stock based compensation in real terms for CEO's:


Interesting way to play with stock options for public at large too.

Like most things, you get what you optimize for.

I think that is a clever way to tease out causality.

This is why the public ownership model is bound to fail, and already the most successful companies are avoiding it as long as possible or entirely.

Alan Greenspan, on his way out, famously said

> he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan said that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

It's not a stretch to apply it to all C-levels at all public companies: they will absolutely manipulate the company to benefit themselves at the expense of the shareholder.


This is my sister's observation after 20 years in manufacturing. All her experiences at the executive level were of folks manipulating the company to get their bonuses regardless of the damage they did. They'd simply move on when a company failed.

She got sick of it all after 20 years, and now runs a chocolate shop in semi-retirement.

> They'd simply move on when a company failed.

And often the failing company would even pay for the outplacement consultants.

That and a ginormous exit package.

It sucks, but paying a CEO to get out without causing a scene might be worth more in the long run than keeping them on.

Crappy system, IMO.

He built his entire career, as a leader of USA financial policy, as a hardcore Randian Objectivist (he was a close friend of Ayn Rand herself, probably the most powerful Randian in the world), and then on the way out said "oops, I was wrong"?

Yes, he did.

"You found that your view of the world, your ideology, was not right, it was not working?" Greenspan agreed: "That's precisely the reason I was shocked because I'd been going for 40 years or so with considerable evidence that it was working exceptionally well."

> It's not a stretch to apply it to all C-levels at all public companies: they will absolutely manipulate the company to benefit themselves at the expense of the shareholder.

No, that actually is a stretch, essentially by definition.

How are c-execs of public corps different from c-execs of other corps? They all get a bonus metric to meet and have the opportunity to game the hell out of it.

Yes, they have the opportunity. That does not mean that all will, nor does it mean gaming it is actually in their best interest all the time.

Do you mean fail as in become socially and perhaps politically unacceptable ways of doing business?

No, I mean being outcompete by other businesses, in China and locally.

I think you have it backwards. CEOs can cook the books far easier if they are not a public company. Meanwhile, in China: https://www.reuters.com/article/us-china-anbang-regulation/c...

The reason that companies are not going public as quickly is because they aren’t making money, not because they are making too much money.

The public ownership model is awesome at raising capital.

So are Ponzi schemes.

Me: Looks back at the incredibly successful 400 year history of public companies.

You: Notes a small amount of manipulation by CEOs and says public ownership is doomed.

thinking face emoji

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