(1) The CEO is actually much more heavily invested in the company than the shareholders. His salary, and probably the major part of his assets, are dependent on

(1) The CEO is actually much more heavily invested in the company than the shareholders. His salary, and probably the major part of his assets, are dependent on the performance of the company. On the other hand, the average share holder is well diversified. (2) Therefore, a CEO will be incentivized to pursue a highly conservative strategy, while the shareholders may wish that he takes more risk. 1 is true (assuming heavy equity-based compensation), but 2 does not follow from 1. What does follow is that the CEO will do whatever he can to make short term gains for the company before he exits, even if it means kicking the can down the road for future managers and long-term shareholders to take a hit on at a later date. When the whole management team is on in this short-term focus, it is colloquially referred to IBGYBG (I'll be gone, you'll be gone). Shareholders are not a homogeneous group of investors. Some pension/mutual funds invest with the goal of exiting in 10 years. Some activist shareholders invest with the goal of pumping up the price, then cashing out within 3 months (see Carl Icahn and Apple). A sizeable (and growing) portion will be owned by index funds while some will be owned by hedge funds, etc. Then you also need to factor in employees, executives, etc. One (newer) way to make this group happy as a whole and solve the IBGYBG problem is through clawbacks - punishing ex-executives for the things that happened on their watch. Check out Wells Fargo to see how this is playing out in Congress and in court. The question the paper is trying to answer - what motivates CEOs to "exert effort" in able to return industry-beating results - seems like it has a simple answer to me: no CEO wants to fail at his/her job and be known as the one who presided over company X's slow decline into bankruptcy/irrelevance. Doesn't look so good on the resume when shopping around for your next C-suite role.