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I'll give a shareholder's perspective. Management, when left unchecked, frequently engages in in wasteful empire building and prestige projects. The most appare

I'll give a shareholder's perspective. Management, when left unchecked, frequently engages in in wasteful empire building and prestige projects. The most apparent manifestation of this is in mergers and acquisitions. Decades of evidence shows that the median merger destroys shareholder value for the acquiring company. Imposing strong controls on corporate management is one of the most important thing that shareholders can do. This might take the form of independent boards, which aren't handpicked by the CEO. Or the removal of poison pills (which raises the threat of a hostile takeover for underperforming companies). But most important of all is the existence of transparent, consistent, regularly evaluated metrics. That means quarterly earnings targets. Like any job, CEOs need consistent feedback to keep their incentive aligned with those who employ them (shareholders). Management has shown time and time again, that when monitoring is weakened, they go off the reservation and destroy shareholder value. The good thing about earnings is that it's they're easy-to-measure, hard-to-fake tangible proof of continuing performance. In contrast stories about "long-term value" or intangible promises of future rewards are usually BS used to justify extravagant empire building while the CEO uses the company's balance sheet as his personal piggy bank. Lest anyone think that evil Wall Street shareholders are hobbling visionary CEOs, observe the rare cases when management does prove its credibility. Prime example is Amazon, which time and time again has scarified short-term earnings for long-term development. And nobody could possibly claim that it's punished by Wall Street for this. The difference is that unlike 99% of CEOs, Bezos has conclusively proven his ability and alignment with Amazon shareholders.

gogopuppygogo 6y ago
Bezos was an investment banker. Before he had the track record of long term development (only born from long term efforts) he knew how to speak Wall Street and had a track record on Wall Street. Most CEO’s will never be capitalized like him for long term empire building so it’s hard to say there couldn’t be more Amazon sized successes out there if Capital was more accessible for longer term visions.
- darkerside 6y ago
  This seems sensible. If you want the goodwill from your investors to make a long term bet like Amazon did, you need to explain it to them in terms they can understand. It's a language anyone can learn with sufficient training and experience.
- jsdavo 6y ago
  Wait, I thought Bezos was a quant, not an investment banker?
  - hchz 6y ago
    He worked at bankers trust, but not as a banker, and then at a quant hedge fund, but not as a quant.
- smabie 6y ago
  Bezos was never an investment banker.
mistrial9 6y ago
"go off the reservation" .. I suspect that my father many decades ago engaged in casual references like this, but I recall as a child that it was frowned upon by people who sought to reset and build positive relations between races in North America
- pbhjpbhj 6y ago
  Forgive me for straying OT: It seems like a fact-based analogy. 'A group have been restrained to "territory", but a member has broken that restraint'. There doesn't seem inherently to be a judgement as to the restraint or the rogue being right/wrong. I'd be interested in why you felt the usage was beyond the pale sufficiently that it needed to be reined in? The concept of territorial reservations doesn't appear to me to denigrate any group particularly; maybe I'm wrong in that?
  - mikepurvis 6y ago
    Not the parent, but it's obvious what the origin of the phrase is, and while it may not be as icky as something like "open the kimono", it's definitely one that is trivially replaced with no loss in meaning, and therefore almost certainly should be: "The issue with 'off the reservation' and similar phrases is that these things are said without any thought. They become a part of the common vernacular. Freely they move from mind to mind, mouth to mouth. Maybe the meaning of these sorts of phrases never should have been the issue. Maybe living lives without thinking about what we say and do is of greater concern." https://www.npr.org/sections/codeswitch/2014/06/29/326690947/should-saying-someone-is-off-the-reservation-be-off-limits https://www.npr.org/sections/codeswitch/2014/06/29/326690947...
    - dionian 6y ago
      We can also listen to the phrase without imputing immoral motives to the speaker.
      - mikepurvis 6y ago
        Sure. No one is saying that the person is bad for saying it. Indeed, they're probably a good person, and for that reason may be interested in hearing why the phrase is better avoided. Particularly if their regular travels (friends, work colleagues, etc) may not put them in contact with indigenous people.
vikramkr 6y ago
Management left unchecked just does what they're incentivized to do. You can't pass on the blame as shareholders when shareholders create incentive packages that reward getting a bonus today for an acquisition instead of not really getting paid for sustainably growing the business over the next decade.
- holidayacct 6y ago
  Management in many companies are just puppets installed for the purpose of keeping a person or group of persons in control. You'd be surprised at how many companies have management that has the decision making capabilities of a toddlers. And when I say toddler, I mean that in a literal sense. You can take an intelligent toddler and have them make day-to-day decisions that would be BETTER than middle-management.
- yellowstuff 6y ago
  People say that shareholders "own" a public company, but that ownership is much more limited than ownership in the normal sense. In reality shareholders have very little direct input on how the CEO gets paid. The best chance for shareholders to influence CEO incentives would be if an activist investor got involved and made it an issue, but that's fairly rare, and usually only happens in the most egregious cases.
- jl2718 6y ago
  Share loans are a really simple way to align incentives. Execs get shares loaned with interest at market value, and can’t sell faster than the loan repayment schedule of 20% per year after the end of tenure. Some other rules apply like dividends can’t be paid from a negative value loan. Sure, option incentive packages try to approximate this, but they can’t legally capture the downside like a loan can.
cma 6y ago
>the median merger destroys shareholder value for the acquiring company. Median doesn't seem like the right metric. If you measured VC by median outcome I'm sure it looks like they always fail.
sokoloff 6y ago
> Decades of evidence shows that the median merger destroys shareholder value for the acquiring company. As an investor, I care more about the total (sum of average) returns of mergers, not the median. Just like in venture capital (where the median investment is clearly negative), the total return matters and is driven by the large returns on success. I'd still be happy to invest in Berkshire Hathaway in 1955 even if you told me that their median merger over the next 60 years would be value destroying (so long as the average would turn out the way it has).
QuesnayJr 6y ago
The evidence is that the merged firm is worth more than the two component firms, but it's the target that reaps the gains. This suggests that acquirers tend to overpay. See page 111 of this survey paper: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.15.2.103 https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.15.2.103

gogopuppygogo 6y ago

Bezos was an investment banker. Before he had the track record of long term development (only born from long term efforts) he knew how to speak Wall Street and had a track record on Wall Street. Most CEO’s will never be capitalized like him for long term empire building so it’s hard to say there couldn’t be more Amazon sized successes out there if Capital was more accessible for longer term visions.

darkerside 6y ago
This seems sensible. If you want the goodwill from your investors to make a long term bet like Amazon did, you need to explain it to them in terms they can understand. It's a language anyone can learn with sufficient training and experience.
jsdavo 6y ago
Wait, I thought Bezos was a quant, not an investment banker?
- hchz 6y ago
  He worked at bankers trust, but not as a banker, and then at a quant hedge fund, but not as a quant.
smabie 6y ago
Bezos was never an investment banker.

mistrial9 6y ago

"go off the reservation" .. I suspect that my father many decades ago engaged in casual references like this, but I recall as a child that it was frowned upon by people who sought to reset and build positive relations between races in North America

pbhjpbhj 6y ago
Forgive me for straying OT: It seems like a fact-based analogy. 'A group have been restrained to "territory", but a member has broken that restraint'. There doesn't seem inherently to be a judgement as to the restraint or the rogue being right/wrong. I'd be interested in why you felt the usage was beyond the pale sufficiently that it needed to be reined in? The concept of territorial reservations doesn't appear to me to denigrate any group particularly; maybe I'm wrong in that?
- mikepurvis 6y ago
  Not the parent, but it's obvious what the origin of the phrase is, and while it may not be as icky as something like "open the kimono", it's definitely one that is trivially replaced with no loss in meaning, and therefore almost certainly should be: "The issue with 'off the reservation' and similar phrases is that these things are said without any thought. They become a part of the common vernacular. Freely they move from mind to mind, mouth to mouth. Maybe the meaning of these sorts of phrases never should have been the issue. Maybe living lives without thinking about what we say and do is of greater concern." https://www.npr.org/sections/codeswitch/2014/06/29/326690947/should-saying-someone-is-off-the-reservation-be-off-limits https://www.npr.org/sections/codeswitch/2014/06/29/326690947...
  - dionian 6y ago
    We can also listen to the phrase without imputing immoral motives to the speaker.
    - mikepurvis 6y ago
      Sure. No one is saying that the person is bad for saying it. Indeed, they're probably a good person, and for that reason may be interested in hearing why the phrase is better avoided. Particularly if their regular travels (friends, work colleagues, etc) may not put them in contact with indigenous people.

vikramkr 6y ago

Management left unchecked just does what they're incentivized to do. You can't pass on the blame as shareholders when shareholders create incentive packages that reward getting a bonus today for an acquisition instead of not really getting paid for sustainably growing the business over the next decade.

holidayacct 6y ago
Management in many companies are just puppets installed for the purpose of keeping a person or group of persons in control. You'd be surprised at how many companies have management that has the decision making capabilities of a toddlers. And when I say toddler, I mean that in a literal sense. You can take an intelligent toddler and have them make day-to-day decisions that would be BETTER than middle-management.
yellowstuff 6y ago
People say that shareholders "own" a public company, but that ownership is much more limited than ownership in the normal sense. In reality shareholders have very little direct input on how the CEO gets paid. The best chance for shareholders to influence CEO incentives would be if an activist investor got involved and made it an issue, but that's fairly rare, and usually only happens in the most egregious cases.
jl2718 6y ago
Share loans are a really simple way to align incentives. Execs get shares loaned with interest at market value, and can’t sell faster than the loan repayment schedule of 20% per year after the end of tenure. Some other rules apply like dividends can’t be paid from a negative value loan. Sure, option incentive packages try to approximate this, but they can’t legally capture the downside like a loan can.

cma 6y ago

>the median merger destroys shareholder value for the acquiring company. Median doesn't seem like the right metric. If you measured VC by median outcome I'm sure it looks like they always fail.

sokoloff 6y ago

> Decades of evidence shows that the median merger destroys shareholder value for the acquiring company. As an investor, I care more about the total (sum of average) returns of mergers, not the median. Just like in venture capital (where the median investment is clearly negative), the total return matters and is driven by the large returns on success. I'd still be happy to invest in Berkshire Hathaway in 1955 even if you told me that their median merger over the next 60 years would be value destroying (so long as the average would turn out the way it has).

QuesnayJr 6y ago

The evidence is that the merged firm is worth more than the two component firms, but it's the target that reaps the gains. This suggests that acquirers tend to overpay. See page 111 of this survey paper: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.15.2.103 https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.15.2.103