Originally Posted by aquajets1
While that is the technical purpose, how would you comment on how the effects outside (i.e. personal ambition, government, etc) of the business market affect those decisions?
( by the way, i love how every conversation not related to android turns into a philosophical or societal discussion) (the android ones turn into slap fights)
One of the biggest issues in corporate governance is how to allign Management's interests with the shareholders' interest. There is no simple answer. Lets assume a simplest of scenarios where owners only care about money and nothing else....
You can pay an anual bonus based on accounting metrics like profits. The problem is this can encourage a manager close to retirement to shoot for short term profits over long term profits. No investment in R&D, that costs money now, and the profits wont hit for years! It also creates a reward for cooking the books. And so on....
A much better solution is to give the managers stock options, or so we thought for a while. If the shareholders stock price goes up, so does the value of managements options. Wallstreet takes a longer term view and will (often) frown upon management teams that sacrifice long term profits for short term gains, and also the option terms are typically 5 or 10 years so management has to have a longer time horizon to cash in. On the downside, they still find ways to game the system, like backdating their options or managing wall street perceptions, sometimes illegally. There is also the issue that an option does not have the same risks as a share of stock, just the same reward. Management with options will have an incentive to take bigger risks than the shareholders would, knowing that they make a ton if they hit a home run and lose nothing if they strike out. This, along with a bonus structure that rewarded risk played a huge role in the Enron failure. The fraud that made the press was simply an attempt to cover up what had already gone sour from a poor reward scheme. Same issue for the investment banks.
So now what? Boards need to be vigilant and shareholders need to hold boards accountable. As I said even with a simple goal like make money, there is no simple way to keep managers perfectly aligned with shareholder interests. Reward sytems for management need to provide incentives for good behavior and disincentives for bad behavior, but there has to be oversight to make sure the system is not gamed, and action is taken if it is. The companies that do this well have a big long term competitive advantage. Many professional investors (including Buffet) put a big emphasis on corporate governance, more so than historical financial results.