Comments on: Do Equity Incentives Drive Executives to Fudge Their Financials? Who Cares? http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/ Entrepreneurship, Startup Companies and Business Philosophy Fri, 03 Feb 2012 07:09:48 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Mike http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/comment-page-1/#comment-5700 Mike Mon, 23 Jun 2008 23:41:08 +0000 http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/#comment-5700 Who gets hurt? Interesting question. As a former Enron executive, I can assure everyone that the stakes are very high indeed. In the Enron, MCI and other famous cases, billions of dollars and thousands of jobs were sacrificed on the altar of quarterly earnings. Most cases of earnings management end less dramatically than those famous cases but the principle (or lack thereof)are the same - it is like smoking - highly addictive and always fatal but over an always uncertain time frame. Who gets hurt? Interesting question. As a former Enron executive, I can assure everyone that the stakes are very high indeed. In the Enron, MCI and other famous cases, billions of dollars and thousands of jobs were sacrificed on the altar of quarterly earnings. Most cases of earnings management end less dramatically than those famous cases but the principle (or lack thereof)are the same – it is like smoking – highly addictive and always fatal but over an always uncertain time frame.

]]> By: Mike http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/comment-page-1/#comment-5693 Mike Mon, 23 Jun 2008 22:43:11 +0000 http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/#comment-5693 Todd, You're right. The question is who gets hurt? I've heard arguments that this is all prudent business management, but my gut says otherwise. Other Mike, Very well put, sir! Mike Todd,

You’re right. The question is who gets hurt? I’ve heard arguments that this is all prudent business management, but my gut says otherwise.

Other Mike,

Very well put, sir!

Mike

]]> By: Mike http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/comment-page-1/#comment-5655 Mike Mon, 23 Jun 2008 16:31:30 +0000 http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/#comment-5655 Do Equity Incentives Drive Executives to Fudge Financials? Yes! Who Cares? Almost Nobody. Responsible Executives should care a lot. The crux of the problem is the decision making time frame. For any given decision, the best decision for this quarter may be very different from the best decision over some longer time frame. When bonuses and even executive survival depend on quarterly measurement, optimal quarterly decisions get made even when the long term consequences are less than optimal or even bad. Common practice is for senior management to pay lip service to long term while driving everyone in the organization to meet quarterly goals. This pattern develops and becomes common practice when management teams succumb to the holy grail of meeting quarterly earnings expectations. Analysts know full well that the value of the any enterprise is a long term question but they get graded on the accuracy of their quarter earnings forecasts. Once this cycle gets going, it only stops when the inevitable problems eventually show up and someone forces a management change with a new CEO. The new CEO gets a short grace period and then the cycle repeats. Want to know why Warren Buffet is perceived to be so successful? He is one of very few corporate leaders who can get away with making multi-year decisions in a world dominated by quarterly thinking. The "theory" of matching management incentives to equity performance is valid. The "practice" of doing it on a quarterly basis verges on criminal negligence. Do Equity Incentives Drive Executives to Fudge Financials?
Yes!
Who Cares?
Almost Nobody. Responsible Executives should care a lot.

The crux of the problem is the decision making time frame. For any given decision, the best decision for this quarter may be very different from the best decision over some longer time frame. When bonuses and even executive survival depend on quarterly measurement, optimal quarterly decisions get made even when the long term consequences are less than optimal or even bad. Common practice is for senior management to pay lip service to long term while driving everyone in the organization to meet quarterly goals.

This pattern develops and becomes common practice when management teams succumb to the holy grail of meeting quarterly earnings expectations. Analysts know full well that the value of the any enterprise is a long term question but they get graded on the accuracy of their quarter earnings forecasts.

Once this cycle gets going, it only stops when the inevitable problems eventually show up and someone forces a management change with a new CEO. The new CEO gets a short grace period and then the cycle repeats.

Want to know why Warren Buffet is perceived to be so successful? He is one of very few corporate leaders who can get away with making multi-year decisions in a world dominated by quarterly thinking.

The “theory” of matching management incentives to equity performance is valid. The “practice” of doing it on a quarterly basis verges on criminal negligence.

]]> By: Todd Rhoad http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/comment-page-1/#comment-5487 Todd Rhoad Sat, 21 Jun 2008 23:30:08 +0000 http://www.businesspundit.com/do-equity-incentives-drive-executives-to-fudge-their-financials-who-cares/#comment-5487 According to the book "Take on the street" by Arthur Levitt, even the analysts are 'persuaded' to make certain recommendations on particular companies. It would appear that equity incentives convince almost everyone to make the wealthy even wealthier. According to the book “Take on the street” by Arthur Levitt, even the analysts are ‘persuaded’ to make certain recommendations on particular companies. It would appear that equity incentives convince almost everyone to make the wealthy even wealthier.

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