1095
n
Liaisons and intrigues
In addition, Jim found that boardroom friends engaged a lot
in another type of behavior towards the CEO: ongoing advice
and counseling. They gave their CEO informal feedback about
the formulation of the rm’s strategy: they acted as a ‘sounding
board’, continuously provided general feedback and sugges-
tions, etc. All this happened outside the company’s formal
board meetings. Directors who were not personal friends hardly
engaged in this type of behavior.
Usually CEOs don’t easily do this; accept or even ask for ongoing
counselling and opinion. It is well known from research that
a primary inhibitor to seeking advice is the perceived effect it
could have on the advice-seeker’s status. People often believe
that others will view their need for assistance as an admission of
uncertainty or dependency, and as an indication that they are
less than fully competent or self-reliant.
There is little doubt that CEOs – who are
expected to be condent, proud, and self-
assured – have these tendencies too! Fierce,
testosterone-driven CEOs may not take
criticism or even advice easily, but if the
director is a personal friend, it might be
easier to swallow. Psychologically, it is easier
to listen to criticism from someone you
know and trust than from a stranger. Hence, having your friends
in the boardroom may not be such a bad thing after all.
CEOs and their stock options . . . (oh please . . .)
Let me now turn my attention (and hopefully yours too . . .) to
the topic of how CEOs generally are rewarded by their boards.
And a major element here is, of course, the illustrious stock
options. Any idea why we continue to reward top executives with
stock options? We accept it, nowadays, as a given, but why do we
have that practice in the rst place?
You might say “because it constitutes performance-related pay;
through them, you nancially reward top managers for their
‘‘
having your
friends in the
boardroom may not
be such a bad thing
after all
’’
Business Exposed110
achievements”. Fair enough, because for many of us mortals our
pay depends to some extent on our performance. However, do
realize that for CEOs, for example, this component is often as
high as 80 percent. Eighty percent! Do you know many people
(employed in the same large corporations that these executives
head) whose salary is 80-percent dependent on some measure of
their achievements? Not many I suspect.
And, in theory, large corporations that reward their top managers
through stock are right – and I am saying “in theory” for a
reason. This practice – of offering CEOs stock-based pay – is
a recommendation straight out of something called “agency
theory”. It is one of the few scientic theories in management
academia that has actually inuenced the world of management
practice. It is basically a theory that stems from economics.
It says that you have to align the interests of the people
managing the rm (top executives) with those of its share-
holders, otherwise they will only do things that are in their
own interest, will be inactive, lazy, or plain deceitful. Yep, these
economists have an uplifting world-view. But that is why we
have such a huge performance-related component in the pay of
most top executives.
But are you really sure you want people like that managing your
rm? People who will be lazy and purely operate in their own
interest if given a chance? Do you really want a CEO who really
needs performance-related pay and who otherwise, if put on a
xed salary, wouldn’t do much and just hang about? In case you
missed it, I intended this as a rhetorical question . . .
But anyway, we give them stock – and lots of it – to incentivize
them. But the question still lingers: why stock options? And that’s
a story in itself.
Agency theory doesn’t only say that people will be lazy and
deceitful if given a chance; it also says that managers are inher-
ently risk-averse; much more risk-averse than shareholders would
like them to be. And the theory prescribes that you should give
them stock options, rather than stock, to stimulate them to take
more risk.
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