The culprit behind the dismal state of corporate governance is Wall Street capitalism. That's the view of Insead Professor Ludo Van der Heyden, who has been named Academic Director of the French business school's new corporate governance Initiative. "Corporate governance – and beyond that governance by the state – has failed in the USA," he says. "That is a major lesson of the recent financial crisis. Of course, it has failed in other countries as well, as the UBS debacle attests. But the absence of adequate corporate governance in the US financial sector has certainly been shown. And the response is now being worked out between the US government and the banks right now." The problem with corporate governance, he reckons, is that poorly performing CEOs have no downside risk. Market mechanisms for pay have created perverse effects. His colleague David Young suggests an alternative: "Executive Wealth Leverage", a metric of pay linked to shareholder wealth. Based on US data, Young calculates that the pay of CEOs in the US correlates to changes in shareholder wealth by a factor of only 0.4, based on the absence of a downside.
But that doesn't mean candidates for CEO will buy it. There is a market for CEOs, after all. It's one that lacks transparency as a matter of its structure, since we don't know the real quality of a CEO until long after the recruitment process – or even the retirement process – is finished. In the current market, there's little reason to expect that a candidate for CEO would accept anything other than a one-way bet.
Source document: The discussion is summarised on the Insead Knowledge website, with video and a link to its new corporate governance initiative website.
No comments:
Post a Comment