Profit before Perks

EXECUTIVE OFFICERS MUST BE FREE FROM AVARICE
Profit before Perks

► TLDR: In a public company, the shareholders are the owners of the company. Multiple shareholders cannot run a company, so they must employ executive officers to do this for them. It is not possible to oversee, in detail, everything that these managers do, so it is essential that managers can be trusted to act in the interests of the company, not themselves. Executive officers must be from from avarice. ◄

"Leadership is the privilege to better the lives of others. It is not an opportunity to satisfy personal greed."
—Mwai Kibaki, former president of Kenya (1931–)

In an ideal business, directors pursue the company's objectives without undue consideration for personal gain. Upon election to the board, they negotiate their salary and standard perks, and from then on, their focus is on the success of the business. Yet there is a risk that bosses can be dazzled by the wealth generated around them, and work toward boosting personal gain instead of the profits due to shareholders.

This situation, known as "the divorce of ownership and control," first arose in the late 19th century, with the creation of large, public limited companies (plcs) that allowed senior management more freedom to operate beyond effective shareholder scrutiny. As long as the company profits were satisfactory, directors were free to conduct their business functions as they saw fit. However, if a business enterprise comes to reflect the aims of its managers, will the business be focused on profit maximization (for its owners, the shareholders) or on increasing the status, financial rewards, and power of its managers?

Personal Interests

Some directors act opportunistically; they seem to be more interested in personal gain than in the company's financial well-being. The banking crisis of 2008 led the shareholders of many companies to question corporate governance mechanisms and executive pay. The shareholders of Barclays Bank, for example, were stirred into taking action just before the bank's 2012 AGM. They had discovered that in the previous year, profits had fallen by 3 percent, shares had dropped by 26 percent, but chief executive Bob Diamond was due to receive a bonus of $4.2 (£2.7) million and total pay in excess of $10 (£6.3) million.

Restricted Ownership

In private limited companies, the situation is simpler. Since share ownership is restricted (often within a single family), the directors and the shareholders are usually the same people. In any case, it is unusual for peaple to take advantage financially of those within their own circle of family and friends. For example, the problem of perks before profits is rarely an issue in Germany, where the mittelstand (medium-sized) companies—which are mainly family companies—are the dominant business model. A recent study of the different performances of family-owned and publicly owned companies in Spain found that family-owned companies performed better, in terms of financial equity, than nonfamily companies of the same size in the same industry. Countries such as the UK and US, however, have a larger proportion of plcs than many other countries. After decades of noninterference, shareholders are once again becoming interested in corporate governance and gain. ■

(The Business Book, DK)