Corporate Governance: How They Pay Themselves

The organizers of a tennis tournament needed money. They approached the CEO of a big company and asked him to sponsor the tournament.

“How much?” asked the CEO.

“One million,” said the organizer.

“That is too much money,” said the CEO.

“Not if you consider the fact that you personally can play one match, sit at the honorary stand next to a member of the presidential family and be the one that hands over the prize,” said the organizer.

“Where do I sign?” said the CEO.

That’s the power of incentives, you see. People do what they perceive as in their best interest and are biased by incentives.

Look at the brokerage business. Stock brokers have a strong incentive to get us to trade. They advise us what to buy and sell. Volume creates commissions. Investment bankers encourage overpriced acquisitions to generate fees. Investment bankers have every incentive to get initial public offerings (IPO) deals done, regardless of the company’s quality. Their compensation is tied to the revenues the deal brings in. Analysts are rewarded for helping sell the IPO. Brokers want to move the stock.

What did Groucho Marx say? “I made a killing on Wall Street a few years ago…I shot my broker.”

Similarly, in the medical field, some psychologists ensure themselves future income by telling their patients that another visit is required. And they don’t talk about the limits of their knowledge. Their careers are at stake. As American actor Walther Matthau said, “My doctor gave me six months to live. When I told him I couldn’t pay the bill, he gave me six more months.”

Want to Read More? This content is exclusive for members of Value Investing Almanack. Login to read if you are a member. Else, click here to subscribe.