ethics are an economic issue

I forgot to mention in my initial post that ethics are an economic issue. If you have any doubt as to that fact then simply look at the $700 billion price tag of the Emergency Economic Stabilization Act. Consider that large dollar amount as a debit in the ethical accounting system.

Still don’t believe it? Have you heard that the Dearly Departed CEO of Lehman Brothers, Richard Fuld, made nearly half a billion dollars since the year 2000? Not bad for a guy who steered his company into the ground over those 8 years. Furthermore, the 28,000 former employees of Lehman are now scrambling to write the next chapter in their lives.

I hope that you know Dick Fuld (paging Dr. Freud, Dr. Sigmund Freud) is not an isolated case of executive hubris. A comprehensive list is even beyond the scope of Google.

One of the ways that this sort of outcome can be averted in the future is to structure incentive compensation plans for executives that focus on a wide array of performance measures, and not just the rewarding of a high stock price. For example, modern executives have numerous constituencies to satisfy, including:

• shareholders
• bondholders
• bankers
• employees
• suppliers
• distributors
• customers
• regulators
• politicians
• foreign governments
• and even activist groups

So why not develop a single measure of performance that evaluates the degree to which an executive has satisfied these varied constituencies?

In our hyper-business culture we have so focused on the shareholder as the only important constituent, that my suggestion probably sounds absurd. In business school there was extraordinarily little discussion of any constituency other than holders of the common stock. But, in the long run, if a management-team does not satisfy the aforementioned relationships then it is likely that the business will suffer in the long-run. This suffering will certainly affect the stock price of shareholders. In other words, the satisfaction of multiple constituencies is an economic issue for all parties involved.

Additionally, whatever measure of performance is chosen should evaluate executives over a sufficiently long period of time. Say, at least one business cycle. The combination of a more comprehensive performance measure and a long time horizon should help to alleviate some of the abuses of excessive compensation. Most importantly, if executives have to satisfy all of the above-listed groups of people then it is also more likely that they will act in a more ethical fashion. And that would be good for all of us.

With smiles!

Jason

PS – I saw “I’m Not There” and “Before the Devil Knows You Are Dead” last night. I totally appreciated the chances that Todd Haynes took with “I’m Not There,” but ultimately I was checking the back of the DVD case to see how long the movie lasted. Not enough emotional content for me. “Before the Devil Knows You Are Dead” had the opposite problem: too much emotional content for me. The story was one that would make Bill Shakespeare proud. And the acting was excellent. And Marisa Tomei! And…I found it to be too depressing.