A System of Problems
Investors are reeling from corporate scandals. Regulators are investigating and
However, the system is integrated and complicated. The incentives for executives,
Figure 2-2. Corporate participants and the various interlinking relationships.
For example, analysts talk to the management
The public auditors for the firm have had a long and fruitful relationship with the company. They have
Why are managers so obsessed with pushing hard for smooth and increasing profits, and with gaining analysts' favor? It is because they have been awarded stock and stock options by the board. If they can increase the price of the stock, they can cash in their options and stock and become rich. These incentives were awarded by a board that is largely picked by the managers.
We also rely on regulators to monitor corporate behavior. However, regulators often come from this very system. They often have experience as
The types of monitoring and incentives used in the United States to align the interests of executives and shareholders are also used in other capitalist-oriented countries. However, important differences do occur. Indeed, in many
The tale of Germany's Gerhard Schmid, the former CEO of MobilCom, is telling. As CEO in 2001, Schmid transferred 70.9 million euros ($69.5 million) in new MobilCom stock to a shell company that his wife controlled. The German regulators, the German Financial Supervisory Authority, said that the actions did not fall under its jurisdiction. Therefore, it wouldn't investigate even though Schmid broke the law by not informing other executives or the board. Even though the German securities laws and enforcement are more lax than that of the United States, MobilCom's board of directors did find out about the transfer and investigated. In June 2002, the board
In most countries, the laws, regulators, and enforcement are so weak that the