Sunday, December 20, 2009

Corporate Leadership's Moral Hazard

Do corporate leaders confront moral hazard? That is, would a corporate leader (e.g. manager) make a different decision if they assumed all risk (i.e. monetary gain or loss) of outcome?

I ask this because I'm often witness to decisions that, if were based on personal monetary gain or loss, would probably be different. But since most of us have no "skin" (i.e. money) in the game (or very little), decisions are often based on political game-playing, rather than what is most beneficial to shareholders - or employees for that matter.

It's my belief that most all corporate leadership has to deal with moral hazard. Without significant monetary incentives, we often make decisions that benefit ourselves rather than shareholders.


Adam Fokken said...

Too true.

Scooter said...

Interesting. It's a question of incentives? Sort of a freakonomics thing?

I was once told (by leadership far above my level) that I need to make decisions that benefit me personally, and that those decisions, should I believe strongly in them, will benefit those following me (that moment of leadership was courtesy of a comment I made about why I had left two teams - because it benefitted the product and the team after my initial involvement or due to a leadership change, not because it benefitted me). So, accordingly, there's no catch-22 between my goals and corporate goals. I find that reasoning dubious at best, particularly given the number of Ponzi schemes that have recently been uncovered - those being an extreme example of personal benefit.