Organization Espresso

One of the ethical dilemmas between shareholders and management, I have come across is with a speech from the movie “The Wall Street” given by a character called Gordon Gekko. I am quoting the speech verbatim to set the context of my take on it-

Gekko: Well, I appreciate the opportunity you’re giving me, Mr. Cromwell, as the single largest shareholder in Teldar Paper, to speak.

Well, ladies and gentlemen, we’re not here to indulge in fantasy, but in political and economic reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market, when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company!

All together, these men sitting up here [Teldar management] own less than 3 percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than 1 percent. You own the company. That’s right — you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes.

Cromwell: This is an outrage! You’re out of line, Gekko!

Gekko: Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents, each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents.

The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.

In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you.

I am not a destroyer of companies. I am a liberator of them!

The point is, ladies and gentleman, that greed — for lack of a better word — is good.

Greed is right.

Greed works.

Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.

And greed — you mark my words — will not only save Teldar Paper, but that other malfunctioning corporation called the USA.

Thank you very much.

Every time I hear about the Government about the austerity in corporate compensation this speech is the first thing that comes to my mind. A classic debate that where the line is drawn, what compensation is justified and what is not. As Gekko points out in the speech that the management owns less of the companies these days, how would one determine what is acceptable and what is not.

This is a classic organization culture issue and an ethics issues. Lately we have seen fall of multiple companies in the great financial meltdown which were known across the world for obscenely high compensation and off the mill bonuses. The compensation earners went out unscathed, however the stakeholders including the investors and the customers burnt the fingers. The greater question is that how we ensure that the corporate management are more responsive and understanding of the stakeholders. A immediate reflexive solution comes to my mind is having greater equity ownership by the management.
Equity based compensation, ESOPS etc. are fairly common and well worked techniques. Though I am not really an expert on the compensation side of business but its not really a rocket science to understand that ESOPs and equity ownership of the management often leads to insider trading and bloating of account books like in the case of Satyam. The point is management looks into the personal gain through the ways which are not enhancing the earnings per share and stockholder value through business (not valuation I must emphasize).
I do not totally disagree with Salman Khursheed emphasizing need for austerity, but I strongly feel that this austerity cannot be attained by caps on compensation or government intervention. This needs to be addressed through the responsible compensation practices. By associating the compensation through value generated through the core business not by a mad race of valuations, accusations and unwarranted risks.

The bottom line is, that irrespective if would want or not, like it or not there would always be a constant struggle between multiple stakeholders to push forward their interests and grab the greater benefit pie from the organization. The only answer to this tug of war lies in stringent and learning processes with detailed checks and balances to ensure a fair bit of the economic benefits to everyone. Though easier said than done this would be an evolving process through out. As Gordon Gekko said Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind. May be this time round the organizations need a Greed to be Just and Fair.

Update: Personally speaking of my own opinion on the kind of compensation outline, the company should actually keep a slot of equity separate with ownership lying with the corporation itself and give a mix of returns on EPS and Valuations averaged over a period of 3 years as a part of management compensation.

by Prats | on Tuesday, November 3rd, 2009 at 12:23 pm | Organization Culture . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.