Page 130 - Introduction to Business

104 PART 1 The Nature of Contemporary Business

jobs, and they may not own enough stock or have that good a severance package to
offset this loss. Moreover, even if they do own a decent amount of stock or have a
good severance package, many top corporate officers don’t want to lose the power
and prestige of being a CEO or other top executive of a major corporation. Some-
what similarly, corporate directors may not want to lose their lucrative director-
ships (total director compensation at many big companies today approaches
$100,000 per year) and the power, prestige, and networking opportunities that go
with the directorship. Thus, corporate officers and directors may be more reluctant
to entertain takeover bids than the ordinary shareholder of the corporation—
creating a potential conflict of interest.

Short-Term Versus Long-Term Orientation. Investors (as opposed to
speculators) in shares of major corporations frequently have a rather long-term focus.
Shareholders may intend to own shares of quality companies literally for decades. As
a result, they may not be particularly concerned with a company’s current profitabil-
ity if current profits are suffering because the company is investing positively for the
future. The classic “buy-and-hold” investor is mostly concerned not with a company’s
present stock price but with what that company’s stock price is going to be in thirty
years (perhaps when the investor is planning to retire). The long-run success and prof-
itability of the corporation is what such individuals are interested in.
In contrast, many corporate officers (and even boards of directors) have recently
been criticized for their highly short-term focus and orientation. Today, the tenure
of many corporate CEOs is less than five years, and such corporate officers often pull
out all the stops to make sure that the company is a raving success during their
tenure in office. Such an approach may have a variety of benefits for given CEOs and
other top corporate officers. First, executive officer bonuses are generally based on
annual corporate profits. Second, stock options for executives usually have a rela-
tively short fuse (certainly nothing like a twenty or thirty year duration), and it thus
is important financially for CEOs and other top executives to keep the company’s
short- to medium-term stock price high. Third, high current profitability and a high
current stock price help keep speculators in a company’s stock happy and off the
backs of the CEO and other corporate officers. Finally, running a highly profitable
and successful business helps increase the marketability of the CEO and other offi-
cers should they for whatever reasons seek employment with another corporation.
The area of corporate research and development (R&D) is one area where this
long-term versus short-term orientation conflict comes to the foreground. A long-
term investor in a company’s stock wants the company to invest heavily (even at the
price of high current profitability) in new product and other research and develop-
ment, so as to enhance the company’s posture thirty years hence. A corporate CEO
planning to leave the company in two years may, in contrast, slash the company’s
R&D budget in order to sharply boost current company profits. While such an action
is legal, and certainly is expedient for the given CEO, it is also possibly deleterious to
the long-term interests of the shareholders the CEO is supposed to be serving.
Moreover, in recent years the pressure from CEOs and other corporate officers
for high current earnings has arguably led to actions far beyond just perhaps inap-
propriately cutting R&D budgets. Indeed, a variety of prominent companies have
during the past few years illegally “cooked” their books. For example, the Enron
Corporation through a variety of schemes inflated its income by $586 million,
Sunbeam Corporation overstated its 1997 income by $71.1 million, and WorldCom
Corporation inflated its earnings by a whopping $3.8 billion. In all three cases, top
corporate officers reaped millions of dollars in performance bonuses and exercised
stock option gains due to the inflated earnings, although their actions in this regard

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