The Greed Cycle

1
The Greed Cycle

• John Cassidy
• Financial writer, The New Yorker
• A systems analysisrules practices affect ethics

2
Ethics a systems perspective
GOVERNMENT
BUSINESS
SCHOOLS, ETC.
FAMILY/INDIVIDUAL
3
Two big questions

• Generallyharnessing but channeling greed
• Invisible Hand?

• Specifically corporate governance via
  shareholder value?

4
Roots I Crash of 29

• Roaring 20s bull market
• Price manipulation corporate, stock market
  insiders

• 1934 SEC
• Earnings, other reports
• Transparency, level field, confidence?
• Berle Means
• managerial firm

5
Roots II That 70s show

• Bear market
• Competitive decline
• Agency theory (Jensen Meckling 76)

• Principals own, agents control
• Monitoring costs
• Corp. govern. problemand yardstick
• How align interests?

6
Shareholder value revolution

• 80s takeover wars
• Raiders financiers
• No target too big
• Going private LBOs
• Intellectual rationale
• Agency theory
• Disgorge free cash flow
• Make managers owners
• Debt, excess and collapse

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Executive stock optionsSH value redux

• Right to buy at set (strike) price date
• Not an expense

• Invented 1950
• 1980 less than 1/3 of CEOs
• 1994 7/10 CEOs ½ of pay

8
Ethical fly in the options ointment Moral hazard

• Managers (says Cassidy) benefit by gaming system
  Stock pricing is alignment Achilles heel

9
Options ethics

• Manipulating options
• Resetting strike price
• Timing
• Overuse earnings
• Manipulating stock price
• Earnings inflation
• Debt concealment
• Buybacks, downsizing
• Stock (over)pricing treadmill

10
Post-97 ethics crisis

• Cendant 98 (direct marketing)
• Marketing costs capitalized
• Sunbeam 98 (appliances)
• Chainsaw Al downsizing
• Lucent 00 (phone equipment)
• Pension gains as earnings
• Enron 01 (energy trading)
• Internal asset sales as earnings
• Debt off balance sheet

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Find the accounting shenanigans!
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The costs

• Worsened inequality
• Climate of ethical abuse
• Short term management
• Single-stakeholder model

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Possible solutions

• Indexed strike price?
• Problems
• Co. luck
• Market beyond managers control

• Reward for quality service
• Board design
• German
• Compensation implications?