The Economist - USA (2021-02-06)

54 Business The EconomistFebruary 6th 2021

Bartleby Talentmanagement

H

owbestshouldmanagersbein-

centivised?Inthebiblicalparableof

thetalents,a masterdivideshisproperty

amongthreeservantsbeforegoingaway.

Twoputhismoneytoworkanddouble

itsvalue;thethirdburiesit inthe

ground.Thefirsttwoservantsarere-

wardedandthethirdispunished.

Thebiblicalstoryisanearlyexample

oftheprincipal-agentproblem.When

delegatingauthority,howcana principal

besurethattheiragentswillactrespon-

sibly?Theproblemisusuallydiscussed

intermsofthepotentialfortheagentsto

begreedy,andtakemoneyforthem-

selves.Theunfortunateservantinthe

parableactsoutoffear,declaring:“Mas-

ter,I knewyoutobea hardman.”Sure

enough,theservantiscastintothe“out-

erdarkness”wheretherewillbe“weep-

ingandgnashingofteeth”.

Inthecorporateworld,somesay,fear

playsasbiga partasgreedindistorting

managerincentives.Criticsclaimthat

managersareunwillingtoinvestin

long-termprojectsbecausetheyfretthis

willdamagethecompany’sprofitgrowth

intheshortterm.If thathappens,the

managersmayworrythattheywillbe

firedbytheboard,orthatthecompany

willbesubjecttoa takeoverbid.

Companieshaveseverallayersof

agents.Theboardisworriedaboutpres-

surefromfundmanagerswhoarethem-

selvesactingonbehalfoftheunderlying

investors,andfearlosingclientsif they

donotdeliverabove-averagereturns.

LucianBebchukofHarvardLaw

Schoolarguesthattherehasbeentoo

muchfocusontheroleofinstitutional,

andparticularlyactivist,investorsin

drivingshort-termism.Writinginthe

HarvardBusinessReview*,henotesthat

managersatbothAmazonandNetflix

havebeenabletopursuelong-term

growthattheexpenseofshort-termpro-

fitswithoutexperiencinganysignificant

pressurefromshareholders.Indeed,

growthstocksingeneral(definedasthose

wherethevaluedependsontheexpecta-

tionoffutureincreasesinprofits)have

beenverymuchinfashioninrecentyears.

MrBebchuksaysthisshort-termism

“bogeyman”hasbeenenlistedtoarguein

favourofinsulatingmanagersfromshare-

holdercontrolusingrestrictedvoting

rights,specialsharesandtherest.Some

thinkexecutivesmaybeconstrainedby

theconcentrationofownershipina few

institutionalhands,asthefund-manage-

mentindustryconsolidates.MrBebchuk

believesit isfoolishtothinkbacktoa

“goldenera”whenshareownershipwas

dispersed.Managersmayhavefeltno

pressuretoproduceshort-termresults.

“But”,hesays,“theyfeltnopressureto

producelong-termresultseither.”

Perhapstheproblemliesnotwith

investors,butwiththeincentivesusedto

motivateexecutives.AndrewSmithers,an

economist,hascalculatedthatthepropor-

tionofoperatingcashflowpaidoutto

shareholdersbynon-financialAmerican

companieswasjust19.6%between 1947

and1999.Bytheendofthatera,share

optionsbecamea popularmeansof

motivatingmanagers.Subsequently,the

proportionofcashflowpaidtoshare-

holdersaveraged40.7%between 2000 to

2017,whilecashusedforinvestmentfell.

Toexaminetheeffectofincentives,

XavierBaeten,a professorattheVlerick

BusinessSchoolinBelgium,studiedthe

StoxxEurope 600 indexofbigEuropean

companiesbetween 2014 and2019.When

hecomparedindividualfirms’returns

onassets withthechiefexecutives’

remuneration,hefounda positiveim-

pactofhighpayonperformanceoverthe

shortterm,definedasthenext 12

months.Yetnosuchrelationship

showedupovera three-yearperiod,

implyingthattheinitialgainssoon

dissipated.(Thestudycontrolsforvari-

ablesincludinga firm’ssize.)

MrBaetenthenexaminedthecompo-

sitionoftheexecutives’packages.He

foundthatshort-termperformancewas

betterwhenincentivesweremorethan

200%ofbasepaythanwhenincentives

werelessthan100%.Healsofoundthat

afterthefirst 12 months,theimpact

switched.Executiveswithincentivesof

morethan300%ofbasepayperformed

significantlyworseinthenexttwoyears

thanthosewhoreceivedlessthan100%.

Thisisnotproofthatexecutivein-

centiveshaveledtoanexcessiveshort-

termfocus.Butit suggeststheneedfor

carefullydesignedincentiveschemes.

Theprincipal-agentproblemrequires

eternalvigilancebyshareholders.Getthe

formulawrongandweepingandgnash-

ingofteethwillfollow.

Executives,notinvestors,maybetoblameforshort-termism

.............................................................

* https://hbr.org/2021/01/dont-let-the-short-

termism-bogeyman-scare-you

replace Mediapro. No credible buyer

emerged. Canal+, a pay-tv group con-

trolled by Vincent Bolloré, a ports-to-

media tycoon, unexpectedly stayed away.

Having lost the main football rights in 2018

after several decades, Canal+ says it can

live without Ligue 1 (it still shows a handful

of matches). Many think it may rejoin the

fray, but offer much less than Mediapro

did. Amazon has also shown interest in

streaming rights, but has offered stingier

terms than traditional broadcasters. tv

channels may bid for one match at a time.

For now, French football has no broad-

casting deal for most matches—a catastro-

phe for clubs that rely on such rights for a

third of their income (often more for small-

er teams). They are already facing an entire

season with no gate receipts. Pandemic-hit

sponsors have less money to throw around.

Player transfers, a traditional source of

cash, are tricky in a depressed market. The

league has already indebted itself to tide

teams over; struggling clubs have been able

to tap banks for state-backed loans. But a

public bail-out of an industry that rewards

its stars with multimillion-euro contracts

would look unseemly.

Other European leagues are also ailing.

Some, like the English Premier League, of-

fered rebates to broadcasters during the co-

vid-19 crisis. An auction for Italy’s Serie a

rights in January fell short of expectations.

A group of European clubs estimates 360

teams will need financial help to survive.

The main concern in France is which chan-

nel will be airing the showdown on Febru-

ary 7th between Olympique de Marseille

and Paris Saint-Germain—if any. French

football wanted to be viewed as the most

competitive in Europe. Now it would be

happy just to be viewed. 7

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