212 InManagersWeTrust
Some managers whom I admire enormously—and whose oper-
ating records are far better than mine—disagree with me re-
garding fixed-price options. They have built corporate cultures
that work, and fixed-price options have been a tool that helped
them. By their leadership and example, and by the use of options
as incentives, these managers have taught their colleagues to
thin kli ke owners. Such a culture is rare and when it exists
should perhaps be left intact—despite inefficiencies and ineq-
uities that may infest the option program.^11Investors should loo kfor boards that ta ke the lead in policing
stoc koption compensation, but beware—they are scarce.
DEALS
Just as the disease of random executive compensation must be
avoided by intelligent investors and trustworthy boards, so must the
costs of imprudent acquisition policies and defensive tactics.
Offensive
Offensive acquisition strategies require careful board attention be-
cause of the strong possibility that even outstanding senior managers
possess individual interests that conflict with owner interests. Ac-
quisitions give CEOs enormous psychological benefits by expanding
their dominion and generating more action. Acquisitions driven by
these sorts of impulses come at shareholder expense.
Most acquisitions do not achieve gains in business value. A 1999
study by the global accounting firm KPMG concluded that “83% of
mergers [during the period 1996–1998, when trillions had been paid
in merger deals] failed to produce any benefits for shareholders and,
even more alarming, over half actually destroyed value.” That study
also found, based on interviews with managers involved in mergers,
that less than half did any postdeal review to test whether value was
added or subtracted!^12
A governance problem exists because most acquisition attempts
do not come to the board for discussion until the process is sub-
stantially under way and until after the CEO has invested substantial
personal capital in them. Rejecting an acquisition proposal after the
CEO invests substantial personal capital is often considered a rejec-
tion of the CEO who presented the proposal to the board. This prob-
lem is especially acute among CEOs who resent hearing bad news.