shouldpushforsmallerboardswithmoreoutsidedirectors,
selected not by the CEO but by an independent group
representing stockholders.Thenumberofdirectorships that
an individual can hold should be restricted, and directors
should have no other business relationship to the firm.
Finally, audit committees should include members with
enoughaccountingexpertisetoasktoughquestionsaboutthe
firm’s accounting choices.
37
Theissueofexecutivecompensationhastobeexaminedin
conjunctionwithcorporate governance.Asignificantfactor
behind complexity remains the incentives of managers to
cookthebooksintheshortterm,leavingotherstocleanup
the mess in the long term. We continue to believe that
providing managers with equity stakes in the firms they
manage plays an important role in reducing the conflicts
between managers and stockholders, but the granting of
executiveoptionsto accomplishthishascreatedsignificant
side costs.
CONCLUSION
Arecomplexfirmsworthlessthanotherwisesimilarsimple
firms?Insomecases,theyareandwehaveexaminedboththe
sources of complexity in financial statements and the
appropriateresponsesinvaluation.Complexityistheresultof
businessdecisionsmadebythefirm(theycandiversifyand
makethebusinessmixmorecomplex),structuringdecisions
on how the firm is organized (holding structures and
consolidation), and disclosure decisions(on how to reveal
information to financial markets). Thus, firms can have
complex financial statements even if they are in simple