Ethics Publicity and Reputation

Managers are Ethics is an important factor that constrains many managers (and is often sadly underestimated mosteafrennotecrkminaus by economists). Most CEOs want to do well for themselves, but they want to do so only "within or ^^hk^ people. the bounds of the normal, accepted, ethical range of actions." Staying within the bounds of the ordinary also reduces the concern for negative publicity and legal liability for violation of their fiduciary duties.

Ethical standards are Yet ethical standards are themselves defined by CEOs as a group—and these have slipped over relative and changing. time. In some dimensions, the race seems to have been to the bottom. For example, one hundred years ago, the financier J.P. Morgan argued that no CEO should make more than 20 times what the average company employee earns. The average today is almost 200 times. Consequently, being paid 200 times an average worker's pay does not violate the ethical boundary of a CEO today. Similar arguments apply to almost every other issue in corporate governance: if a practice is commonplace among her peers, it is unlikely to violate an executive's sense of appropriateness.

Lack of transparency The desire to avoid negative publicity is also an important constraint on executive compensa-^hat^ tion. Negative publicity seems also to be responsible as to why managerial compensation has constrained more by come to consist of many complex components. The complexity renders pay packages fairly board capture than opaque to the press. Researchers are often similarly bewildered when they try to determine whether executive pay is primarily linked to the need to incentivize managers to seek out corporate performance or primarily due to managerial board capture. Both seem to matter, but there is some evidence that obfuscation is particularly important. First, the less-visible retirement packages are often higher even than reported compensation packages. Second, boards often change the terms of executive options that would otherwise expire worthless. Both of these facts indicate that it is not the incentives that are important.

Reputation sometimes Corporations can also reduce their financing credibility problem through building reputations. constrains managers. a manager who has once harmed investors is much less likely to be able to raise capital in the future. Conversely, a company that has a long history of treating investors well (e.g., paying dividends and repurchasing shares) often has an easier time raising capital than a company that has just started up. Reputation may also play a role when a manager is CEO of only a small company, and has his sights set on being selected manager of a larger company in the future. To receive a higher call (with more opportunities to become richer), the manager must constrain his self-interest for a while. One problem with reputation as an agency control mechanism is that managers close to retirement no longer care as much about their reputations as they care about their severance packages. Most CEOs retire, rather than graduate to bigger companies.

driven by incentive issues.

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