Management and the Capital Markets: Issues in Managing the Tensions between Two Cultures (Pdf of Keynote Slides)

Harvard NOM Working Paper No. 05-14

Kalmbach Lecture, Simon School, U. of Rochester; U. of Chicago Booth Finance Seminar; The New Corporate Governance Conf. (in Honor of Joel Seligman), Washington U., St. Louis, Law School; Harvard Bus. School Acctg. and Control Seminar, and Corp. Governance Center, LeBow College of Bus., Drexel U.

Barbados Group Working Paper No. 05-03

30 Pages Posted: 14 May 2005

See all articles by Michael C. Jensen

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Abstract

Note: SSRN is experimenting with enabling the distribution of different types of files: slides, spreadsheets, video, etc. This is the second upload of a pdf file of Powerpoint slides. We are interested in our users desires to distribute files that go beyond word processing text files. You can communicate with me on these issues via my email address below.

Top management teams and boards of directors stand between (and are under pressure from) both the capital markets and the internal managerial organization. These two groups speak different languages, and each perceives the firm and its purposes in different ways and evaluates performance according to their specific worldview. It is the job of top management and boards to manage the tensions between these two cultures. And few have been doing a good job of it. Neither culture is universally right. The capital market's perspective held the upper hand in the last bubble. And the result was much value destruction. It is time for firms to break this cycle of dependence to put balance back into the relations between internal management and external market forces, and put a halt to managing earnings (which is just another term for lying to the markets). I discuss the critical importance of Strategic Value Accountability (SVA) the missing concept in corporate governance, how the widespread distribution of equity-based compensation coupled with the failure to clearly assign SVA decision rights can lead to the value-destroying over-democratizations of SVA rights to managers that have neither the specific knowledge or talent to exercise these rights. I also discuss the dysfunctional consequences of the almost universal practice of linking annual managerial bonuses to budget and other targets, how it destroys value and how it leads to the erosion of integrity throughout organizations.

Keywords: Budget Target Based Bonuses, Lying, Integrity, SVA, Strategic Value Accountability

Suggested Citation

Jensen, Michael C., Management and the Capital Markets: Issues in Managing the Tensions between Two Cultures (Pdf of Keynote Slides). Harvard NOM Working Paper No. 05-14; Kalmbach Lecture, Simon School, U. of Rochester; U. of Chicago Booth Finance Seminar; The New Corporate Governance Conf. (in Honor of Joel Seligman), Washington U., St. Louis, Law School; Harvard Bus. School Acctg. and Control Seminar, and Corp. Governance Center, LeBow College of Bus., Drexel U.; Barbados Group Working Paper No. 05-03. Available at SSRN: https://ssrn.com/abstract=723382 or http://dx.doi.org/10.2139/ssrn.723382

Michael C. Jensen (Contact Author)

Harvard Business School ( email )

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