As a student interested in pursuing a major in finance I recently read a book titled: “The Essays of Warren Buffett: Lessons for Corporate America“.1 The book covers multiple aspects of investing, however, the one section that caught my attention the full of tension relationship that often exists between the CEO and the Board of Directors. A factor that is presented as one possible cause of this tension is that CEO’s are usually pressured by the Board of Directors to yield results.

I viewed this situation as a battle between short-term and long-term results. The CEO is often times more aware of the company’s situation than the Board of Directors. Consequently, the CEO is aware both the short-term and long-term effects that a specific action can have. However, his/her ability to take actions that are best for the company is interrupted by the demands of the Board of Directors, placing the CEO in a difficult situation. However, it is important to state that I disagree with the book that the Board of Directors mainly focuses on short-term results. As representatives of shareholders, I believe that they have in mind the long-term gain of the company as well.

This “clash” can be addressed with the ideas learned from Chapter 5, Motivation In Action.2 This chapter focuses heavily on the reward system in organizations. One type of organizational based incentive often given to employees high in the organizational hierarchy such as CEO’s is stock ownership. The book touches on stock ownership used as a method to motivate CEO’s in Chapter 3, Common Stock. In theory through stock ownership employees will take actions similar to the owners of the company because they own part of the company through stocks. Consequently, the clash between the Board of Directors will decrease as both parties will have a similar mentality, addressing both the short-term and long-term requirements of the company. However, while the “clash” is diminished, the reward method might not be the best for the future of the company. Stock ownership in practice usually leads to CEO’s focusing on short-term actions to inflate the value of the stocks, therefore disregarding the long-term goals.

To expand on the idea presented above, the actions of the Board of Directors can fall under the “Rewarding Follies Theory”. The Board of Directors attempts to motivate CEO’s and make them focus on both the short-term and the long-term. However, through their rewarding technique, they only encourage short-term results.

In conclusion, I believe it is important for the Board of Directors to identify new methods of rewarding CEO’s and other employees in order to assure that they are concerned with both the short-term and long-term. In this way, the company may survive longer and through turbulent times.

 

Works Cited

  1. Buffett, Warren. The Essays of Warren Buffett: Lessons for Corporate America. New York: n.p., 1998. Web.
  2. Langton, Robbins, Judge, Organizational Behaviour, 7th edition.