Friday, February 01, 2008

New management rules for the CEOS (I)

From the economic point of view, there is a theory(agency theory) within the field of organizational economics ,which explains the opposition between the CEO´s management interest, and those of the shareholders ,employees and community. This is more obvious when it comes to risk management, because in case of failure the burden cost lies upon shareholders and the community (employment losses),but not necessarily in CEO´s pockets, because they might claim their retirement bonus ,unless they face justice to clear up their responsibility, when such a risk turn out to be a business failure.-
On the other side, Management models have tried to deal with this issue, throughout the so called Contract Theory, which says that because firms is so widely considered like a network of different and some times conflicting interests, there is no better way to internally regulate those one, than with the help of contracts. These contracts, might be the kind of either short run or long run periods contracts , depending on its scope and level of application. Thus, on daily operations these contract are the kind of well done job contracts, with penalties for failures (for instance low quality,) and bonus for results achievement (productivity or profit). On the strategic level, (CEO´s field) these contract, are the kind of a long run focused time span, although with strong emphasis on short run financial results, which becomes like the monitoring board, to evaluate the application of strategies .-
Whatever the focus of these contract, the fact is that risk management is hard to assess, mainly because of the nature of new strategies which the CEO´s are responsible for. New strategies implementation, means to undertake risks anyway, thus the question becomes what kind of risks failures are they accountable for?. Risks are within the core of business and wealth creation, therefore too much control about risks, might imply to introduce additional constraints to the whole decision making process, and profit seeking strategies. Double check procedures, and rotating risk involvement decisions among team members instead, within the frameworks of performance contract, seems to be a valuable instrument ,to get the proper equilibrium between those interest linked to short run profit seeking behavior CEO´s job) ,with those linked to its long run sustainability (shareholders ,employees and community ).