From Shareholder Value to CEO Power: the Paradox of the 1990s

Why did CEOs remuneration exploded during the 90s and persisted to high levels, even after the bursting out of the Internet bubble? This article surveys the alternative explanations that have been given of this paradox mainly by various economic theories with some extension to political science, business administration, social psychology, moral philosophy, network analysis. Basically, it is argued that the diffusion of stock-options and financial market related incentives, that were supposed to discipline managers, have entitled them to convert their intrinsic power into remuneration and wealth, both at the micro and macro levels. This is the outcome of a de facto alliance of executives with financiers, who have thus exploited the long run erosion of wage earners’ bargaining power. The article also discusses the possible reforms that could reduce the probability and the adverse consequences of CEOs and top-managers opportunism: reputation, business ethic, legal sanctions, public auditing of companies, or shift from a shareholder to a stakeholder conception. Introduction a Puzzling Paradox In the era of shareholder value, how should we explain the boom in manager’s, especially CEOs’ remuneration, which persisted even after the bursting of the Internet bubble? This article tries to disentangle alternative explanations of this paradox. It suggests a likely interpretation: the diffusion of stock options and financial market-related incentive mechanisms, that were supposed to discipline managers, has entiled them to express their power, not least in terms of their remuneration and wealth. This is the outcome of a de facto alliance of executives with financiers, who have exploited the long-run erosion of wage earner’s bargaining power. Why did such acute concern about managers’ remuneration arise at the end of the 1990s and not before? Both corporate-related factors and the macroeconomic context seem to have played a major role in the emergence of the paradox of managers’ compensation (section2). The complexity of the forces that shape the performance of corporations and the incentives that govern managers’ behaviour addresses challenging questions for economic as well as managerial theories of the firm. In a sense, the search for an optimal principal/agent contract is bound to fail precisely because the objectives of the managers and ♣ Extrait de Competition &Change, Vol.9. n°1, March 2005, p. 7-47.