Robin Hanson (back in April 1996):
One of the biggest problems with existing corporate capitalism is keeping CEOs (chief executive officers) accountable to their shareholders. Unaccountable CEOs can give themselves huge salaries and perks, discriminate freely in hiring and promotion, and build empires rather than shareholder value.
In theory, boards of directors oversee CEOs, and can be sued by shareholders should they fail in that task. But in practice such failure is hard to prove, board members are often nominated by the CEO, and CEOs often put each other on their boards. In theory shareholders can dump the current board or CEO at annual meetings, but a commons greatly reduces the incentives for any one shareholder to mount an expensive campaign to find and convince other shareholders. In principle someone could buy out the whole company, dictate changes, and then sell the better-run company at a profit, but existing law and CEOs now lay many obstacles in this path.
The biggest problem with unaccountable CEOs is that they don’-t know when to step down and let someone else run the company. The value of companies often jump when such a CEO dies. So a recent “-Just Vote No”- campaign focuses on this problem, and proposes that dissatisfied shareholders withhold their vote in a certain way, in order to signal they think the current management should step down. The companies with the highest no votes are then publicized, to try and shame management into action.
The main proponent of this Vote No campaign thinks the following proposal of mine has promise. I propose to create, for each stock, a separate market in that stock for trades which are “-called-off”- if the CEO does not step down in the next year. The price of the stock in this market should indicate the market’-s expectation of the value of that company with a different CEO. If that stock price is consistently and significantly higher than the ordinary stock price, that should be a clear market signal, from informed traders, for the CEO to step down. (If there is no price, because there is no trading, then there is no signal.)
Ordinarily CEOs respond to statistics showing how poorly their company is fairing relative to similar companies by explaining how they are really different. And they respond to statistics of unhappy shareholders by pointing out how little incentives any one of them has to become well informed. These excuses should be blunted by my proposal, and board members may more plausibly fear legal action for ignoring these market signals.
This proposal is an example of a more general concept of policy markets.
Robin Hanson’-s comment on my previous blog post:
You make a valid point about there being a difference between CEO futures and decision markets. It is the board, not the CEO, who we might hope would be willing to overrule the CEO ego. And I’-ve had a web page arguing for CEO decision markets since 1996. [See above.]
Robin Hanson (in Forbes in 2006):
[…] My idea: Set up two new stock markets where investors would be making not outright bets on the future of a company but conditional bets. In one market the trades are consummated only if the current chief executive remains in place at the end of the current quarter. In the other market the trades are consummated only if the incumbent is bounced out by the end of the quarter. The price spread between these two markets would send a signal about whether the boss should stay or go.
Say Eisner is the current boss and you own one share of Disney you want to sell. Instead of selling on the New York Stock Exchange for, say, $30, you could do simultaneous sell orders, each for one share, on the two alternative markets. Perhaps Disney is trading in the Stays Put market at $29 and in the Early Retirement market at $31. If Eisner does keep his job, only the first trade becomes valid: You give up your share and get $29. If he gets the ax, only the second trade is valid and the buyer (probably a different buyer) gives you $31.
Just as the $30 price on the Big Board reflects the collective wisdom about the value of Disney, the $29 Stays Put and the $31 Early Retirement prices would reflect the collective wisdom about relative values under different management scenarios. Spreads would open up because sellers (or buyers) in the alternative markets would often do only one of the two trades. If you happen to think Disney is worth $30 a share overall but would be disappointed to see Eisner leave, you would sell only in the Early Retirement market. If he does get bounced, you’-re happy to have the $31 cash- if he stays put, you are happy to continue owning the stock. On the other side of your trade: a hedge fund that thinks Disney would be worth $32 if a new manager came in.
The directors’- job would be to listen to the markets. If a wide enough spread opens up in favor of a departure–-maybe 1%–-get out the pink slip. […]
Previously: PaddyPower’-s betting lines on CEO exits + Marginal Revolution on CEO exit betting lines