MIT Sloan Senior Lecturer Robert Pozen
MIT Sloan Professor SP Kothari
From The Wall Street Journal
Every year, shareholders of U.S. companies weigh in on executive pay by casting advisory votes on the reports of compensation committees. The committees are appointed by corporate boards to make recommendations about appropriate pay levels. Shareholders tend to take their reports at face value, voting to approve them in over 97% of cases. But their confidence is undermined by a lack of awareness about the often flawed methods compensation committees use to determine pay.
The trouble is that compensation committees frequently rely on faulty performance metrics that inflate executive pay. But the committee reports do not provide a sufficient explanation of these metrics to shareholders.
First, their reports routinely use “adjusted” earnings that are much higher than the figures calculated under Generally Accepted Accounting Principles. While many companies tout adjusted numbers in their press releases on earnings, regulations require these releases to give their GAAP figures equal prominence. By contrast, there is no similar rule for compensation reports, which may use only the adjusted numbers without quantifying their differences from GAAP.
Take Merck & Co., whose CEO had a bonus goal for 2015 of $3.40 in adjusted earnings per share. The compensation committee concluded that he had met that target, since the company’s adjusted earnings were $3.56 per share. But the committee’s report failed to mention that GAAP earnings were only $1.56 per share.
This example is not unique.
Golub Distinguished Visiting Professor of Finance, Chester Spatt
The past few months have been turbulent for Tesla CEO Elon Musk.
From publicly accusing a Thai rescue diver of being a pedophile (without evidence) and conducting a radio interview while smoking marijuana to insulting equity analysts on one earnings call and threatening to take Tesla private — then reversing those statements, triggering a SEC and a criminal investigation — Musk has engaged in some reckless behavior.
Then there are production problems with Tesla not being able to deliver cars on time. A big question is whether Musk should step down. While investor confidence in Musk has taken a big hit, he is a visionary leader and there would likely be great disappointment if he left the company.
What Musk does need is a lot more checks and balances by his management team. Investors would like Musk to have more self-control and act more like other legendary leaders, such as the late Steve Jobs of Apple and Amazon.com’s Jeff Bezos.
For that to have a chance, Tesla’s management team must play a bigger role in guiding the company’s strategy both internally and externally. If Musk is required to step down as CEO for a period of time by the SEC, the management team must be ready to take the wheel.
Tesla also needs to step back and review the basics of corporate governance. U.S. securities laws and common business practices are meant to keep market participants honest, so that they effectively represent their own best interests and those of their shareholders.
Pilar Opazo, Lecturer, Work and Organization Studies
From Modern Restaurant Management
When Chef Ferran Adrià shuttered his famed elBulli restaurant in 2011, foodie circles were stunned. elBulli was at the peak of its fame: it had three Michelin stars and a waiting list of two million diners. Adrià—widely considered one of the most imaginative culinary minds of the world—operated in an elite class of chefs. He kept his restaurant open just six months a year and served one meal a day, never offering the same dish twice.
Rumors circulated that the closure was due to a family feud or money problems. But the truth was that Adrià was petrified of repeating himself. (“Can you imagine this pressure?” he told The New York Times. “You cannot.”)
In 2014 Adrià reopened elBulli not as a restaurant, but as a foundation dedicated to studying and understanding the nature of creativity. It’s a subject in which Adrià has passionate expertise. When he arrived at elBulli in the early 80s, it was a French restaurant. By the 1990s Adrià was head chef and elBulli was transformed as a test kitchen for gastronomic invention.
But while he became known for dreaming up dishes like Escoffier’s classic peach melba and smoke foam, Adrià was engaged in a far more ambitious project—achieving and sustaining a culture of innovation. He and his team established a set of best practices for organizational creativity and systematic invention. The result: processes and structures that are applicable not just to restaurants but other organizations as well. Here are some elements of elBulli’s, ahem, secret sauce: Read More
Hal Gregersen, Executive Director of the MIT Leadership Center
From Harvard Business Review
During a time when many retailers are struggling, business is booming at Target. But it wasn’t too long ago that the discount retailer’s future didn’t glow so bright. When CEO Brian Cornell took the reins two years ago, he inherited a company that had been struggling for years, taking far too few risks, and sticking too close to the core.
Since then the world has fallen in love with a far edgier Target, which has expanded its offerings through collaborations with such power brands as Lilly Pulitzer, Toms, Neiman Marcus, and SoulCycle, and updated product lines that break the status quo, like its latest gender-neutral kids home brand Pillowfort. But Cornell didn’t start right out of the gate making any big changes like these. Instead, he took time to carefully contemplate his approach, listen to his team, and ask questions.
At the MIT Leadership Center, I recently spoke with another leader, Guy Wollaert, chief exploration officer at Loggia Strategy & Design, about similar experiences he encountered at another highly visible brand, Coca-Cola. During his 20-plus year tenure with the global beverage brand, most recently serving as its chief technical and innovation officer, Wollaert made it a point to seek — and surround himself with — new ideas and people who challenged him to reflect and question first, then act later.
MIT Sloan Senior Lecturer Robert Pozen
Should public companies focus on earning profits for their shareholders, or should they serve broader societal needs? Larry Fink, the head of BlackRock, the largest fund manager in the world, recently issued a letter to company CEOs stating: “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
Yet the same letter tells public companies that they should adopt a strategic plan with “a path to achieve financial performance.” The letter reconciles these potentially conflicting objectives by pushing companies to pursue “long-term value creation” rather than short-term profits. In other words, they can enhance their long-term financial returns to shareholders by serving the needs of other stakeholders—even if this lowers short-term profits.
While BlackRock was trying to sensitize companies to their social responsibilities, the letter could undermine the accountability of corporate directors to their shareholders. CEOs could hypothetically justify any decline in annual earnings by claiming they were serving all stakeholders in hopes of increasing long-term financial results. How will shareholders later assess whether these stakeholder-focused policies actually resulted in higher financial returns? And does the long term mean five, 10, or even 20 years? Read More