Robert M. Wiseman
Eli Broad Legacy Faculty Fellow of Management
PhD: University of Minnesota
Current research interests include modeling decision behavior
under uncertainty and the role of risk in corporate governance and
strategic decision making and, more specifically, the role that a
CEO’s risk preferences have on firm performance.
Nearly half of the Broad School students in the Weekend MBA Program and the Executive MBA Program in my strategy courses now have stock options. When we get to that portion of the curriculum, they are very interested in how they should value this portion of their compensation. The interesting aspect of this – and my research in executive compensation shows this is a pervasive tendency – is that when a company is in a stable or positive financial position, corporate leaders tend to believe their stock options are more valuable than the market thinks they are.
Executive compensation:
maximizing shareholder value or stock option value?
Given this, it is clear that CEOs and other top corporate leaders who receive large portions of their compensation in stock options have an incentive to maximize the value of their stock options by keeping their company’s financial situation as stable as possible. They may become too conservative, not making necessary investments in research and development or capital equipment, to avoid taking prudent risks in an effort to minimize the volatility of the stock price. For example, we find that as the intrinsic or exercise value of a CEO’s stock options rise, firms reduce capital investments. At extreme levels of option value, they reduce investment in research and development. In the long-term, they are not fulfilling their responsibility as leaders of a corporation: To maximize shareholder value.
The impact of this in terms of corporate governance is that this desire by executives to protect the value of their stock options can easily descend into malfeasance. Recent evidence finds that as the value of executives’ stock options rises, firms are more likely to engage in earnings manipulation. One of the ways that regulators intended to alleviate this temptation is to use restricted stock awards, for example, as part of WorldCom’s new corporate governance plan. While restricted stock must be expensed in the accounting system and, therefore, can provide a more accurate picture of the company’s outstanding liabilities, it is not clear yet what effect they will have on corporate leaders’ sometimes damaging focus on short-term decision making.
In my strategy classes, I talk more about corporate governance than I used to: If strategy is about how corporations decide what to buy and sell – mergers and acquisitions – and where and when to make capital investments, it is important to understand how senior managers make decisions and manage across different entities. What are the incentives that drive their choices? How could these incentives lead to unwanted consequences?
The story we should learn from the 1990s is that as representatives of shareholders, boards need to have control over these executives. Boards cannot rely on compensation design to align the interests of managers and shareholders. They must take an active role in oversight as a complement to reward structures, because any reward structure is likely to have unforeseen and unwanted side effects. Fortunately, we are starting to see greater oversight by boards due to the Sarbanes-Oxley Act and because of increasing shareholder pressure.
Management
2005-06 Academic Year
Research
John Hollenbeck, Eli Broad Professor of Management, received two grants: a U.S. Army SBIR Grant to develop optimization strategies and algorithms for normative engineering models for the design of Army organizations (with Aptima Incorporated) and a U.S. Air Force ETAP Grant to develop and test a team leadership simulator to be used for teaching and research purposes at the Squadron Officers College and the Air Force Officer Accession and Training School.
Robert M. Wiseman, associate professor, was named the Eli Broad Legacy Fellow of Management; Remus Ilies, assistant professor, was named the Gary Valade Research Fellow; and department chair, Donald Conlon, received the Eli Broad Professorship in Management.
New Faculty
Lois Landis Kurowski
Professor of Practice/Specialist
PhD: University of Illinois at Urbana-Champaign
Gerry M. McNamara
Associate Professor
PhD: University of Minnesota
Kent D. Miller
Professor
PhD: University of Minnesota
Enrollment
| Undergraduate | |
| General Management | 736 |
| Human Resource Management | 90 |
| Doctoral | |
| Organizational Behavior/Human Resource Management | 12 |
| Strategic Management | 4 |