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While that is all true, what makes you think that the CEO of the institutional investor is less susceptible to these problems, or that the CEO of an institutional investor is subject to greater oversight?

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Aug 28th, 2010 at 05:13:24 AM EST
[ Parent ]
The exorbitant salary of the CEO of an instititional invester may depend in a similar way on the share price of that firm, but not on the share price of the shares they hold. Institutional investors have far less incentive to support risky gambles in the companies whose stock they hold.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Aug 28th, 2010 at 10:12:56 AM EST
[ Parent ]
Why would that be so? If the CEO's plans fail, he'll lose just as much of his share value as the institutional investor will lose on his investment in the company.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid (arvid.hallen at gmail.com) on Sat Aug 28th, 2010 at 10:51:35 AM EST
[ Parent ]
But CEO's in the US do not get paid primarily in stock, they get paid primarily in stock options. If the option is to buy stock at $50/share, and the stock is at $48, nothing is lost in those options from the stock dropping by $8, and a great deal is gained in those options from the stock rising by $8.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Aug 28th, 2010 at 01:44:37 PM EST
[ Parent ]
Really? And here I thought everyone knew that handing out stock options to CEO's is an insane way of rewarding management, as it disaligns the interests of shareholders with that of the management. It for example shifts the focus from dividends to share buybacks, among other things.

Really, doesn't everyone know this? I read of it (for abouth the thosandth time) as late as a few days ago, in  a book I just bought.


Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid (arvid.hallen at gmail.com) on Sat Aug 28th, 2010 at 01:56:17 PM EST
[ Parent ]
Hence the occasionally discussed agency problem in corporate governance. In theory, corporate officers should be selected by and accountable to the shareholders, but this is rarely the case in practice. Just another one of those problems, about which we seem never able to do anything effective. Now the SEC is supporting a rule that allows any group that holds 3% of the stock of a publicly traded corporation to be able to propose candidates for the board of directors. We will see if this holds and if it makes any difference.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 28th, 2010 at 09:38:57 PM EST
[ Parent ]
On the other hand, institutional investors have been on the forefront of the whole leveraged buyout game, and are the ones driving the unrealistic expectation of double-digit (or even high single digit) real return on investment.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Aug 28th, 2010 at 12:43:32 PM EST
[ Parent ]
And the institutional investors were also heavily involved in the move by retirement funds into commodities. IIRCC, CALPERS is still reeling from the hit they took on oil futures when they were too slow to exit positions in June and July, 2007.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 28th, 2010 at 08:41:56 PM EST
[ Parent ]

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