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Comment by yummyfajitas | Hacker News Reader

To expand on this, hiring the CEO and giving them a golden parachute might still be a good thing.

Suppose Nokia's chances of survival were 10% without Stephen Elop and 20% with him. That means he is worth 0.1 x value of Nokia if Nokia survives.

If you pay Elop based directly on the performance of Nokia (i.e., he only gets paid if Nokia does well), he'll stay at Microsoft. Why leave MS for an 80% chance of getting paid nothing? Obviously Elop demands some cash up front, a golden parachute, or something of that nature, and a rational board of directors will give it to him.

In 80% of situations like this, the CEO gets paid well for running the company into the ground. But that's a better situation than the alternative, i.e. 90% of similarly situated companies crashing and burning.

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> Suppose Nokia's chances of survival were 10% without Stephen Elop and 20% with him. That means he is worth 0.1 x value of Nokia if Nokia survives.

With respect, this is complete nonsense. It would only be true if there were no replacement for Elop who could not produce similar returns for a lower cost.

Supply and demand, not intrinsic value.

Who is a replacement? Care to list 30 such replacements along with the types of contracts you expect Nokia would have been able to negotiate?

With many millions of dollars of shareholder wealth at stake, only people with a strong track record should be seriously considered.

In other words, you're agreeing with me; Elop is benefiting from a windfall of lack of information. This lack of information forces companies to make inefficient choices of leaders and waste lots of money on leadership.

So Nokia has a lack of information but you don't ? What decision should have been made? And whose responsibility is it to make that decision?

Sure there are problems with corporate governance but ultimately we're talking about the risk of misallocating capital belonging to investors, whose job it is to oversee the allocation.

Then shouldn't part of their job also be researching and coming up with a larger pool of candidates for a position of that importance? Not saying Nokia didn't necessarily do that, but I suspect in a lot of cases, there tends to be a short list that people choose from initially. Expanding out from that short list and spending more time gathering more info might take more time, but would ultimately be in the shareholders' interest.

Not to nitpick, but since we're on the topic of corporate governance... Hopefully this will make it a bit more clear on why the governance issues are so murky: At least in Canada, and I'm fairly sure the United States as well it's actually not investors' job to oversee the allocation. The board of directors manages the company. Investors merely get to vote for who gets to be on the board of directors.

Sooo, it's the job of the board of directors to select who the CEO (an officer in Corporate Law-speak) is.

Well, it's indirect, but they're still ultimately responsible for it. If there weren't any control, why would anyone invest?

That's a good question (not sarcasm, it might come off that way). I actually do have a small investment yet I never planned on exercising any control and only control a trivial number of shares. There's a fair bit of academic debate on these theories of control and how shareholders relate to companies.

Personally I think there's a lot of freeloading off the small group of big players that do exercise control. I have a certain amount of faith that they won't vote in a way that's seriously adverse to my interests as a little fish.

With respect, this is complete nonsense. It would only be true if there were no replacement for Elop who could not produce similar returns for a lower cost.

I realize Elop's pay is set by supply and demand, and if Nokia could find a cheaper person with the same qualities, they would and should hire him.

I'm just pointing out that it is in Nokia's best interest to pay significant amounts of cash comp to a good executive even if that executive "runs the company into the ground".

How exactly do you establish the %likelihood that a particular CEO will save your company to the degree of precision that you could actually meaningfully incorporate it into a business model?

Seeing as Elop's $6M pay is orders of magnitude smaller than Nokia's $25B market cap, you don't need to be very accurate. Say my 10% was wrong, even wildly so. As long as Elop gives Nokia more than 0.024% improved odds over his next best alternative, he is still worth $6M.

(Yes, I'm ignoring the time value of money, risk, etc, to simplify.)

You're just pretending you can calculate inherently incalculable probabilities. How do you determine the probability a company will fail under a variety of potential CEOs so that you could even get a mathematically-justifiable rank order? You can't run trials, you can't really extrapolate from past performance, you're subject to all kinds of confounding variables, you can't actually treat 'failure' as '$0 market cap', etc, etc, etc.

The best you could ever hope to do is "CEO candidates with this kind of background tend to have this kind of record when taking over this kind of company", which I'm sure is quite an illuminating sample.

You are correct - the board's estimate is merely the best approximation they can come up with based on incomplete information and a subjective set of priors (yes, "subjective prior" is redundant). So what?

I really don't get the point you are making. Are you telling me that a struggling company shouldn't try to get what they believe is the best possible CEO, provided his pay package is vastly smaller than the variance in possible outcomes for the company?

My point is that it's ridiculous to try to justify golden parachutes for bad CEOs using fake math, and the fact that the market bears these kinds of contracts isn't evidence on its own that they are good.

So business decisions that use uncertain numbers are "fake math"?

You realize that with the narrow exception of a few quant traders, you've pretty much described all business decisions.

The fact that most business decisions are made by gut feeling implies that post-hoc pseudo-mathematical rationalization shouldn't be called out as bullshit?

The problem with this is that the CEO gets the same payout if he does a good job and things don't work out or if he fantastically mismanages the company.

I think a lot of the problem with CEO failure come from risk adverse boards being unwilling to try someone new as opposed to the accepted stable of CEO candidates. Small pool equals big compensation even for failure.

There's more to it than that. Board members of large corporations tend to be CEOs of other large corporations. Not only do they see each other at charity events and such, they have a vested interest in not being too hard-nosed about compensation.

The question is why the shareholders put up with it, and I don't have an answer to that question.

Because it sounds like the safe, experienced play. It does work for a lot of companies (says something about the companies more than the CEO), and I would suppose it is easier to make deals to keep the company going when you have all the "club" contacts. When it fails, it fails in amazing spectacular ways.

I guess many should be sorta happy since it allows untried upstarts to disrupt the market and truly well run companies to expand. I feel sorry for all the people caught up in the fail.

Or you can give him a variable payout - $6M if he fails, $20M if he succeeds. This is a far more common situation.

Sure, but there's failure with best effort and then there's the fiasco. Not enough is done to punish the latter, IMO.

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