My name is Marc Hodak. (Professor Hodak to you students of corporate governance at certain universities.) I had a hard time figuring out what I wanted to do when I grew up. In relatively short order, I was trained as an engineer, then as a lawyer, then as a financial economist. When I realized that most of the productive world consisted of business, I went to get some business experience, too. I rather enjoyed it, but a few months into my work for a major corporation, we began the process of developing budgets for the next year. We were supposed to develop targets for revenues, volume, profits, etc. All of my training up to that point compelled me to ask my boss, “What is the objective of this exercise. Should we be aiming for and suggesting targets that are optimistic or guarded?” Guarded targets were safer to promise, but implied a muted effort on behalf of our shareholders, and I was taught that we should be maximizing the value of the company for the shareholders. On the other hand, I recognized that management bonuses were based on performance relative to target, and optimistic targets worked against the interests of management. My boss simply shrugged and walked away.
That was the first time that I saw a behavioral problem disguised as an analytical problem. I soon began to see this all around me.
This blog nominally supplements my work in organizational incentives, especially instances where the interests of principals (e.g., owners, shareholders, etc.) clash with those of the agents (managers, employees, etc.). I am perpetually amazed by the fact that these incentives are largely invisible to the inhabitants of the organizations whose behaviors they drive. I fix them by making their incentives and their effects visible, and improving the alignment of interests.
All this ties into governance since, in my experience, about 80 percent of perverse incentives are the unintended consequence of well-intended governance policies. One can’t miss the parallel with the effects of public policies on national economic behavior, which is the mother load of unintended consequences. I only wish I had more time to treat these issues in a topical manner.