Subscribe to this blog's feedTalking of incentives (which we were - see Rob Davies' article here), this is an excerpt from a long account of the fall of Bear Stearns, betraying, Brad DeLong points out, just how obsessed some CEOs can get with hitting the quarterlies:
Cayne took the news peacefully. He resigned as C.E.O. on January 8, but remained chairman of the board. Schwartz was named the new C.E.O. His immediate priority was making sure Bear posted a profit in its current quarter, which ended February 29.I do not know what is more unbelievable:
* That somebody who takes over halfway through a quarter thinks that his "immediate priority" as CEO should be to make it so that the business shows a profit that very quarter.
* That somebody who takes over halfway through a quarter thinks that he can make decisions as CEO that affect whether the business shows a profit that very quarter.
* That somebody who takes over as CEO in the middle of a financial crisis thinks that it is constructive for him to send an immediate signal that driving a wedge between actual fundamentals and reported financial results is a good business to be in.
* That any senior executive for any financial firm thinks that one-quarter financial results will materially impact market expectations of whether his organization is overleveraged--hence vulnerable to a liquidity problem.
Presumably Schwartz wasn't worrying primarily about his bonus - but it's telling that the focus on the quarterly profits was so intense as to exclude the concerns DeLong mentions, and part of that is due to the culture of linking bonuses to short-term results. Schwartz had spent his working life worrying about the next quarterly figures; it's only natural that, in the extremely unusual situation in which he found himself in January this year, his instinct would be to focus on the next 10-Q and let the longer-term issues sort themselves out, just as a climber will overcome his fear by focussing only on the next move rather than the drop below him.
Didn't work, though.
Felix Salmon also discusses the article, generally approvingly, though raising an eyebrow at the alleged bear raid.
The whole thing's worth a look if you have the time.
