Melbourne Business School News Podcast: The danger of 'option wealth' biasing CEO decision-making

Podcast: The danger of 'option wealth' biasing CEO decision-making

When CEOs have a lot to lose from a fall in their company's share price, they may be tempted to make adverse decisions, says Professor of Business Strategy Geoff Martin.

Professor Martin's research focuses on strategic decision-making by CEOs and the effect their decisions can have on organisations and the community. In the latest Melbourne Business School Podcast, he speaks with Yasmin Rupesinghe about his work in the area of product recalls.

"We're looking at CEOs' accumulated option wealth – so what they've got to lose in the stock options from a decline in the share price – and how that affects the timing of their recall decisions," he says.

Previous research has found that product recall announcements released on a Friday have less of an impact on share price – but there is a risk to customers, who need to know the information as soon as possible, if the announcement is delayed.

"We've hypothesised that the more option wealth the CEO has to lose, the more likely they are to make the release of the product recall announcement on a Friday," he says.

Professor Martin says his research is part of a larger trend towards making sure CEO incentives are aligned to community outcomes as well as share prices.

"We're seeing a lot of noise at the moment, particularly from super funds in Australia and other institutional investors, saying: 'We want to make sure that the compensation contracts are designed in ways that don't create incentives for the CEO to make the shareholder rich at the cost of society.'"

Listen to the full episode above, or visit our podcasts page for more.

Professor Martin teaches Business Strategy, Corporate Strategy and the Social Entrepreneurs units on our MBA programs. Visit his faculty profile for more information.

Yasmin is a Program Manager on our Executive MBA and Senior Executive MBA programs, and a radio presenter for PBS FM.

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