While the alignment of interests between managers and shareholders (via stock options or free shares) theoretically aims to resolve agency conflicts, it sometimes encourages value-destroying behaviour because it encourages managers to favour the immediate maximisation of the share price to the detriment of the industrial and commercial health of the company in the long term.
Here are the mechanisms and specific examples that explain this phenomenon:
1. The preference for short-termism (underinvestment)
Executives who are compensated based on stock market performance may be tempted to sacrifice profitable long-term investments to achieve short-term earnings goals.
The finding: A survey by the National Bureau of Economic Research (2005) reveals that more than half of CFOs are ready to reject a value-creating investment (with a positive NPV) if it leads to missing the short-term earnings per share targets promised to the market.
The impact: By reducing R&D, training or maintenance expenses (considered as expenses for accounting purposes), we artificially inflate the immediate result and therefore the share price, but we erode future competitiveness.
2. The illusion of financial engineering (The Boeing example)
The alignment of interests can push managers to use cash to buy back shares (share buybacks) rather than to invest in the industrial tool. This mechanically increases earnings per share (EPS) and the value of stock options, but weakens the company.
The example: Boeing spent about $50 billion to buy back 400 millions of its own shares, prioritizing shareholder returns (and executive valuations) over investment in quality and safety. This strategy led to a major human and industrial crisis (737 MAX accidents), ultimately destroying considerable value for these same shareholders.
3. The confusion between “Input” and “Output”
The stock market value is an output, a consequence of good investment decisions (input). By focusing compensation on output (the stock price or EVA), managers can lose sight of the real drivers of value: customers and products.
The Coca-Cola example: In the 90s, Coca-Cola indexed the remuneration of its executives to the growth of EVA and the stock price. This led to decisions focused on finance (financial engineering via the “49 solution”) and aggressive price increases that ended up alienating customers and bottlers, destroying the relationship of trust that was the basis of the brand’s sustainability.
4. The “Credibility Gap” trap
When the stock market price rises thanks to these tricks, the market incorporates unrealistic growth expectations. Managers then find themselves trapped in their own success and are forced to take excessive risks or push cost cutting to the point of absurdity to justify these valuations, which often ends in a sudden collapse.
The Kraft Heinz example: The pressure for immediate profitability led to drastic budget cuts that initially boosted margins, but ultimately destroyed brand value, forcing massive write-downs ($16 billion in 2020).
In short, linking remuneration to shares can transform corporate management into an exercise in financial management disconnected from the industrial reality, where the shareholder replaces the customer as the absolute priority, which is paradoxically the surest way to destroy long-term value.