Bruce Bueno de Mesquita and Alastair Smith are professors of politics at New York University. They write about the choices facing leaders in “The Dictator’s Handbook” (Public Affairs Press, 2011). The following is the final in a series of guest posts by Bueno de Mesquita and Smith applying the arguments in The Dictator’s Handbook to provide a different way of thinking about current events (and in this case, particularly current!):
Since the financial collapse of 2008, voters have been baying for the blood of greedy business executives. Yet, the very firms that took the world’s financial system to the brink continue to pay huge bonuses. And this happens despite many of the same firms having been propped up by the public purse. Why do business leaders show such insensitivity? As with so much in life, the answer lies in politics.
Business leaders, like leaders of governments or any other organization, worked hard to get to the top and they want to stay there. They do what it takes to keep their job as chief executive and this means keeping their essential backers happy. These backers are not the masses of small shareholders, and they are certainly not the general public, so it should come as no surprise that a chief executive’s actions infuriate these groups.
In terms of the political organization of businesses, large publically traded companies most closely resemble rigged election autocracies. There are typically millions of people-shareholders-with a nominal say in the choice of chief executive. But in reality the decision to retain a leader comes down to the choices of senior executives, board members and possibly a few large institutional investors. No executive lasts long if he does not keep this small group happy, which is why such insiders receive large bonuses and rewards even as the organization fails. Investing to promote an increase in a stock’s price and paying large dividends might be really good for shareholders and the economy as a whole, but generally these groups are not the political threat to the corporate leadership. So, as in dictatorship, insiders prosper at the expense of the broader community. This will not change until publicly traded companies alter their governance.