Risk-taking isn't one of those things that's universally bad or universally good. For entrepreneurs, who have little to lose and a lot to gain, most risk-taking is good. For established companies, which have a lot to lose and a lot to gain, it's much more of a balancing act.
There are a lot of risks that have a moderately large upside and a huge potential downside, that tends to be delayed, that a lot of CEOs are given a lot of incentives to take. Mark Hurd with HP comes to mind: it's pretty risky to cut payrolls, gut R&D budgets, and focus mainly on really high-margin products like overpriced ink. The upside is a big bump in profits, but the downside risk is making your employees hate the company and getting killed when someone else starts selling slightly less overpriced ink. The downside tends to be delayed a bit, though, so CEOs who make $25m and get a golden parachute don't need to worry about it.
I'm not sure how you can characterize reducing costs and making short term profits a "risk-taking". If anything, it's the safest thing Hurt could do. Research is risky. Big, ambitious projects are risky. Selling toner isn't.
Also, most CEO's incentives are medium to long term, anyway. Compensation is usually a mix of cash and restricted stock, all of which goes down the drain if the company tanks. Take Ed Whitacre as an example - his pay is $1.7M in cash + $7.3M in restricted stock. His fortune is strongly tied to the medium-term (several years) value of GM.
The amount of risk isn't as important as the kind.
R&D project: if it fails, you paid people to do something that wasn't commercially viable. You have a lot of talent and knowledge under one roof. If it succeeds, upside potential is tremendous. You can move those smart people to another project that might have better odds of taking off.
Laying people off, not because you need to, but because you don't have the vision to make decisions you didn't study in business school: saves costs and usually pops the stock price for a few months, but causes the best people to leave when they can, trashes the culture, and fills the company with mediocrities and yes-men. Upside is minimal; downside is potential loss of the whole company.
When you phrase it this way, there is no incentive for anyone (CEO or shareholder) to prefer layoffs to a big R&D project.
With the R&D project, the CEO gets a big payoff if it succeeds, and loses only his stock options if it fails horribly and takes down the company. Big upside, no downside. With layoffs, the stock price pops for a few months and goes back down years later when the CEO's restricted shares are allowed to be sold. The upside to the CEO is truly minimal in this case.
You write as if the CEO is malicious and willing to lose money in order to ruin a perfectly good company.
Actually, it's more like this. Most CEOs aren't going to start R&D projects because (a) they'll pay off later, during a successor's tenure, and (b) vision can't be taught in MBA programs.
On the other hand, cutting the R&D projects and saying that "unprofitable operations" (even if they were profitable) were slashed will pop the stock price in the short term.
You're naive if you think CEOs don't have ways to benefit from temporarily popped stock prices even if their restricted shares can't be sold until much later. If they want to be a bit sleazy and secretly sell early, they can ask a spouse or sibling to short-sell or buy puts on the open market. Or they can use foreknowledge of the pop to hand one-day gains over to their friends. Illegal? Probably. (The reason I don't say "yes" is that insider trading has a technical meaning that most violations of the law's spirit don't meet.) Unethical? Yes. Likely to lead to jail time? No. Common as dirt? Yes.
It's pretty rare for people to commit insider trading violations for their own accounts, because it's easy to get caught. Instead, they tell their friends what is about to happen as a means of favor-trading. With that, it's pretty much impossible to get caught.
I don't think most corporate executives are malicious, so much as avaricious and narcissistic. Will they help their companies if it suits them? Yes. Will they hurt their companies if it suits them? Most of them will. The "we are the nobility and you are the peasants" mentality prevents most of them from caring too much either way about their companies; they care more about themselves, their friends, and maintaining their social class.
Risk-taking isn't one of those things that's universally bad or universally good.
Thank you. Degenerate risk-taking is bad enough, but criminal when other people will suffer most of the consequences.
Good risks generally have limited downside. For example, R&D projects and startups that, if they fail commercially, only cost the money put into them, are good risks. Bad risks are generally those that have huge downside and low upside, that are taken because the consequences can be pushed off onto other people. An example of this would be eschewing a $500,000 safety device on an oil rig under a mile of ocean, thus admitting (realized, thanks to BP) risk of ecological catastrophe.
Corporations are notorious for externalizing costs but where they really shine is in the externalization of low-frequency, high-impact risks that most people can't evaluate. They're great at that.
I think that corporate executives often find themselves in a place where boredom gets the better of them. In dysfunctional companies, a well-studied executive can add value. The reward for this is moving on to a better job at a better company. Eventually, the executive ends up as the CEO of a great company like HP before some awful CEOs did it in. Problem: the company is running well and doesn't really need a CEO. People are already doing great work without direction. Result: CEO gets bored. I know a day trader who increased his profits by refusing to work between 10:30 and 3:00. He could find good trades in the first and last hour of the day, but "boredom trading" in the bland middle injected noise and didn't make any money for him. Most big-company executives are bored traders: making capricious decisions that just add noise, just to feel useful and fill time.
> Corporations are notorious for externalizing costs but where they really shine is in the externalization of low-frequency, high-impact risks that most people can't evaluate.
So true. This reminds me Feynman's investigation of the Challenger crush.
There are a lot of risks that have a moderately large upside and a huge potential downside, that tends to be delayed, that a lot of CEOs are given a lot of incentives to take. Mark Hurd with HP comes to mind: it's pretty risky to cut payrolls, gut R&D budgets, and focus mainly on really high-margin products like overpriced ink. The upside is a big bump in profits, but the downside risk is making your employees hate the company and getting killed when someone else starts selling slightly less overpriced ink. The downside tends to be delayed a bit, though, so CEOs who make $25m and get a golden parachute don't need to worry about it.