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The CEO's ethical dilemma in the era of earnings management

The CEO's ethical dilemma in the era of earnings management Purpose – The paper aims to argue that stock‐based compensation for top leaders is a very recent phenomenon that is associated with lower shareholder returns, bubbles and crashes and huge corporate scandals and that it is time to bring an end to it and find a better, more authentic approach that will enable corporations, stakeholders and the financial community to thrive. Design/methodology/approach – The paper details how many executives engage in a dangerous and little‐discussed practice that comes very close to the line of illegality, one that betrays the spirit of securities laws and accounting regulation: earnings management. It concludes that far too many corporate leaders are now using their talents and corporate resources to smooth earnings, and bump up the stock price, rather than to build their companies. Findings – The paper proposes that corporations find a way to restore the focus of the executive on the real market and on an authentic life by eliminating the use of stock‐based compensation as an incentive. Practical implications – The author's remedy: top executives should be prevented from selling any stock – for any reason – while serving as a corporate leader, and indeed for several years after leaving their post. Originality/value – The author calls for an end to stock‐based compensation because it is associated with lower shareholder returns, bubbles and crashes and huge corporate scandals. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Strategy & Leadership Emerald Publishing

The CEO's ethical dilemma in the era of earnings management

Strategy & Leadership , Volume 39 (6): 5 – Nov 8, 2011

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1087-8572
DOI
10.1108/10878571111176628
Publisher site
See Article on Publisher Site

Abstract

Purpose – The paper aims to argue that stock‐based compensation for top leaders is a very recent phenomenon that is associated with lower shareholder returns, bubbles and crashes and huge corporate scandals and that it is time to bring an end to it and find a better, more authentic approach that will enable corporations, stakeholders and the financial community to thrive. Design/methodology/approach – The paper details how many executives engage in a dangerous and little‐discussed practice that comes very close to the line of illegality, one that betrays the spirit of securities laws and accounting regulation: earnings management. It concludes that far too many corporate leaders are now using their talents and corporate resources to smooth earnings, and bump up the stock price, rather than to build their companies. Findings – The paper proposes that corporations find a way to restore the focus of the executive on the real market and on an authentic life by eliminating the use of stock‐based compensation as an incentive. Practical implications – The author's remedy: top executives should be prevented from selling any stock – for any reason – while serving as a corporate leader, and indeed for several years after leaving their post. Originality/value – The author calls for an end to stock‐based compensation because it is associated with lower shareholder returns, bubbles and crashes and huge corporate scandals.

Journal

Strategy & LeadershipEmerald Publishing

Published: Nov 8, 2011

Keywords: Corporate governance; Unethical leadership; Earnings expectations; Earnings manipulation; Shareholder capitalism; CEO's compensation; Capital markets community; Stock‐based incentives; Ethical leadership; Ethics

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