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Not Real World

August 24, 1986

Theoreticians who espouse the doctrine that insider trading would give executives greater incentive to improve the performance of their firm show lack of real-world understanding.

Improved performance can be achieved by giving executives options to buy company stock at a specific price somewhere down the line, a motivational tool quite commonly used already. And nothing prevents today's executives from buying stock in the open market if they follow proper reporting rules to the Securities and Exchange Commission.

But executives who buy only for a month or so, trying to capitalize on insider knowledge, are not improving the lot of their companies' shareholders.

Another factor that minimizes the argument for executive incentive through stock ownership is the fact that more than 50% of the price action of a stock comes from the direction the stock market is going (completely beyond control of the executive), and another 25% is dictated by the direction of the industry the firm is in.

That means the best of direction by the executive could fall prey to a downward-moving stock market and a poorly performing industry. When the oil industry started to slide a few months ago, how many investors could be enticed to buy oil stocks, no matter how well managed? Bonuses may be more suitable to encourage company growth than stock devices.

As a former educator, let me be the first to say that I would appreciate the academicians getting out in the real world for a few years before being allowed to "educate" our youth. Their Ivy League theories are like the weatherman who knows all the calculations but is too dumb to look out the window.


Beverly Hills

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