CEOs Learn Something in Business School

The dominant theory of how corporations work is, to exaggerate only slightly, that chief executive officers spend their time trying to enrich, aggrandize and enjoy themselves at the expense of the corporation, while shareholders use a variety of crude mechanisms—incentive pay, proxy proposals, shareholder activism, the threat of hostile takeovers, etc.—to try to make the CEOs act in the interests of shareholders. It is sort of a strange theory. It is not how most of us do our jobs. But there is a real appeal to it. “Incentives matter,” people say. “Lots of CEOs are psychopaths,” people say. “Humans are rational maximizers of their own self-interest,” economists say. It makes sense that if you want to analyze how a corporation functions, you should focus on the incentives and constraints facing the CEO.

An alternative theory is something like: Most CEOs try to do a good job running their companies, and if you want to analyze how a corporation functions, you should focus on the CEO’s actual beliefs about what a good job would be. This is fuzzier and more subjective than looking at incentives, but I think it also has a real and underrated appeal.