PracticeConsultingLetters – Give risk-making directors the thumbs up rather than

Letters - Give risk-making directors the thumbs up rather than

When is a cat fat? It sounds to me as though many of the finance directors who voted on the ‘Big Question’ about paying large bonuses to underperforming directors (Fat cat payouts come under fire from finance chiefs, page 1, 20 September) have forgotten portfolio theory.

Quoted companies can grow and succeed only if their directors take risks.

These directors are often likely to be ‘undiversified’ in the sense that their careers, reputations, and share options, are invested in the company: this dictates a cautious approach which, if common across quoted companies, would be unacceptable to investors. If, in addition, directors had employment contracts of the type recommended by some journalists and politicians, where the price of failure was redundancy without compensation, this would simply serve to reinforce that sense of caution. Economic logic suggests an incentive structure that mitigates or counteracts that caution.

It may be fun to imagine the merciless punishment of the apparently foolhardy, but this is hardly going to encourage the taking of sensible risks some of which are always bound to fail.

William Arthurs, Wilco International

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