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

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.

Citation

Martin, R. (2011), "The CEO's ethical dilemma in the era of earnings management", Strategy & Leadership, Vol. 39 No. 6, pp. 43-47. https://doi.org/10.1108/10878571111176628