So much of what we read in the financial press—particularly in the aftermath of the financial crisis—makes us worry about cowboy CEOs who “bet the firm” on risky investments.
But the truth is that investor returns are more threatened by widespread conservativism on the part of chief executives. The top executives have a substantial amount of their net worth wrapped up in their companies. Failure means loss of a job and reputation. They are desperate to avoid taking on too much risk.
Many of the corporate governance measures put in place in the last few years have been designed to overcome this problem. We want to better align executive interests with shareholder interests. And that includes making executives want to take more risk.
If you are an outside shareholder with a diversified portfolio, you aren’t as concerned about the failure of a particular company. After all, typically the failure of one company in a sector just means more profits for its rivals. You generally want companies to take on more risk than their managers would prefer.
So perhaps we shouldn’t be surprised that the tech sector is rife with risk-taking singletons—23.5 percent—and the utility sector has so many more marrieds. And perhaps investors in companies whose CEOs get married should demand more performance-based compensation, to encourage more risk-taking.
Otherwise, those married guys might be dragging down the performance of your investment portfolio.
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