One topic that has been on my mind a lot for the past few months has been the notion of who bears risk. For example, Social Security is a system that insures people who have worked throughout their lives from living in abject poverty when they reach retirement age. The argument is whether the costs of Social Security are worth the risk it mitigates.
Leaving government programs aside, Mark Nottingham has an interesting post on who bears risk in the world of business. Conventional wisdom is that shareholders are the main risk bearers when it comes to firms, but there’s an alternative argument that employees most of the risk.
I hadn’t really thought about it, but it’s certainly true. Shareholders obviously suffer when a company’s stock performs poorly, but most investors diversify enough that they are insulated from suffering significantly when a firm fails. Compare that to the fate suffered by employees of companies like Enron, where many employees got burned both ways. Not only did they lose their jobs, but they also lost most of their investments because the company offered incentives for employees to invest their retirement funds in Enron stock.
If employees are the main risk bearers in any enterprise, what management practices does that dictate? And even if it is true that employees bear the risk, incentives are what really drive human behavior. Executives have many financial incentives to please shareholders, so that’s probably what they’ll continue to do.