by Hubertus Hofkirchner -- Vienna, 01 Oct 2018
Much has been written about certain agency and ethical problems arising between a corporation's shareholders and its board, not to mention other stakeholders.
- Incentives: Board compensation rules may lead to short term decision making instead of securing long-term value in shareholders’ interest.
- Transparency: Corporate boards have a high degree of message control regarding the information which reaches shareholders. Bad news is kept in an inner circle. Actors seek to preserve their ego and authority.
- Decision criteria: Shareholders are dependent on corporate boards’ judgement about the likely results of corporate actions. The board may be biased or not fully informed compared to the broader perspective of its shareholders, not to mention conflicts of interest, be they subtle or even blatant.
Second-generation prediction markets open novel and effective ways to deal with these issues and generally, any information disparity. Opposing opinions quickly converge into a shared view and participants develop a common, detailed picture of likely developments and underlying drivers.
Battle short-termism – A prediction market should track a set of expected future realisations for those KPIs which determine the board's variable compensation. At a minimum, this will alert shareholders of conflicting long-term trade-offs. The participant mix of such a prediction market should be carefully designed, in particular reach beyond second and third level management to ensure an appropriate balance of perspectives and to safeguard strategic information within the corporation.
Prevent message control – Shareholders should demand that a crowd beyond top management collectively predict future strategic KPI realisations, thereby bypassing the board as a information bottleneck. This may sound uncomfortable for the corporate board, at first. However, they would also benefit by expanding employee participation beyond their direct reports who in turn are known to limit information flow upwards to the board.
Overcome bias - Discussions at shareholder meetings often come too late to allow meaningful impact on strategic decisions. Powerful corporate boards treat shareholder approvals as a mere formality and regard debating shareholders more as a nuisance than as a valuable resource of knowledge. By running a prior prediction market about the expected desired results of a corporate action and about the likelihood of undesirable consequences, shareholders and boards alike will form a deeper and more realistic judgement regarding the expectations underlying board proposals.
These three topics are quite apart from some obvious and simple uses of prediction markets for shareholder purposes, such as running consensus predictions for sales growth or cash-flow for a short-term and a long-term prediction horizon.
One more thing
In some continental countries like Austria, Germany and Switzerland, corporate boards have a primary duty to the company, not solely to shareholders like in the Anglo-Saxon parts of the world. There, the use of a prediction market is even more beneficial to embrace all different stakeholder groups, including employees and the surrounding community, and help consolidate all future expectations despite their diverse ultimate ends into one common one.