Case Study: Hedging Executive Performance and the Proxy of Fiduciary Responsibility: A Proposal for Operating Excellence

Executives manage operating risks in a variety of ways, though few directly manage the risks associated with human capital. In the service industries, performance measurements like productivity, quality, customer satisfaction, and schedule variance tend to be addressed in a general sense. Issues of executive accountability rise to the surface and underscore how very important performance measurements are to operating excellence. The problem is that company boards really don’t employ a systemic methodology for valuing the strength of executive management talents relative to the risks they present to the business.

Hedge funds and their management strategies are directly applicable as a model for managing executive performance. Not only can companies short their exposure in more risky assets, but they can also arbitrage undervalued business units and organizations. The parallels with hedge funds illustrate the application of mathematical concepts like Alpha, Beta, and the Capital Asset Pricing Model. Moreover, companies can establish the framework to proxy fiduciary responsibility to their executive team by addressing the fundamental concept of risk versus return.