It’s hard to overstate the power of incentives. Charlie Munger says: “Show me the incentive and I will show you the outcome”.
The biggest factor determining how well incentivised you are is whether you own something. If you own your own house, rather than rent, you’ll devote more time and money to improving it and making sure it lasts.
The same applies to business. Unfortunately, most publicly-listed companies are run by agents not owners (this is known as the principal-agent problem). Many chief executives have minimal direct equity ownership and are incentivised on short term performance measures, like bonuses and stock options. This has scope to create problems.
Below I compare how a long term business owner and agent might think, and discuss the implications for investors.