Unless current shareowners suffer a penalty for having CEOs who engage in earnings manipulation and insider trading they are likely to encourage such unethical and damaging behavior, finds a study by Ramy Elitzur, since choosing less ethical managers may be in the best interests of current shareholders, but not future ones.
Many accountants believed that markets are efficient and as such, a lot of the issues of earnings management would be corrected by the markets. But this belief has changed over time, and we understand better now that earnings manipulation occurs and does indeed affect markets.
See How Smart Managers Make Dumb Decisions and Why Shareholders Encourage Them, Science Daily, 11/14/2011.
One step in the right direction would be to have more input from long-term shareowners concerning who gets nominated and elected. See the
Model Shareowner Proposal for Proxy&Acces. The research provides one more reason for allowing long-term shareowners a role in nominating directors. See USPX standards.