What's up with agency?
In business, it seems like stock ownership isn't proceeding under the agency theory. That is, managers of firms don't appear to act as agents of investors, at least, not to the extent that investors wish or believe they ought to be. Instead, shareholders are more accurate characterized as investing in the talents of the managers. Or perhaps better yet, as making side bets on the bets the managers are making. Is this because of incestuous board relationships and other conflicts of interest? Or will the downturn cause investors to stop wanting to make these kinds of side bets?
The prevailing wisdom on the problem is that you attack it by means of incentives. That is, you assume that you are hiring a crook, and that your responsibility is to make sure that the crook is cheating for you, instead of on you. I am suspicious that whole approach may be wrong.
In a similar fashion to the microeconomics result that charging parents for picking up their kids late at daycare leads to even more tardiness [Freakonomics], I suspect that this implicit posture that managers are crooks and need to have their interests mechanically aligned with owners ends up producing a system in which managers feel entitled to exploit their information asymmetries to get around these rules. (After all, if "the incentives aren't properly aligned," they can't really be blamed for exploiting them, right?)
Perhaps the answer is the same: a return to moral argument. But a diffuse set of shareholders of a public company has a lot of obstacles in making moral demands on a company's management structure. Presumably the board is the vehicle by which this happens, but there's a lot of risk there of over-coziness, an agency problem on stilts (the board is itself the shareholders' agent), and classical information asymmetry.
So how would shareowners exert moral pressure in a more direct, socially powerful way? Putting it another way, how should they make better decisions about hiring morally competent managers, rather than ignoring that and hiring ones they think are managerially competent (but perhaps morally questionable)?
In government contexts, how do voters exert direct moral pressure on lawmakers and executives to provide the leadership they are elected to provide, rather than using the information asymmetry and systemic lags to engage in featherbedding and other kinds of corruption?
Both areas suffer from common problems: historical methods of direct social pressure available to the majority of the stakeholders simply aren't effective. Voters by and large don't go to the same parties as politicians, so if they stop inviting the politician to parties because he or she is corrupt, the politician can just go to the parties of the people whose influence they are transmitting. Same goes for CEOs and shareholders. ¶ 11:40 PM
Saturday, August 15, 2009
The agency problem seems to be getting worse. Or perhaps it's as bad as it's ever been, but we're in a payback period now where it's more noticeable how bad it actually is. Whatever the case, we should take advantage of the situation to try to think of ways to improve it.
In business, it seems like stock ownership isn't proceeding under the agency theory. That is, managers of firms don't appear to act as agents of investors, at least, not to the extent that investors wish or believe they ought to be. Instead, shareholders are more accurate characterized as investing in the talents of the managers. Or perhaps better yet, as making side bets on the bets the managers are making. Is this because of incestuous board relationships and other conflicts of interest? Or will the downturn cause investors to stop wanting to make these kinds of side bets?
The prevailing wisdom on the problem is that you attack it by means of incentives. That is, you assume that you are hiring a crook, and that your responsibility is to make sure that the crook is cheating for you, instead of on you. I am suspicious that whole approach may be wrong.
In a similar fashion to the microeconomics result that charging parents for picking up their kids late at daycare leads to even more tardiness [Freakonomics], I suspect that this implicit posture that managers are crooks and need to have their interests mechanically aligned with owners ends up producing a system in which managers feel entitled to exploit their information asymmetries to get around these rules. (After all, if "the incentives aren't properly aligned," they can't really be blamed for exploiting them, right?)
Perhaps the answer is the same: a return to moral argument. But a diffuse set of shareholders of a public company has a lot of obstacles in making moral demands on a company's management structure. Presumably the board is the vehicle by which this happens, but there's a lot of risk there of over-coziness, an agency problem on stilts (the board is itself the shareholders' agent), and classical information asymmetry.
So how would shareowners exert moral pressure in a more direct, socially powerful way? Putting it another way, how should they make better decisions about hiring morally competent managers, rather than ignoring that and hiring ones they think are managerially competent (but perhaps morally questionable)?
In government contexts, how do voters exert direct moral pressure on lawmakers and executives to provide the leadership they are elected to provide, rather than using the information asymmetry and systemic lags to engage in featherbedding and other kinds of corruption?
Both areas suffer from common problems: historical methods of direct social pressure available to the majority of the stakeholders simply aren't effective. Voters by and large don't go to the same parties as politicians, so if they stop inviting the politician to parties because he or she is corrupt, the politician can just go to the parties of the people whose influence they are transmitting. Same goes for CEOs and shareholders. ¶ 11:40 PM
