The Agency Cost Paradigm: The Good, the Bad, and the Ugly
In the “managerialist” world that preceded our present world—the shareholder value world—some corporate managers could, and did, help themselves when they should have been doing their jobs. They were bad agents, using their positions to get unwarranted leisure and unwarranted perquisites at the expense of their principals, whether the principals were seen as the corporation, its shareholders, or both. The modern agency cost paradigm has focused the attention of courts, directors, and scholars on this problem, in part by conceptualizing the duty of corporate managers as maximizing shareholder value. This paradigm has had a variety of effects: some good, some bad, and some ugly. As for the good, the agency cost paradigm focused on this problem of managerial enrichment, emphasizing to the bad agents a message that they should not be working for themselves, and set about looking for a solution. It provided a simple, clear benchmark that may quickly indicate when managers are performing badly. What about the bad? The pathologies of a laser-like focus on readily demonstrable—some would say short-term—shareholder value have become clear. Recent examples include takeovers and other transactions in which the principal motivations include reductions in research and development costs and tax savings through relocation to other jurisdic-