Rethinking the Purpose of the Corporation

Document Type

Article

Publication Date

2019

Source Publication

2019 Corporate Governance Report 14:2

Abstract

In 1976, two economists at the University of Rochester, Michael Jensen and William Meckling introduced the concept of “agency costs”—the costs incurred by shareholders of public corporations to get corporate management to act on their behalf. In the Jensen-Meckling view, shareholders were the “principals” in an economic relationship with professional corporate managers who were the “agents.” Principals delegated decision-making authority over a corporation to agents act in their interests. Inevitably, the financial interests of principals and agents differed at least slightly, hence the various possible agency costs borne by shareholders including salaries, incentive compensation, inefficiency, suboptimal decision-making, and corporate empire-building.

Comments

This article is based upon a speech given by Edward Waitzer to the Best Corporate Citizens in Canada Gala on June 7, 2018 in Toronto.

The article is also published in (2018) Journal of Applied Corporate Finance 30:2 and as an editorial in (2018) Corporate Knights, which is linked here.

Content in all 3 publications is the same with minor variations in wording.

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