Rethinking the Purpose of the Corporation
2019 Corporate Governance Report 14:2
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.
Waitzer, Edward, "Rethinking the Purpose of the Corporation" (2019). Articles & Book Chapters. 2763.