Agency Costs

When managers of a company act in a way that is at odds with the interest of the owners of a company, in economics, this is called "agency costs."

Dale Oesterle at the Business Law Profs blog, looks at transactions in which senior management and venture capitalists have made huge profits by taking a public company private, refinancing it, and then making a new public offering of the same company, has some pointed questions to ask about agency costs.

The troublesome question: Why are the assets not better managed in the hands of the public firm managers for the benefit of the public firm shareholders? Is the agency cost in publicly traded firms as large as is suggested by the profits of private equity funds? Or have the private equity funds just picked the low hanging fruit? If the problem is endemic, where have regulations failed? Henry Manne argues in todays WSJ that we have over regulated takeovers. Others argue that we have under regulated public company managers. It does suggest that our fixation on executive salary excess is a drop in the bucket compared to losses due to sloppy management of many of our publicly traded companies.

My conclusion: The single biggest problem is that members of the boards of directors of publicly held companies are elected on Soviet style ballots. There is no meaningful legal way for shareholders to control publicly held corporations short of having a single individual or small consorstium of new buyers purchase a majority of the stock.

The elections themselves are clean, but they are shams, because there is no meaningful opportunity for shareholders to nominate board members who will appear on the ballot.

Incidentally, I also agree that "executive salary excess is a drop in the bucket compared to losses due to sloppy management of many of our publicly traded companies", although I think the former is a symptom of the latter.