CEOs and the Principal-Agent Problem

The principal-agent problem seems to have become an epidemic in corporate America. Many CEOs have been fired for poor performance and unethical behavior. These CEOs ruled as monarchs. Fraud committed by Bernie Ebbers has deeply affected WorldCom. New York’s attorney-general, Eliot Spitzer said in The Wall Street Journal: “The honour code among CEOs didn’t work. Board oversight didn’t work. Self-regulation was a complete failure.”

A potential solution is to allow shareholders a larger part in institutional governance. Currently, management rarely complies with shareholder resolutions. The Economist reported that a proposal by the Securities and Exchange Commission to make it easier for shareholders to nominate candidates to boards of directors was shot down by corporate lobbyists. If the SEC can't even get a proposal passed, how are we to reign in the power of CEOs?


Dr. Tufte said...

I think there's a lot of reach in this position.

Bad CEO's are noticeable precisely because there are many good ones to contrast them with.

Additionally, we tend to get waves of executive persecution after the stock market takes a dive. This "history" will repeat itself again after the next serious up and down cycle in the stock market. That makes me dubious about whether behavior changes, or only the expectations of parties who might be interested in pressing cases.

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