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Abstract

In the “managerialist” world that preceded our present shareholder value world, some corporate managers could, and did, help themselves when they should have been doing their jobs. The modern agency cost paradigm has focused attention 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. The agency cost paradigm has had a good effect by focusing on the problem of managerial enrichment and providing a simple, clear benchmark—shareholder value-- that may quickly indicate when managers are performing badly. However, the pathologies of a focus on readily demonstrable—some would say short-term—shareholder value have become clear. Recent examples include transactions in which a principal motivation is a reduction in research and development. Such transactions may not be as unambiguously bad as the bad agents’ behavior in acting for themselves, but may ultimately prove more costly. What about the ugly? Agency costs were supposed to go down if managers focused more on increasing share price. Hence, there was more emphasis on pay for performance (with performance defined as an increase in share price, and share price considered an accurate reflection of performance) than on fixed salaries. But it has proven exceedingly difficult to define performance, and gaming of performance measures is not uncommon. The ugly is how at least some managers have used short-term gimmicks to get short-term stock price gains that increase their own compensation while leaving the corporation and its shareholders no better off. Some scholarship suggests that this effect was actually intended—that what motivated the shift from managerialism to shareholder value was not a (wholly) legitimate attempt to reduce those agency costs, but instead, at least in part, an attempt by institutional investors and other big market players to induce CEOs to game earnings formulas.

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