Duly Noted: Solving the Principal-Agent Problem in Firms:The dumbest idea in the world?Posted: December 30, 2011
This article in Forbes argues that a new book by the Dean of Rotman School provides an antidote to the rampant excesses of modern day capitalism. The principle swipe is against the landmark paper (over 29000 Google Scholar citations) by Jensen and Meckling on both the prevalence of the principal agent problem in the governance of firms and the various solutions to overcome it – including creating incentives that maximize shareholder value. Quoting Jack Welch, former CEO of GE, the article says that maximizing shareholder value is the dumbest idea in the world. I my self am not sure if this is THE dumbest idea in the world – in fact there are many more that would easily surpass P-A problem resolution – but I am sure this will ignite a debate about why firm’s exist – what is the best governance mechanism for them and the role of economic theory and action in our lives. I for one need to go back and read the article and then read the book.