PRINCIPALS AND AGENTS (COMMENT). About a month ago I posted here in support of a John Kay article pointing out some advantages that markets can have in placing checks on large bureaucracies. Dick Weisfelder and Elmer made comments about the difficulties of controlling bureaucracies. They agreed that the problems are similar for public and for private bureaucracies, and, I think, are of the view that we do a better job of controlling public bureaucracies than controlling private bureaucracies. They both pointed out the lack of success of “shareholder democracy.” Kids, you can think about these problems as principal/agent problems. (An example of a principal/agent problem: how can the owner of a ship (the “principal”) get the captain (the “agent”) to act in the owner’s interest rather than in the captain’s interest. After all, the captain is there and the owner isn’t there.) How do shareholders (the “principals”) get the executives of the company (the “agents”) to act in the best interests of the shareholders? I would answer the question by saying that they often don’t do it successfully. I think Dick and Elmer would agree.
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