At the heart of modern capitalism is a fundamental structural divide: between senior inside managers responsible for the day to day operations of the corporation, on the one hand, and outside investors who own shares in a large number of corporations. According to standard corporate law theory this creates an inevitable conflict between shareholders, the principal, and managers, the agent.
Seen this way, managers should serve at the behest of shareholders – if, indeed, shareholders are principals. But to watch the counter-attack on post-Enron corporate reform now taking place in Washington, D.C., it appears as if the managers have overthrown the principals.
Of course, in reality this principal-agent model radically misstates the structure of modern capitalism. Managers are capitalists – they earn their income from the profits of the corporation; and shareholders are capitalists – they also earn their income from corporate profits. So managers, in the form of their representatives at the U.S. Chamber of Commerce and Business Roundtable, ought to be able to understand the value of reforms such as expensing of stock options and allowing shareholders opportunities to place their nominees for corporate boards on corporate proxy statements. These reforms should improve the ability of the market as a whole to function more efficiently.
A conference next month in Delaware could help turn the corner in this debate. The International Corporate Governance Network is bringing together representatives from various corporate constituencies, including managers and institutional investors, to discuss potential reforms in Delaware law with members of the Delaware judiciary that might make it easier for shareholder nominees to get elected to corporate boards. Here is a link to a recent story in the Financial Times on the conference and on the new agenda of the ICGN.