Spring 2013 Business Law Symposium – “Agency Theory: Still Viable?”

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Overview:

The Wake Forest Law Review will host its Spring 2013 business law symposium on Friday, March 22, at the School of Law.  The Symposium, for which Professor Alan Palmiter is serving as faculty adviser, will address whether the assumptions about human motivations implicit in modern agency theory are still viable.

Michael Jensen, who in 1976 expounded the agency costs theory of the modern corporation, will give the keynote talk.  In addition, a panel of distinguished scholars will consider whether contemporary corporate governance mechanisms — such as executive compensation, board composition, and effective oversight of management by independent directors, institutional investors, financial intermediaries, and the media — are producing the promised benefits of reducing agency costs within modern business corporations.

Keynote Speaker: Michael Jensen – Harvard Business School

Speakers:

  • Jayne Barnard- William and Mary Marshall-Wythe School of Law
    • “Shirking, Opportunism, Self-Delusion and More: The Agency Problem Lives On”
  • Barbara Black- University of Cincinnati College of Law
    • “Regulating Broker-Dealers’ Sales Practices: Does Jensen’s Integrity Framework Offer Another Approach?”
  • Doug Branson – University of Pittsburgh School of Law
  • Charles M. Elson- Alfred Lerner College of Business & Economics, University of Delaware
    • “Corporate Agency Theory, Internal Promotion Structures and the Creation of Shareholder Value”
  • Craig Ferrere- Weinberg Center for Corporate Governance, University of Delaware
    • “Corporate Agency Theory, Internal Promotion Structures and the Creation of Shareholder Value”
  • Wulf A. Kaal- University of St. Thomas School of Law
    • “Beyond the Regulatory Sine Curve: Dynamic Regulation of the Financial Services Industry”
  • Donna M. Nagy- Indiana University at Bloomington, Maurer School of Law
    • “Making Money While Making Law:  A Fiduciary Solution to an Agency Problem in Politics”
  • Angel Oquendo- University of Connecticut School of Law
    • “All for One and One for All:  The Divide between Derivative Suits and Shareholder Class Actions”
  • Alan Palmiter– Wake Forest University School of Law
    • Sponsoring Professor and Moderator
  • Ajay Patel- Wake Forest University School of Business
    • “The Impact of National Culture on Corporate Financial Decisions”
  • Rob Nash- Wake Forest University School of Business
    • “The Impact of National Culture on Corporate Financial Decisions”
  • Kenneth Rosen- The University of Alabama School of Law
    • “Financial Intermediaries as Principals and Agents”
  • Faith Stevelman – New York Law School
  • Andrew Verstein- Yale Law School Center for the Study of Corporate Law
    • Honorary Guest
  • Jaap Winter– University of Amsterdam
  • “Agency Theory Ignores Human Behaviour”

Schedule:

8:30-8:35: Welcome – Dean Blake Morant

8:35-8:50: Opening Remarks – Professor Alan Palmiter

8:50-10:15: Session 1 with presenters:

Jayne Barnard- William and Mary Marshall-Wythe School of Law

Douglas Branson- University of Pittsburgh School of Law

Jaap Winter- University of Amsterdam

10:15-10:25: Break

10:25-11:15: Session 2 with presenters:

Charles Elson- Alfred Lerner College of Business & Economics, University of Delaware

Craig Ferrere- Weinberg Center for Corporate Governance, University of Delaware

Wulf Kaal- University of St. Thomas School of Law

11:15-11:25: Break

11:25-12:15: Session 3 with presenters:

Barbara Black- University of Cincinnati College of Law

Kenneth Rosen- The University of Alabama School of Law

12:15-1:30: Break for Lunch

1:30-2:30: Keynote Speaker Michael Jensen

2:30-2:40: Break

2:40-4:00: Session 4 with presenters:

Ajay Patel & Rob Nash- Wake Forest University Schools of Business

Donna Nagy- Indiana University Maurer School of Law

Ángel Oquendo- University of Connecticut School of Law

4:00-4:15: Closing Remarks

4:15: Refreshments (Courtyard)

 

Symposium Videos

Abstracts

 

Professor Jayne Barnard- William and Mary Marshall-Wythe School of Law

“Shirking, Opportunism, Self-Delusion and More: The Agency Problem Lives On”

One would think, after nearly a century of effort to limit the self-serving and wealth-destroying practices of corporate executives, that Americans could now feel confident that the goals of our corporate boards and CEOs were fully-aligned with those of their investors. We should now be able to observe these men and women acting with integrity, diligence, and grace.

Investor anxiety about shirking, opportunism, self-promotion, and greed should be, one would think, an artifact of the past.

Alas, we cannot say we have achieved that enlightened state of affairs.  It is still all too possible to find evidence of executive corruption, mendacity, and hubris.  All the gatekeepers, media scolds, scholarly inquiries, and judicial sermons aimed at curbing the agency problem have failed to restrain the worst in human impulses.

 


 

Professor Barbara Black- University of Cincinnati College of Law

“Regulating Broker-Dealers’ Sales Practices:  Does Professor Jensen’s Integrity Framework Offer Another Approach?”

There is a vigorous debate over the appropriate standard of conduct for regulating the sales practices of broker-dealers that provide advice to retail investors.  In this essay I focus on five types of investments that have recently been the subject of regulatory action:  auction rate securities, private placements, non-traded real estate investment trusts, proprietary mutual funds and variable annuities.  I explore whether Michael Jensen’s integrity framework offers another approach to improving broker-dealer sales practices.   Can a culture of honoring your word be instilled in the brokerage industry, which is a business where salesmanship is paramount?

 


 

Professor Doug Branson- University of Pittsburgh School of Law

The primary authors of governance reform in this country seem to espouse a new and different reform with near clockwork regularity, in five year intervals, since at least 1965 and possibly earlier.  Very few, if any, aspects  of the reforms proposed have any connection with reality.  A principal reason is that espousal of these faux “reforms” is limited to a very small number of academics who teach at elite U.S. educational institutions.  They speak to and interact only with each other, snugly ensconced in what truly is an ivory tower.  The results is that many of the key issues with which governance should be dealing today, such as corruption, diversity, or multinationals’ code of conduct and their enforcement, receive little attention, and none by the purported reforms who occupy center stage.

 


 

Professor Charles Elson & Mr. Craig Ferrere – University of Delaware

“Corporate Agency Theory, Internal Promotion Structures and the Creation of Shareholder Value”

Agency theory tends to approach the problems of business organization with an adversarial conceptual framework.  In this view, the structures within a corporation are intended to mitigate the problems and costs associated with the tendency for the agent’s interests to diverge from those of the principals.  We argue that the corporation should be viewed instead from a perspective which emphasizes cooperation.  Rather than primarily addressing agency problems, corporate structures act to leverage and accumulate institutional knowledge through cooperative efforts.  We emphasize the firm-specific nature of the skills and knowledge which are essential to the enterprise’s success.  We also point out that firm-specific knowledge is acquired by employees in a process of gradually learning by doing over extended periods.  Also, the amount of this information which must be learned and used increases as the employee is promoted upwards in the hierarchy.   Additionally, the dynamic process of learning by doing creates a situation where the agent may know more than the principal about the appropriate corporate goals and objective function.  Accordingly, the “tournament theory of internal promotions,” to use an illustrative corporate structure, does not need to be understood as a response to incentive problems.  Rather, tournaments facilitate gradual learning of the required knowledge which expands with subsequent promotions and allows for an open-ended set of performance objectives to be developed through time.  Significant employee stock ownership complements this by affecting a division of surplus amongst the employees who have committed their human capital.

 


 

Professor Wulf Kaal- University of St. Thomas School of Law

“Beyond the Regulatory Sine Curve: Dynamic Regulation of the Financial Services Industry”

Governance adjustments via stable rules in reaction to a systemic shock can result in suboptimal governance outcomes, market volatility, and economic loss. The economic conditions and the corresponding requirements for optimal and stable rules are constantly evolving. Globalization, financial innovation, ethical challenges, and the bounded rationality of decision makers, among many other factors, will likely result in future crises, requiring perhaps even more extensive governance adjustments. However, anticipation of future developments and preemption of possible future crises do not play a significant role in the current regulatory framework and academic literature. This paper explores how a dynamic approach to regulating the financial industry could help address the shortcomings of inflexible rules, including the need for perpetual rule enactment, adjustment, and revision



 

 Professor Donna Nagy- Indiana University at Bloomington, Maurer School of Law

“Making Money While Making Law:  A Fiduciary Solution to an Agency Problem in Politics”  

It focuses on Members of Congress and their widespread practice of holding personal investments in companies that are directly affected by legislative action.  Although the idea of lawmakers as fiduciaries is hardly a new one, the implementation and enforcement of fiduciary principles – most particularly the duty of loyalty — is frequently overlooked as a meaningful solution to agency problems in politics.   After exploring the legal rules that guard against self-interested decision-making by corporate directors as well as by government officials in the executive and judicial branches of the federal government, the paper will propose new restrictions on the personal investments that Members of Congress may hold during their service as public fiduciaries.



 

Professor Angel Oquendo- University of Connecticut School of Law

“All for One and One for All:  The Divide between Derivative Suits and Shareholder Class Actions”

Derivative suits differ in essence from shareholder class actions.  The former involve genuinely collective claims; the latter, an aggregation of individual claims.  The two kinds of suit additionally give rise to dramatically different challenges.  Derivative suits inevitably undermine the group’s autonomy, inasmuch as they allow any shareholder to bypass the legitimately elected board of directors.  Shareholder class actions, like class actions in general, compromise the procedural rights of absent class members.

Grasping the difference at stake will, on the one hand, aid courts in distinguishing between the two types of action.  It will also, on the other hand, facilitate understanding what collective rights are all about.  Specifically, one will be able to perceive that a genuinely collective right is not, by necessity, politically or philosophically problematic and that the aggregation of individual entitlements does not really give rise to a collective entitlement.

 


 

 Professors Ajay Patel & Robert Nash – Wake Forest University School of Business

“The Impact of National Culture on Corporate Financial Decisions”

 


 

Kenneth Rosen- The University of Alabama School of Law

“Financial Intermediaries as Principals and Agents”

Financial intermediaries, such as broker-dealers, long have hosted significant agent/principal relationships. Over time the presence of increased regulations were superimposed on these relationships.  Such regulations include both government issued laws and administrative rules as well as a complex web of self-regulatory organization rules. Some might view such codification as supplanting more traditional notions of common law agency theory. However, I will explore how these rules might be viewed as the progeny of agency theory, giving the traditional theory continued importance in understanding the newer rules. Moreover, it is interesting to consider whether the new and older concepts should coexist as “belts and suspenders” holding up incentives for better behavior by the relevant principals and agents.

 


 

Professor Faith Stevelman- New York Law School

“Beyond Agency: Towards an Integrated Legal Discourse of Corporate Governance”

At the twilight of the agency paradigm’s hegemony, corporate legal theorists face the challenge of reintegrating concerns over legal compliance, appropriate risk taking, corporate management’s fidelity to corporate ‘best interests’ into a unified discourse of corporate governance. While the Great Recession has laid waste to vast financial resources and the financial security of innumerable households, it has not been wasted at the academic level. Rather, it’s occasioning a broad reexamination of the fundamental tenets of market efficiency, investor rationality, corporate governance and federal law’s role in managing corporate risk-taking. Some agency theorists admit that their (market/shareholder value-centric) constructs and approach to law has actually failed to build corporate value and failed empower shareholders as avatars of corporate value. Yet many seek to double down on the promotion of shareholder primacy and shareholder rights as a solution and prescription for even less law in the area of corporate governance.



 

 Jaap Winter- European Corporate Governance Institute

“Agency Theory Ignores Human Behaviour”

Agency theory is or should be severally challenged, both practically and in research in two main areas: board performance and executive pay.

First, the current legal and economic approach, based predominantly on agency theory, does nothing to explain board performance. Regulation based on this approach only focuses on factors that aim to increase the monitoring role of non-executives, thereby ignoring the interaction between non-executives and executives and the behavioural factors determining the interaction.  See:http://www.dsf.nl/assets/cms/File/Research/DSF%20Policy%20Paper%20No%2031%20Boards%20on%20Task%20-%20Towards%20a%20Comprehensive%20Understanding%20of%20Board%20Performance(1).pdf.

Second, the alignment theory in corporate governance suggests that the interests of managers should be aligned with those of shareholders through incentive schemes, in order to mitigate or take away the agency problem. In reality this however creates problems that go way beyond the design and governance of incentive schemes and relate to amongst others crowding out of intrinsic motivation, cheating, status benchmarking etc. It seems we cannot handle high levels of financial incentives. Behavioural research shows what explains this. See: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1652137.