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Common Agency and the Public Corporation

Paul Rose

Ohio State University - Moritz College of Law

November 1, 2010

Vanderbilt Law Review, Vol. 63, October 2010
Ohio State Public Law Working Paper No. 125

Under the standard agency theory applied to corporate governance, active monitoring of manager-agents by empowered shareholder-principals will reduce agency costs created by management shirking and expropriation of private benefits (through, for example, high compensation and perquisites). But while shareholder power may result in reduced managerial agency costs, an analysis of how that power is often exercised in public corporation governance reveals that it also can produce significant costs: influential shareholders may extract private benefits from the corporation, incur and impose lobbying expenses, and pressure corporations to adopt inapt corporate governance structures. Because of these costs, the simple principal-agent model on which shareholder empowerment is based begins to collapse. This article offers an alternative model - a common agency theory for public corporations. A common agency is created when multiple principals influence a single agent; in the case of a corporation, common agency describes a shareholder/management relationship in which multiple shareholders with competing preferences exert influence on corporate management. The common agency theory set out in this article provides several important contributions to the literature on corporate governance and shareholder empowerment. First, the theory provides a more complete explanation of the motivations for and outcomes of shareholder activism, including the activities of governmental owners, large institutional investors and “social” investors. Second, the theory helps to more clearly delineate the costs and benefits of increasing shareholder power. Finally, building on these findings, the theory suggests possible regulatory changes to ensure that the benefits of shareholder activism outweigh its costs.

Number of Pages in PDF File: 64

Keywords: shareholder activism, proxy access, corporate governance, institutional investors, shareholder influence, agency costs

JEL Classification: K22, G23, G28, K2

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Date posted: March 8, 2010 ; Last revised: November 2, 2010

Suggested Citation

Rose, Paul, Common Agency and the Public Corporation (November 1, 2010). Vanderbilt Law Review, Vol. 63, October 2010; Ohio State Public Law Working Paper No. 125. Available at SSRN: http://ssrn.com/abstract=1565507

Contact Information

Paul Rose (Contact Author)
Ohio State University - Moritz College of Law ( email )
55 West 12th Avenue
Columbus, OH 43210
United States
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