Common Agency and the Public Corporation

Abstract

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.

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

JEL Classification: K22, G23, G28, K2