AGENCY THEORY AND FIRM PERFORMANCE
AGENCY THEORY AND FIRM PERFORMANCE
By
Alex Ganas
Department of M.B.A
At the university of I.S.T / L.S.B.U
There has been considerable discussion of managerial agency and firm performance problems that arise from the separation of ownership and control.
Economists have long been concerned with the incentive problems that arise when decision making in a firm is the province of managers who are not the firm 's security holders.
The adoption of the agency logic increased during the 1980’s as companies started replacing the hitherto corporate logic of managerial capitalism with the perception of managers as agents of the shareholders.
The most common belief is that Agency Theory is based in the economic model of man (e.g. Brennan ,1994).
Jensen and Meckling arguing that the theory is grounded in what they call REMM – the Resourceful, Evaluative, Maximizing Model (Jensen ,1994).
They argue that the REMM most closely replicates human action and that the economic model of man is a simplified version that does not reflect the spectrum of human behaviour. Lets see a table that compares the two of them with logical order.
Comparison of Economic Model of Man and REMM
Economic Model of Man
REMM
Rational
Bounded Rational
Maximizer
Maximizer based on thorough evaluation
Motivated by incentives
Actions driven by Incentives
Self-Interested
Self-Interested
Opportunistic with guile
Opportunistic if beneficial
Focus o Focus on extrinsic rewards
Will substitute goods if beneficial (not driven exclusively by extrinsic rewards)
Not other regarding
Altruistic if beneficial
Resourceful
Resourceful – innovative when facing constraints and opportunities With the understanding that man is self-interested, ever opportunistic and driven by incentives, agency theory addresses the effect of having this man as a manager in the modern corporation by providing prescriptions to taming him.
ECONOMIC MODEL OF FIRM PERFORMANCE
Industrial
By
Alex Ganas
Department of M.B.A
At the university of I.S.T / L.S.B.U
There has been considerable discussion of managerial agency and firm performance problems that arise from the separation of ownership and control.
Economists have long been concerned with the incentive problems that arise when decision making in a firm is the province of managers who are not the firm 's security holders.
The adoption of the agency logic increased during the 1980’s as companies started replacing the hitherto corporate logic of managerial capitalism with the perception of managers as agents of the shareholders.
The most common belief is that Agency Theory is based in the economic model of man (e.g. Brennan ,1994).
Jensen and Meckling arguing that the theory is grounded in what they call REMM – the Resourceful, Evaluative, Maximizing Model (Jensen ,1994).
They argue that the REMM most closely replicates human action and that the economic model of man is a simplified version that does not reflect the spectrum of human behaviour. Lets see a table that compares the two of them with logical order.
Comparison of Economic Model of Man and REMM
Economic Model of Man
REMM
Rational
Bounded Rational
Maximizer
Maximizer based on thorough evaluation
Motivated by incentives
Actions driven by Incentives
Self-Interested
Self-Interested
Opportunistic with guile
Opportunistic if beneficial
Focus o Focus on extrinsic rewards
Will substitute goods if beneficial (not driven exclusively by extrinsic rewards)
Not other regarding
Altruistic if beneficial
Resourceful
Resourceful – innovative when facing constraints and opportunities With the understanding that man is self-interested, ever opportunistic and driven by incentives, agency theory addresses the effect of having this man as a manager in the modern corporation by providing prescriptions to taming him.
ECONOMIC MODEL OF FIRM PERFORMANCE
Industrial
References: Adams, R. & Mehran, H., 2003, 'Is Corporate Governance Different for Bank Holding Companies? ', Economic Policy Review, 9, 1, pp Jensen, M & Smith, C., 1985 'Stockholder, Manager, & Creditor Interests: Applications of Agency Theory, ' pp. 93-131 in Altman, E Economic Performance. 2nd edn. Rand-McNally, Chicago, IL, 1980 approach ', Strategic Managemetit Journal, 5(4), 1984, pp Likert, R. L. New ' Patterns of Managemetzt. McGrawHill, New York, 1961.