Monday, September 19, 2011

Principal agents

I suspect that this reaction to a press release by the CEO of Netflix is just a principal agent problem:

In classical economics AOL should have died. Borders should have died.They should have spun every dime out to the shareholders who could have invested in the next big thing themselves.

However, Hastings is specifically saying this is the mark of a bad CEO and everyone nods there heads. He is saying that we should burn shareholder profits in an effort to move away from what made the company great.


Shareholders are diluted across thousands of mutual funds and cannot easily exercise control. Returning money to these people also means no longer being the CEO of Borders or AOL. Management loses access to resources and are looking for jobs with less experience. If there was a cultural sense in which winding down the firm made an executive more employable at a later firm, that would be different.

But, as it is, why would an executive ever decide to walk away from the resources of managing a large company when they could profit from spending down the corporate resources. It is not like they can be held accountable by the shareholders, in any meaningful sense. They merely need to promise that, in their judgement, they can invest the money more effectively than the shareholders and keep going.

Heck, how many people working for a large firm consider themselves as working for a shareholder pool as opposed to working for the CEO? After all, only one of these two groups has any day to day authority in the company and access to complete information.

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